REASONS
FOR JUDGMENT
Owen J.
[1]
The Appellants, Joseph Bueti and Serafina Bueti,
are each appealing the reassessment of their 2004 taxation year by notices of
reassessment dated July 11, 2011 and July 8, 2011
respectively (the “Reassessments”). The
Reassessments increased from $54,000 to $260,000 the proceeds of disposition
deemed to have been received by the Appellants on a gift of a residential
property located at 122 Ridgefield Crescent, Ottawa, Ontario (the “Property”) to their son and daughter-in-law. The
Reassessments also reduced the adjusted cost base attributed to the Property by
the Appellants from $150,000 to $100,930. The appeals were heard together on
common evidence.
I.
Facts
[2]
Mrs. Serafina Bueti testified for the Appellants,
and Elizabeth Bernard, an auditor with the Canada Revenue Agency (“CRA”), testified for the Respondent. In addition, Mr.
Leonard Carty testified as an expert witness for the Appellants and Mr. Pierre
Duckett testified as an expert witness for the Respondent.
[3]
The parties submitted a “Statement of Agreed Upon Facts” (partial), which reads
as follows:
1.
At all material times, Serafina Bue[t]i was
married to Joseph Bueti.
2.
Serafina’s father, Domenico Papalia, died on
August 27, 1999.
3.
At death, Domenico owned, among other assets, a
residential property at 122 Ridgefield Crescent, Ottawa, Ontario (the
“Property”).
4.
The legal description of the Property was - Part
of Lot 35, Plan 350931, Being Part 4 on Plan 4R-13988, Ottawa (formerly
Nepean).
5.
At all material times, the Property was
comprised of the lot and the house situated on it.
6.
Under Domenico’s will, the debts were to be paid
first. The residue of the Estate was to be divided into 3 equal parts, Part “A”
consisting of 33 1/3% of the residue, Part “B” consisting of 33 1/3% of the
residue and Part “C” consisting of 33 1/3% of the residue.
7.
Under the will, the Trustees were directed to
pay or transfer Part “A” to Diego Papalia, pay or transfer Part “B” to Serafina
Bueti and pay or transfer Part “C” to the Grandchildren.
8.
On February 29, 2000, the Estate paid probate
tax of $5,125.00 in respect of the Estate, the assets of which had been valued
at $374,608.
9.
On May 2, 2000, the Certificate of Appointment
of Estate Trustee with a Will was issued to the applicants Serafina Bueti and
Diego Papalia.
10.
By . . . July 10, 2000, the creditors of
Domenico Papalia had been notified and all the debts of the Deceased had been
paid.
11.
On July 10, 2000, the estate trustees with a
will of the estate of Domenic[o] Papalia applied to be registered as owners, as
estate trustees with a will, of the Property.
12.
The Estate paid [a] registration fee of $50.00
in respect of the transfer and legal fees.
13.
On July 11, 2000, Serafina Bueti and Joseph Bueti
obtained from the Scotiabank a $55,000 mortgage against the Property and then
advanced and paid $50,000 to Diego Papalia.
14.
Serafina and Joseph Bueti paid, among other
amounts, $930 in legal and transfer fees in relation to the mortgaging of the
Property.
15.
On March 11, 2004, Serafina Bueti and Joseph
Bueti transferred the Property to their son and daughter-in-law for $2.00 and
natural love and affection.
[4]
Following the acquisition of the Property on
July 11, 2000, the Appellants first rented it to arm’s length tenants for
approximately two years. Mrs. Bueti did not recall exactly when the
Property was first rented other than to say it was “after
a period of time”.
[5]
Mrs. Bueti testified as to the condition of the
Property at the time of her father’s death:
Q. Can you describe the condition of the house immediately after your
father died?
A. Yes. Sorry, my memories, my dad. The house was in its original
state that it was from the very beginning. There was nothing done to it
virtually, but it was exactly the way it was at the beginning. It was -- the
walls were very, very black because he smoked all the time. He lived alone.
Q. How old was he when he died, ma’am?
A. He died when he was 88 years old, 88.
Q. Thank you. Can you describe the basement?
A. The basement was in its original state. It was blocks and
cement floor. It had the furnace there. It also had the laundry tubs, a sump
pump in the corner. It was unfinished. There was absolutely nothing done to the
basement.
Q. Can you describe the garage that was attached to the house?
A. The garage that was attached to the house was on level ground,
and there was a door from the garage that walked into the house.
. . .
Q. What else was there in this house besides the (inaudible)?
A. The three bedrooms, there is one bathroom which was in its
original state. There was a kitchen and a living room. Basically, it was three‑bedroom
house.
Q. As far as you were aware, were there any structural problems
with the house?
A. Do you mean the outside structure?
Q. Outside or inside.
A. No.
Q. Do you have any recollection as to if there was any problem
with the roof and when it might have been repaired? There was some discussion,
you heard this morning, about an assumption being made that perhaps the roof
had been either patched or replaced in the course of these 40 years.
A. I am not aware at all of anything except that they had
raccoons in the attic and that had to be -- they had to be removed, and they
patched that part where the raccoons had to be removed from.
Q. So as far as you are aware, it was the original roof?
A. I don’t know. It could have been in the first -- as far as I
can recollect, I don't remember any roof being done.
Q. How about the furnace?
A. The furnace was updated. It was an electric furnace from oil
at some point, and again, I am not sure when.
Q. So originally, it was oil?
A. It was oil originally.
Q. And then it was converted to electric?
A. To electric, yes.
Q. But you don’t recall specifically when that happened?
A. Not specifically,
I cannot say, no.
[6]
Mrs. Bueti also testified that the only improvements prior to
renting were a “very, very good clean
up, and we painted it”
and that she visited her father “[t]wice
a day every single day”.
[7]
In cross-examination, Mrs. Bueti confirmed that the Appellants
were able to rent the Property after cleaning and painting the interior,
although she did stress that they had to use four or five coats of paint.
When asked whether the reason for acquiring the Property in July 2000 was to
rent it, she stated that that was only partially correct and that “[i]t was a sentimental thing with us with the
house. I wanted to keep that because it was my parents’ home.”
[8]
An attachment to a letter from the solicitors of
the Estate of Domenico Papalia (the “Estate”)
dated February 29, 2000 (Exhibit A-2) indicates that for probate the Property
was valued at $150,000. In the same attachment, the other assets of the Estate
(the “Other Assets”) are described as “Personal Property” ($1,000), “Bank
of Nova Scotia Acct# [omitted]” ($7,534.58), “Bank
of Nova Scotia GIC” ($16,773.42), “Receivable
note from 969270 Ontario Inc.” ($177,300) and “216
Class “A” Pref. Shares in 969270 Ontario Inc.” The total value
attributed to the Other Assets is $224,608.
[9]
Mrs. Bueti identified the assets of the Estate
but in cross-examination was not able to explain or even recall what had
happened to the Other Assets or how they were distributed. Mrs. Bueti testified that she
also did not recall receiving one-third of the Other Assets.
[10]
Mrs. Bueti testified that she and her husband
discussed the Property with the other beneficiaries and that she agreed to buy
the interests of the other beneficiaries in exchange for payments of $50,000 to
Diego Papalia and $50,000 to the four grandchildren. The purchase price was based
on a total value of the Property of $150,000.
[11]
Mrs. Bueti was asked by her counsel about a
Transfer/Deed of Land dated July 11, 2000 (Exhibit A-6) (the “Deed”). She testified that the Deed identified a
transfer of the Property from the Estate and from herself and Diego Papalia in
their capacity as the Estate trustees to herself and her husband as joint
tenants for a consideration of $50,000. She confirmed when asked that the words
“Pursuant to the Last Will and Testament of Domenic [sic]
Papalia (father)” appeared on the Deed and stated that as far as she was
aware the transfer of the Property took place in accordance with her father’s will.
[12]
Mrs. Bueti testified that the $50,000 identified
as consideration on the Deed was not paid to any of the other beneficiaries of
the Estate.
[13]
Mrs. Bueti was also asked about a lawyer’s
letter dated November 13, 2000, which addresses a mortgage
transaction with Scotia Mortgage Corporation (Exhibit A-7). Under the heading TRUST
LEDGER STATEMENT, the letter states that $55,000 was received from the
mortgagee and that $50,000 was disbursed to Diego Papalia at the direction of
the Appellants.
[14]
Mrs. Bueti testified that her husband used the $50,000
from the mortgage funds as the consideration for his portion of the Property. When asked by her counsel if the
letter clarified where or to whom the $50,000 consideration identified on the
Deed was paid, she stated that it was “[her] portion”.
[15]
In cross-examination, Mrs. Bueti stated that
$50,000 was paid to Diego
Papalia from the proceeds of the mortgage placed on the Property and $50,000
was paid to the four grandchildren from the Appellants’ personal funds. However, she was unable to
recall whether the payment of $50,000 to the grandchildren was made by cheque
or bank draft.
Mrs. Bueti also stated that, following the purchases, she and her husband owned
the property 50-50.
[16]
Mrs. Bueti explained the circumstances
surrounding the gift of the Property to her son and daughter-in-law on March
11, 2004:
Q. Ms. Bueti, in paragraph
13 [of the Notice of Appeal], there are these (inaudible) March 11, 2004,
which is the date I understand you transferred 122 Ridgefield to your son and
his wife, that you transferred the land portion of the property, and the
parties were in agreement that the existing house was to be sold separately. What
is your understanding of that, how you transfer the land and not transfer the
house on the land?
A. What happened with this,
if I can explain?
Q. Please.
A. We took it as a whole
and transferred to our son and daughter‑in‑law. It wasn’t “We are going to just give you the land.”
We transferred as a whole.
They were going to tear it down
and build a house themselves on it because that existing house was in no
condition. It was too small. They started a family.
I helped my son with was if he
wanted me to phone a company that removes houses from the land, and this is
what I did. Only because he was busy, we just did it in the family. This is
still the way we are.
CDS was the moving company. We had
a contract with them. They offered $14,000 for the house, and they wanted [$]10,000
to take it away. This is what happened. Then my son took over to build on.
[17]
Mrs. Bueti testified that the Appellants’ T1 tax
returns for 2004 were prepared by an accountant. In filing their T1 income tax
returns for 2004, the Appellants took the position that the Property had an
aggregate adjusted cost base (ACB) of $150,000 and that they had disposed of
the Property for proceeds of $54,000.
[18]
According to an e-mail sent by Ms. Bernard on
February 7, 2008 (Exhibit R-3), the $54,000 proceeds were comprised
of a value of $50,000 for the Property, determined on the assumption that it
was a vacant lot, and $4,000 received from CDS, the house-moving company. The
ACB minus the proceeds resulted in a capital loss of $96,000, which was allocated
50-50 between the Appellants.
[19]
Mrs. Bueti carried forward $24,000 of the
allowable capital loss reported in 2004 and applied that loss to capital gains
realized in 2005 on the disposition of four real properties located in Ottawa
and Stittsville.
[20]
The Notices of Appeal indicate that the Property
was owned 1/3 by Mr. Bueti and 2/3 by Mrs. Bueti at the time of the gift
in 2004. However, as noted above, Mrs. Bueti testified that the Property was
held equally by her and her husband, which is consistent with the Deed and with
the filing position taken by the Appellants in their 2004 T1 income tax returns.
[21]
The CRA initially reassessed each of the
Appellants to deny the reported capital loss and to attribute to each Appellant
a capital gain of $104,850. The capital gain was calculated using an ACB of
$50,300 and proceeds of disposition of $260,000. The ACB reflected the amounts
shown on the Deed, being consideration of $50,000, land transfer tax of $250
and a mortgage registration fee of $50. The $260,000 was based on an appraisal
report dated February 25, 2008 prepared by Mr. Pierre Duckett (Exhibit R-5).
[22]
The Appellants objected to the reassessments and
in response to their objections, the CRA reassessed to increase the ACB of the
Property to $100,930, comprised of $100,000 consideration, the additional $300
shown on the Deed and legal fees of $630. The reassessments reduced the capital
gain realized by each Appellant to $79,535.
[23]
Ms. Bernard testified that she believed that the
revised ACB was wrong on the basis that it incorrectly assumed that the $50,000
consideration identified on the Deed and the $50,000 identified as having been
paid to Diego Papalia from the proceeds of the mortgage were separate amounts. Be
that as it may, the Respondent did not seek to alter the ACB used in the second
reassessments currently under appeal. It is trite to say that the Respondent
cannot appeal her own assessment.
II.
The Expert Evidence
[24]
The evidence of the two expert witnesses focused
on the fair market value of the Property at the time of the gift on March 11,
2004. Both experts were well qualified to provide an assessment of value,
although it appears that Mr. Carty had the most recent experience with the
neighbourhood in which the Property was located.
[25]
Neither expert had an opportunity to visit the
original house on the Property as it had been sold and replaced by the new
house erected by the Appellants’ son.
[26]
Mr. Carty testified that he made certain
assumptions about the condition of the property that were based on the
information provided to him by Ms. Bueti through her counsel. In particular, he
assumed the house was not well maintained and that the house was in original
condition. As to the meaning of original condition, Mr. Carty stated:
Well, in original
condition, we would be looking at bathrooms and kitchens, windows that were not
updated. The furnace, again, would probably have been replaced at some time during
the lifetime of the house. The original electrical panel, roof would have
probably been redone at some time due to the age of the house.
[27]
Mr. Carty testified that he did not ascertain
the exact square footage of the house because he did not have access to the
Municipal Property Assessment Corporation (“MPAC”) records for 2004 and because
obtaining the information from the City of Ottawa archives would have taken two
or three weeks. He based the assumed square footage of 1,100 to 1,200 square
feet on other houses that he has appraised in the area. Mr. Carty also stated that
the Appellants were not able to provide him with a single photograph of the
house.
[28]
Mr. Carty acknowledged that the lot was large
for the area and favourably located as it backed on to National Capital
Commission lands and was not a corner lot.
[29]
As for the valuation methodology, Mr. Carty
testified that he reviewed sales in the area from January 2003 to January 2005
and identified 69 properties that had been sold during that period. The prices
ranged from a low of $175,000 to a high of $345,000 with an average of $242,324
and a median of $236,000.
[30]
In this sampling, he looked for properties that
had a similar-sized lot or a lot backing on to green space and a house in
similar condition. He identified a total of six properties that he believed met
at least one of these criteria. However, he stated that he was not able to find
any property with a similar lot size and that he found only one property that
backed on to green space. The average price for these six properties was $188
per square foot, which was based on the area of the homes in the sample. Mr.
Carty stated that in his experience a value-per-square-foot approach yielded
the most accurate results. He did not make any adjustment to the value of each
property.
[31]
Mr. Carty testified that typically the condition
of the Property would have dictated a fair market value below the average
dollar-per-square-foot value. However, he concluded that the lot size and
location and the condition of the house balanced each other out so he used the
average of $188 per square foot. He multiplied this by 1,200 square feet to
yield $225,600 and rounded down to $225,000. I note that if the actual area of
the house was used, the result would be $231,804 (1,233 square feet times $188
per square foot).
[32]
Mr. Duckett testified that he derived his
information about the Property from the sources he had available and applied
inductive and deductive reasoning to reach certain assumptions about the
Property. In particular, he assumed the house on the Property was in good
condition given the market-rate rental charged to the tenants and the fact that
the house could be sold separately from the lot. In his view, this latter fact
suggested that the house had to be “to some extent, a
keeper”.
In his report, Mr. Duckett states that “the building is
assumed to be consistent in terms of quality, and conditions [sic] to
similar one storey residential dwelling[s] built around the same time period,
and sold more recently in the immediate kneighbourhood [sic].”
[33]
Mr. Duckett testified that the CRA maintains a
database of data obtained from MPAC since the 1970s and that he referred to the
information in that database. Mr. Duckett’s research indicated a lot size of
14,171 square feet, a house size of 1,233 square feet on one floor, a basement
of the same size of which 237 square feet was finished, a basement garage of
248 square feet and a detached garage of 284 square feet.
[34]
As for the valuation methodology, Mr. Duckett
researched the multiple listing service (“MLS”) data
for the period from December 1998 to “about 2004”
and identified 25 properties. He then did an analysis of the evolution of the
market over time to ascertain if there was a trend in pricing and saw that prices
escalated from $148,000 in 1998 to $200,000 in 2004. At this point, Mr. Duckett
toured the neighbourhood and took pictures of the 25 properties as well as of
the Property with the new house on it.
[35]
From the data for the 25 properties he concluded
that the average lot size in the area was approximately 6,000 to 7,000 square
feet and that the average house size was approximately 1,000 square feet. This
compared to 14,171 square feet and 1,233 square feet for the Property.
[36]
Mr. Duckett then picked the three properties
with the largest lot sizes. The lot and house sizes of these three properties
were 14,800 square feet and 1,283 square feet for comparable one, which sold
for $248,000 in March, 2004; 14,155 square feet and 1,547 square feet for
comparable two, which sold for $281,000 in May 2004; and 10,527 square feet and
1,100 square feet for comparable three, which sold for $232,000 in June 2004.
[37]
Mr. Duckett opined that it was important to pick
properties that were as homogeneous as possible to minimize the adjustments
necessary in order to compare the properties. Mr. Duckett also stated that the
two most important components of value are the land and the improvements on the
land.
[38]
Mr. Duckett stated that his next step was to
analyze the value of the land separately from the improvements on the land. This,
he said, would facilitate any adjustments to value that would have to be made
to the comparables. To do this, he used a computer program that performed the
analysis by an iterative process.
[39]
The end result was a value for the land on a
per-square-foot basis and a depreciated value for the improvements. The value
of the land so determined was considered a constant. However, for the purpose
of adjustments to account for different lot sizes, 50% of the value per square
foot was used on the theory that the back half of a large lot is worth one-half
the value of the front half. The depreciated value of the improvements was
adjusted to account for differences among the improvements on the properties.
[40]
Using this approach, Mr. Duckett determined that
the adjusted value of comparable one was $260,000, the adjusted value of
comparable two was $252,400 and the adjusted value of comparable three was
$261,900. The adjustments are described on the seventh page of Mr. Duckett’s
appraisal report.
On the basis of the adjusted values, he concluded that the fair market value of
the Property in March 2004 was $260,000.
[41]
I note, however, that the adjustment for lot
size made for comparable one contains an apparent error. Specifically, Mr.
Duckett has added $15,000 to the sale price of that property to account for a
lot size that is 629 square feet larger than the Property. Given the larger
size of the lot I would expect a downward adjustment in the sale price of
comparable one to factor out the larger size of its lot. Such an adjustment
would be consistent with Mr. Duckett’s explanation of the objective of the
adjustments.
[42]
The apparent error in the adjustment of
comparable one’s lot value is highlighted by the adjustment for comparable
three’s smaller lot: an addition of $22,000 to the sale price of that property. Using this adjustment to
determine the adjustment per square foot applied to the lots, the adjustment to
comparable one should have been a decrease in value of approximately $3,800 for
an adjusted value of $241,200.
III.
The Position of the Appellants
[43]
The Appellants submit that the capital gain of
each Appellant should be determined using an ACB for the Property of
$152,770.72 and proceeds of disposition of $225,000. These numbers yield a
capital gain of $72,229.28 or $36,114.64 for each Appellant.
[44]
The Appellants submit that the aggregate ACB of
the Property in the hands of the Appellants consists of the ACB of the
one-third interest in the Property acquired by Mrs. Bueti from the Estate, the
$100,930 assumed to be the ACB of the Property in paragraphs 12(i) and 12(j) of
the Replies of Mrs. and Mr. Bueti respectively and the $930 referenced in
paragraph 21 of each Reply.
[45]
The Appellants submit that the ACB of the
one-third interest in the Property acquired by Mrs. Bueti from the Estate was
$50,910. This amount is one-third of the ACB of the Estate, which is $150,000
under paragraph 70(5)(a) of the Income Tax Act (“ITA”), plus the probate taxes attributable to that
amount plus legal fees of $630 and a registration fee of $50.
[46]
The Appellants submit that the proceeds of disposition
figure of $225,000 used in the calculation of the aggregate capital gain is
supported by the valuation of Mr. Carty and that Mr. Carty’s opinion on
the value of the Property at the time of the gift in 2004 is to be preferred
over the opinion of Mr. Duckett because of Mr. Carty’s extensive experience
with appraisals in the neighbourhood in which the Property is located.
IV.
The Position of the Respondent
[47]
The Respondent submits that the will of Domenico
Papalia did not provide for a specific bequest of the Property to Mrs. Bueti. Rather,
it divided the residue of the Estate equally among Mrs. Bueti, Diego Papalia
and the four grandchildren. As there was no specific entitlement to the
Property, neither paragraph 69(1)(c) of the ITA nor paragraph 70(5)(b)
of the ITA applied to deem the property to be acquired by the beneficiaries at
fair market value.
[48]
The Respondent submits that the Appellants in
fact purchased the Property from the Estate for $50,000 as evidenced by the
Deed and the contemporaneous mortgage, which in the normal course would yield
an adjusted cost base of $50,000 plus related expenses for the entire Property.
However, the Respondent conceded that she could not at this late stage adjust
the ACB below the amount reflected in the Reassessments, which is $100,930. Accordingly,
the position of the Respondent is that the ACB of the Property for the purposes
of the appeals is $100,930.
[49]
The Respondent submitted that the gift of the
Property by the Appellants to their son and daughter-in-law on March 11, 2004
gave rise to proceeds of disposition of $260,000, being the fair market value
of the Property at the time of the gift. The Respondent submits that the
valuation of Mr. Duckett is to be preferred over that of Mr. Carty because it
was based on assumptions drawn from objective sources such as MPAC rather than
from information provided by Mrs. Bueti, was not rushed and utilized comparables
with similar-sized lots. The Respondent submitted that the size and quality of
the lot was a significant factor that was not fully taken into account in Mr.
Carty’s valuation.
V.
Analysis
[50]
Subsection 70(5) of the ITA addresses the income
tax consequences of the death of an individual who owns capital property at the
time of death. That subsection states, in part:
(5) Capital
property of a deceased taxpayer - Where in a taxation year a taxpayer dies,
(a) the taxpayer shall be deemed to have, immediately before
the taxpayer’s death, disposed of each capital property of the taxpayer and
received proceeds of disposition therefor equal to the fair market value of the
property immediately before the death;
(b) any person who as a consequence of the taxpayer’s death
acquires any property that is deemed by paragraph (a) to have been
disposed of by the taxpayer shall be deemed to have acquired it at the time of
the death at a cost equal to its fair market value immediately before the
death;
[51]
As a result of paragraph 70(5)(a) of the
ITA, the Property was deemed to have been disposed of by Domenico Papalia immediately
prior to his death for proceeds of disposition equal to the fair market value
of the Property at that time. In addition, the person acquiring the Property as
a consequence of Domenico Papalia’s death was deemed to have acquired it at a
cost equal to that same fair market value. I note that in this case the more
specific rule in paragraph 70(5)(b) of the ITA overrides the general
rule in paragraph 69(1)(c) of the ITA, which applies “[e]xcept as expressly otherwise provided in
this Act”.
[52]
The question raised by paragraph 70(5)(b)
of the ITA is who acquired the Property on Domenico Papalia’s death? Sections 2
and 3 of the will of Domenico Papalia (Exhibit A-1) state:
2. TRUSTEES
AND EXECUTORS
I HEREBY NOMINATE
AND APPOINT my son, DIEGO PAPALIA, and my daughter, SERAFINA BUETI, as my
Trustees and Executors under this my Will.
I DECLARE that
the expression ‘Trustee’ or ‘Trustees’ whenever used in this my will shall mean
and include the trustee, trustees, executor, executrix, executors or
executrices for the time being and from time to time of this my will whether
original or substituted.
3. TRANSFER TO
MY TRUSTEES
I GIVE, DEVISE AND
BEQUEATH all of my property, both real and personal, of every nature and kind,
wheresoever situate, including any property over which I may have a general
power of appointment, to my Trustees upon the following trusts:
DEBTS &
DEATH TAXES
(a) To pay out of
and charge to the general capital of my estate all my just debts, funeral and
testamentary expenses and all estate, inheritance, succession duties and taxes
whether imposed by or pursuant to the law of this or any jurisdiction
whatsoever that may be payable in connection with any property passing (or deemed
so to pass by any governing law) on my death or in connection with any
insurance on my life or any gift or benefit given or conferred by me either
during my lifetime or by survivorship or by this my Will or any Codicil hereto
and whether such duties or taxes be payable in respect of estates or interest
to fall into possession at my death or at any subsequent time; and I hereby
authorize my Trustees to defer, commute or prepay any such taxes or duties.
This direction shall not extend to or include any such taxes that may be
payable by a purchaser or transferee in connection with any property
transferred to or acquired by such purchaser or transferee upon or after my
death pursuant to any agreement with respect to such property.
RESIDUARY
ESTATE
(b) TO DIVIDE the
residue of my estate into three (3) equal parts, PART “A” consisting of
thirty-three and one-third per cent (33-1/3%) of the said residue of my estate,
PART “B” consisting of thirty-three and one-third per cent (33-1/3%) of the
said residue of my estate, and PART “C” consisting of thirty-three and
one-third per cent (33-1/3%) of the said residue of my estate. My Trustees
shall:
(i) Pay or
transfer PART “A” to my son, DIEGO PAPALIA, provided that if my said son
predeceases the date of division, PART “A” shall be divided equally among the
children of my said son living at the date of division, or if there shall be no
children of my said son living at the date of division, PART “A” shall be
divided equally among the other parts into which I have hereinbefore directed
the residue of my estate to be divided and shall be administered therewith as
portions thereof, respectively;
(ii) Pay or
transfer PART “B” to my daughter, SERAFINA BUETI, provided that if my said
daughter predeceases the date of division, PART “B” shall be divided equaly [sic]
among the children of my said daughter living at the date of division, or if
there shall be no children of my said daughter living at the date of division,
PART “B” shall be divided equally among the other parts into which I have
hereinbefore directed the residue of my estate to be divided and shall be
administered therewith as portions thereof, respectively;
(iii) To divide
PART “C” equally among those grandchildren of mine, namely, DOMENIC PAPALIA,
AGOSTINO PAPALIA, GUISEPPE PAPALIA, and RICHARD PAPALIA, living at the date of
my death, provided that if any of my said grandchildren shall predecease me
leaving issue alive at the date of my death, the issue of such deceased
grandchild of mine as shall then be living shall take in equal shares per
stirpes the share of my estate to which such deceased grandchild of mine would
have been entitled had he survived me.
[53]
It is clear on the face of the will that the
property owned by Domenico Papalia on his death was given, devised and
bequeathed to the trustees and executors of the Estate named in the will and
that Mrs. Bueti was entitled to one-third of the residue of the Estate. It is
equally clear that the Property was not given, devised or bequeathed in
specie to Mrs. Bueti and the other beneficiaries of the Estate.
[54]
At the time of his death, Domenico Papalia was
resident in Ontario. Consequently, the will must be read in conjunction with
the provisions of the Estates Administration Act (Ontario) (the “EAA”).
Subsection 2(1) of the EAA states:
All real and
personal property that is vested in a person without a right in any other person
to take by survivorship, on the person’s death, whether testate or intestate
and despite any testamentary disposition, devolves to and becomes vested in his
or her personal representative from time to time as trustee for the persons by
law beneficially entitled thereto, and, subject to the payment of the person’s
debts and so far as such property is not disposed of by deed, will, contract or
other effectual disposition, it shall be administered, dealt with and
distributed as if it were personal property not so disposed of.
[55]
The effect of this provision is that on his death
the real and personal property of Domenico Papalia devolved to and became
vested in his personal representatives. Professor Oosterhoff states that “[t]he effect of [sub]section 2(1) . . . is
to vest the real as well as the personal property in the personal
representative in trust to pay the debts and to distribute the estate”.[26]Accordingly,
in addition to the will, there are provisions of the EAA under which, on the
death of Domenico Papalia, the Property was transferred to and vested in the
individuals appointed as his trustees and executors under paragraph 2 of his will.
[56]
As for the nature of the beneficiaries’ interest in
the Property immediately following Domenico Papalia’s death, in 909403
Ontario Ltd. v. DiMichele,
the Ontario Court of Appeal confirmed that an entitlement to the residue of an
estate under a will does not amount to a property interest in specific estate
assets. In that case, the Court found that, since the estate assets had not
been distributed at the relevant time, the beneficiaries did not have a
property interest in the real property held in the estate.
[57]
In the earlier case of Spencer v. Riesberry, the Ontario Court of Appeal
stated that “[u]nless the terms of the trust expressly
provide otherwise, a beneficiary has no property interest in any specific asset
of the trust, prior to or absent an appropriation of such asset to the beneficiary by the trustee”.
[58]
In support of this statement, the Court cited with
approval Gennaro v. Gennaro,
a decision of the Ontario Unified Family Court that considered whether a
beneficiary’s interest in the residue of an estate constituted an interest in
the estate’s assets. Justice Steinberg found that the beneficiary under the will
did not have a property interest in the real property in question because the will
did not bequeath to him a specific interest in the property. During the
administration of the estate, the personal representative had full discretion
in carrying out his duties under the will and the beneficiary was not entitled
to compel conveyance of the real property to him.
[59]
In light of the terms of the will in the present
case, the rule in subsection 2(1) of the EAA and the foregoing case law, I have no difficulty concluding that, on the death of Domenico Papalia,
the Property devolved upon and vested in Diego Papalia and Serafina Bueti in
their capacity as trustees and executors of the Estate. However, Serafina Bueti and
the other beneficiaries identified in paragraph 3(b) of the will did not
acquire the Property as a consequence of Domenico Papalia’s death. I therefore
reject the Appellants’ argument that paragraph 70(5)(b) of the ITA
deemed Mrs. Bueti to have a cost of the Property, as she did not, in her
personal capacity, acquire the Property on the death of Domenico Papalia.
[60]
Paragraph 70(5)(b) of the ITA is, however, relevant
to the Estate. Subsection 104(1) states, in part:
104.(1) Reference to
trust or estate - In this Act, a reference to a trust or estate (in this
subdivision referred to as a “trust”) shall, unless the context otherwise
requires, be read to include a reference to the trustee, executor,
administrator, liquidator of a succession, heir or other legal representative
having ownership or control of the trust property . . .
[61]
As a result of subsection 104(1) of the ITA, the
Estate is considered to be a trust for the purposes of Subdivision k of
Division B in Part I of the ITA. Subsection
104(2) of the ITA in turn deems the Estate to be an individual in respect of
the property of the Estate. Accordingly, in general terms, the Estate is
subject to tax under the ITA as if it was an individual.
[62]
Pursuant to subsection 104(1) of the ITA, a
reference to a trust or estate includes a reference to, among others, the trustee
or executor who has control over the trust property. The Property devolved upon
and was vested in the trustees and executors of the Estate and therefore it is
the Estate that is deemed by paragraph 70(5)(b) of the ITA to have a
cost of the Property equal to the fair market value of that Property
immediately prior to Domenico Papalia’s death.
[63]
This leaves the question of what happened to the
Property after it was acquired by the Estate. The only documentary evidence of
a transaction with respect to the Property after it was vested in the trustees
and executors of the Estate is the Document General (Exhibit A-5), the Deed
(Exhibit A-6) and the lawyer’s letter dated November 13, 2000 that provides a
trust ledger statement to the Appellants (Exhibit A-7). The Deed was filed in
the registry office one minute after the filing of the Document General. The
latter named Serafina Bueti and Diego Papalia as the registered owners of the
Property in their capacity as Estate trustees.
[64]
The Deed, which was filed in the registry office
immediately after the filing of the Document General, indicates a transfer of
the Property from Diego Papalia and Serafina Bueti in their capacity as Estate
trustees to Serafina Bueti and Joseph Bueti as joint tenants. The consideration
for this transfer is stated on the Deed to be $50,000.
[65]
Paragraph 5 of the Deed states:
If consideration is
nominal, describe relationship between transferor and transferee and state
purpose of conveyance. (see instructions)
[66]
Under this text appear the words “Pursuant to the Last Will and Testament of
Domenic Papalia (father)”. The Appellants suggest
that this statement is consistent with a transfer of the Property pursuant to
the will and that the $50,000 identified as the consideration for the transfer reflects
Serafina Bueti’s one-third interest in the Property under the will. In other
words, this $50,000 should be added to the $100,000 that the Appellants say was
paid to acquire the balance of the Property from the other beneficiaries.
[67]
I cannot accept that position for four reasons. First,
Serafina Bueti did not have a one-third interest in the Property under the will
for the reasons already stated and therefore paragraph 70(5)(b) could
not apply to attribute a cost of the Property to Mrs. Bueti.
[68]
Second, there is no evidence that a one-third
interest in the Property was transferred by the Estate trustees to Serafina
Bueti as part of a distribution of the Property in kind from the Estate to the
beneficiaries of the residue of the Estate. In fact, the Deed clearly indicates
that the entire Property was transferred from the Estate to Joseph and Serafina
Bueti as joint tenants.
[69]
Third, Joseph Bueti was not a beneficiary under the
Will and therefore could not be taking a 50% interest in the Property “Pursuant to the Last Will and Testament of Domenic Papalia
(father)”.
[70]
Finally, the wording of paragraph 5 of the Deed
presupposes that the consideration is nominal and additional information is
requested. As the consideration was not nominal but was stated on the first
page of the Deed to be $50,000, no response to this question is required and
the response entered is unnecessary and inconsistent with the rest of the Deed.
[71]
With respect to the actual ACB of the Property for
the Appellants, Exhibit A-7 indicates that $50,000 was paid to Diego Papalia
from the proceeds of a $55,000 mortgage on the Property. Mrs. Bueti testified
that this was only part of the consideration paid to the other beneficiaries of
the Estate and that she paid a further $50,000 to the grandchildren from her
own funds. I note, however, that there is no evidence that the Property was
first transferred to the other beneficiaries of the Estate and then sold to the
Appellants. Accordingly, it is entirely unclear to me how the Appellants could have
been purchasing the Property from the other beneficiaries. The only registered
transfer of the Property was from the Estate trustees directly to the
Appellants, and this transfer immediately followed the registration of the
Property in the names of the Estate trustees.
[72]
In any event, apart from Mrs. Bueti’s testimony,
there is no evidence of an additional $50,000 payment to the grandchildren. Moreover,
Mrs. Bueti could not recall any of the details of this payment, including
whether it was made by cheque or bank draft. If indeed a further payment of
$50,000 was made, one would expect that some sort of record would exist, whether
it be a cancelled cheque, a carbon copy of a bank draft or a copy of a bank
statement. Alternatively, one might expect that one or more of the recipients
of the payment would be called to testify as to the receipt thereof. No such
evidence was presented. Therefore I do not believe that there was any payment
other than the $50,000 payment to Diego Papalia identified in Exhibit A-7. Why
this $50,000 was paid directly to Diego Papalia as opposed to the Estate
remains unexplained.
[73]
There were other peculiarities regarding the Estate
that served to call into question Mrs. Bueti’s testimony and credibility. For
example, Mrs. Bueti was not able to recall or explain what happened to the
balance of the Estate, valued for probate at $224,608 (Exhibit A-2). She did
suggest that 969270 Ontario Inc. was wound up prior to her father’s death, but
this is at odds with the assets identified for probate, which included a “Receivable note from 969270 Ontario Inc.” valued at
$177,300 and “216 Class “A” Pref. Shares in 969270
Ontario Inc.” valued at $22,000. For a trustee and executor to have no
recollection of the disposition of $224,608 of assets from an estate of
$374,608 defies belief, even though that disposition did occur some time ago.
[74]
Accordingly, the only credible evidence of
consideration having been paid for the Property is the $50,000 consideration
identified on the Deed and the contemporaneous payment of $50,000 to Diego Papalia
funded by the mortgage. I find that these are one and the same payment.
Accordingly, the cost of the Property to the Appellants was $50,930, being the
$50,000 identified on the Deed plus the expenses of $930 associated with the acquisition
(i.e., the legal fees of $630, the land transfer tax of $250 and the
registration fee of $50).
[75]
As for the fair market value of the Property at the
time of the gift on March 11, 2004, the expert evidence suggests to me that the
value lies somewhere in the range of $231,804 to $241,200. These numbers
represent respectively the per-square-foot value determined by Mr. Carty
multiplied by the actual main floor area of the house on the Property and the
value of comparable one in Mr. Duckett’s valuation as adjusted by me to
correct the apparent error. I note that comparable one is most similar to the
Property in terms of both lot size and house size.
[76]
Given the fact that neither expert had an
opportunity to see the original house on the Property, the assessment of value
in this case is even more of an art than usual because there is little evidence
of the condition of the house. Mrs. Bueti testified that the house was in
poor condition because it was occupied by an elderly gentleman who was a chain
smoker. However, she did not have a single photograph of the house
notwithstanding that her father had lived in it for over 40 years and it had
sentimental value to her.
[77]
Mrs. Bueti also testified that she visited her
father “[t]wice a day every single day.” I am skeptical that she would allow
her father to live in a below average environment when she was visiting the
house twice every day. As well, her description of the house is contradicted by
the fact that it was rented for a market rent after being cleaned and painted
on the inside and that it was ultimately sold to a third party, separately from
the land, rather than being demolished.
[78]
Notwithstanding my concerns regarding Mrs. Bueti’s
description of the house, I will accept that it may have been on the low side
of average condition. Accordingly, I conclude that the value should be fixed at
$236,500, which reflects what I consider to be the mid-point of the two
valuations by the appraisers. Given the fact that neither appraiser had an
opportunity to see the house and that the valuations as adjusted by me are
quite close, I believe this is a fair conclusion in the circumstances.
[79]
For the foregoing reasons the appeals are allowed
and the Reassessments are referred back to the Minister for reconsideration and
reassessment on the basis that the deemed proceeds of disposition resulting
from the gift of the Property on March 11, 2004 were $236,500. There shall be
no adjustment to the ACB of the Property used for the purposes of the
Reassessments. In the circumstances, I do not award costs to either party.
Signed at Ottawa, Canada, this 29th day of October 2015.
“J.R. Owen”
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