Lamarre Proulx, T.C.J.: —This is an appeal from a reassessment relating to the appellant's 1981 taxation year. The main issue is the market value of two properties on December 31, 1971. The other issues concern certain expenses of sale, professional fees, improvements to the properties and property taxes.
This appeal relates specifically to subsection 40(1), and paragraphs 53(1)(h), 54(a), 54(c) and 54(h) of the Income Tax Act and subsection 26(3) of the Income Tax Application Rules, 1971.
Agreement between the parties
A partial agreement as to the facts and issues was filed:
(1) Expenses relating to the sale: $20,700. It is admitted that this outlay was made for the purpose of disposing of the property in question and should he taken into consideration in calculating the capital gain or loss from the disposition of this property, in accordance with subsection 40(1) of the Income Tax Act.
(2) Capital improvements: $7,821.09. Since 1971, the appellant has made improvements to the property in question in the amount of $7,821.09. It is admitted that the cost of these improvements must be capitalized and taken into consideration in the adjusted cost base of this property.
(3) Professional fees (lawyer): $31,699.73. The respondent acknowledges that of the total of $31,699.73, $1,663 constitutes an outlay made for the purpose of disposing of the property in question, in accordance with subsection 40(1) of the Income Tax Act. With respect to the balance of $30,036.73, there is disagreement between the parties as to whether these professional fees constitute (i) an outlay made for the purpose of disposing of the property in question, within the meaning of subsection 40(1) of the Income Tax Act, or (ii) sums that must be added to the adjusted cost base of the property in question.
(4) Professional fees (other): $14,033. The respondent acknowledges that $1,685 of this amount constitutes an outlay made for the purpose of disposing of the property in question, in accordance with subsection 40(1) of the Income Tax Act. There is disagreement as to the balance of $12,348.
(5) Taxes: $36,912.73. There is disagreement between the parties as to whether the amount of these taxes may be added to the adjusted cost price of the property in question.
(6) Disallowed deduction for professional fees: $5,150. In establishing the reassessment under appeal, the respondent disallowed the deduction of $5,150 that the appellant had claimed as professional fees. The parties agree that $575 should be allowed as a deduction in computing the appellant's income. The parties agree that the disallowance of the balance of $4,575 should be upheld.
The facts
The properties in question are located in the parish of St-Bruno, near Montreal. Property No. 1, part of lot 234, was sold on or about April 2, 1980 for $55,000. The other property, No. 2, part of lots 232 and 233 with buildings thereon, was sold on or about June 30, 1980, for $210,000. Property No. 1 has a total area of 134,341 square feet and property No. 2 a total area of 282,242 square feet. With respect to the market value on December 31, 1971, the appellant valued property No. 1 at $47,015 and property No. 2 at $101,955 for the land and $91,185 for the buildings, for a total value of $193,140. The respondent estimated the fair market value of property No. 1 at $22,100 and of property No. 2 at $42,300 for the land and $52,700 for the buildings, for a total value of $95,000.
These are adjacent properties between Rue Beaumont on the south, Boulevard des Hirondelles on the north, Rue Montpellier on the west and residential properties on the east.
Both properties are located in an area zoned for parks and schools. In January 1963 the City of St-Bruno passed a zoning by-law the effect of which was that properties No. 1 and No. 2 are located in a zone referred to as PA, that is, that the only permitted uses were those involving as their primary activity recreation and education under the aegis of a public body. The nonconforming use of a non-conforming structure continued to be permitted, for residential purposes only.
According to the testimony of Jean-Luc Samson, who was part of the family unit that lived on the property at the time, the family was quite pleased by this zoning, because to them it meant that the properties would eventually be purchased by public bodies.
Because there were no offers to purchase, and in view of the increase in the cost of living and the decrease in the family unit's income, the family brought action in 1973 to have the municipal assessment reduced. In 1978, after the judgments of two courts, the Quebec Court of Appeal established the value of the properties for municipal assessment purposes at $44,660 for the buildings, $39,920 for the land where the buildings were located and $1 for the remainder of the land.
On July 4, 1973, expropriation proceedings for land required for a street extension began. The judgment of the expropriation tribunal was delivered on June 9, 1977.
There were still no offers from any public bodies, and so an action was brought under Article 33 CCP to have the zoning by-law annulled. In 1981, the Quebec Court of Appeal gave judgment (1981) C.A. 193 dismissing the action by Jeanne Samson because of excessive delay in commencing proceedings. I quote a passage that is of interest in the case before us, in which Mr. Justice Turgeon of the Court of Appeal stated the following:
[Translation]
No promises, negotiations or even discussions for the use of the land by any government organization were shown.
Testimony of the appraisers
The appellant’s appraiser, Mr. Courcelles, described this kind of property as being a restricted property. In order to arrive at the fair market value of these properties on December 31, 1971, Mr. Courcelles used the cost method for the built-up property, that is, the buildings were appraised on the basis of the cost of reconstruction or replacement, to which he applied a rate of depreciation to arrive at a depreciated value. For the land he used the comparative method, that is, comparison with transactions in the vicinity on a subdivision basis. For the built-up property, the appraiser stated that he could have used two other recognized appraisal methods, comparative or income, but he opted for the cost method solely because he thought that there had been no property sold in the vicinity in the years in question that would be comparable to the property in question. Not because there were no built-up properties sold in the vicinity, but given that in his opinion he was dealing with a very specific property, he concluded that in order to use such transactions he would need to make too many corrections or adjustments. It is recognized in preparing appraisals that when too many adjustments have to be made the conclusions reached are difficult and may be more in error. Nonetheless, market value factors are taken into account in the calculation using the cost method because the cost is weighted according to a depreciation factor. People will not pay as much for a 10 or 15-year-old property as they will for a new property. The depreciation tables used come from the market. According to market statistics, the economic life of a residence is longer than that of secondary buildings.
The land: given that on December 31, 1971 the property was located in a PA zone, which is a public use zone: park, public or semi-public building, the appraiser is of the opinion that any eventual purchaser will be a public body and that the market value of the land will have to be determined on the basis of the factors that determine the purchase price paid by a public institution on an expropriation. The price will be determined on the basis of the best and highest use of the land, without taking into account the zoning by-law. This use results primarily from the type of development prevailing in the immediate vicinity.
[Translation]
Given the presence of single-family residential development where the topography and tree coverage are comparable to the subject property, that is, Rue Montpellier and Rue des Erables, and we could also say Rue Beaumont, and also given the presence of an élite golf course in the immediate vicinity, we are of the opinion that a residential development (or subdivision) of the same type as those on Rue Montpellier and Rue des Érables would be the best and highest use on December 31, 1971. On the south, there is a panoramic view of the golf course, on the east the famous Sommet Trinité development where there are only high-end properties, on the west of the property the development on Rue Montpellier, Rue des Érables and Rue Beaumont. The farther west you go, the more the neighbourhood changes, and you find areas that are not comparable. On the north of the property is Mont St-Bruno park.
The appraiser referred me to a table of sales of lots on Rue Montpellier, from 1966 to 1972. He told me on the basis of these transactions that lots on Rue Montpellier were selling for $0.60 per square foot on December 31, 1971. He appraised the first 150 feet of frontage of properties No. 1 and No. 2 on Rue Beaumont at this value, since he appraised it as having the same value as subdivided lots. With respect to the rear of the properties, about 550 feet in depth, since they were unsubdivided lots he established the value at $0.30 per square foot, using the subdivision method for this purpose. He told me that his appraisal was corroborated by an expropriation judgment dated June 9, 1977.
On July 4, 1973 parts of lots 232, 233 and 234 were expropriated for the opening of Boulevard des Hirondelles. The boulevard divided the original huge property in two. The part on the north of Boulevard des Hirondelles was expropriated by the government of Quebec sometime in the 1980s for public park purposes. The part in issue is the property located on the south of Boulevard des Hirondelles. The expropriation judgment for properties that were not built-up for the purposes of Boulevard des Hirondelles is of interest, since it determined the value of lots that are identical to the lots presently in issue, except for the surface area involved. The following passage appears at page 7 of that judgment:
[Translation]
The tribunal is of the opinion that the expropriated parcel more closely resembles the land on Rue Montpellier adjoining the Samson property. However, we must take into account the fact that the expropriated parcel is undivided, while the lots on Rue Montpellier were subdivided and had municipal services. For this reason the tribunal believes that it is fair and reasonable to attribute to the expropriated parcel a value of $.30 per square foot, or 50% of the value of the subdivided land on Rue Montpellier.
The expropriated parcel was 38,411 square feet, while the total area of properties No. 1 and No. 2 is 416,583 square feet. The date of this expropriation was a year and a half after December 31, 971.
On cross-examination, he was asked why he assumed a purchase for public purposes.
[Translation]
Well, because generally when you have a property that is zoned PA, the most likely purchaser is surely a public institution.
When it was pointed out to him during the same cross-examination that in fact in 1980 the properties were sold to individuals, Mr. Courcelles replied that if they were not sold to public bodies it must have been nearly certain that the zoning would change, as it in fact did.
With respect to the built-up property, the respondent's appraiser based his appraisal on comparability with neighbouring properties, and for the land he ignored the expropriation judgment and did not give a subdivided value for the lot.
Let us first consider the question of the lot. I believe that in respect of the lot the reasoning of the respondent's apparaiser is correct. The market value of the lot in 1971 must be determined on the basis of the zoning by-law in effect. On this point, see Robert A. Kramer, Hillside Shopping Centre Ltd. and McCallum Hill & Co. Ltd. v. Wascana Centre Authority, [1967] S.C.R. 237, Les Immeubles Cataraqui Inc. v. Québec, [1982] C.A. 495. In the first case cited above, Mr. Justice Abbott, speaking for the majority, wrote at page 239:
The learned arbitrator found that the Community Planning Scheme adopted by by-law 3506, passed by the City Council of Regina on December 5, 1961, represented the state of mind of the city authorities at that time. That Planning Scheme was crystallized in the zoning by-law 3618 adopted on December 28, 1962, of which public notice had been given some months before, and which affected the whole City of Regina. The arbitrator held on the evidence that this by-law was an independent zoning enactment, part of an overall city plan and not part of the expropriation proceedings — although passed of course with knowledge of the Wascana Centre Scheme. He held therefore that the bylaw 3618, in limiting the use of the land expropriated to “public service use”, was a determining factor in assessing the amount of compensation. These findings were confirmed by the majority in the Court of Appeal. The Appellants failed to satisfy me that they are wrong and I would therefore dispose of the appeal as proposed by my brother Spence.
In Les Immeubles Cataraqui Inc., Mr. Justice Dubé stated, at pages 496 and 497:
[Translation]
I propose to deal with grounds for appeal (a) and (c) together, because in effect one depends on the other: the expropriation tribunal refused to grant the appel- lant the subdivided value precisely because the property in question was "encumbered" by the designation as an historic area before the appellant purchased it.
The appellant argues that the mere designation of a property as historic at the time of the purchase does not prevent the subdivision of the property in question : according to the appellant, this designation simply imposes an obligation to obtain the approval of the minister prior to undertaking construction projects but, the appellant argues, the minister was not entitled to refuse subdivision.
It seems to me that according to this by-law it is clear that the minister was entitled to refuse to permit purchasers of the Cataraqui estate to subdivide it.
. . . accordingly, I believe that the Expropriation Tribunal was justified in not granting a subdivided value for the Cataraqui estate but rather in considering it as what it has always been, a huge lot used for residential purposes; . . . .
The property in question could not have been subdivided for residential subdivision purposes and accordingly the value of the lot must not be calculated on that basis. An eventual purchaser could only have continued the nonconforming use of the prior owner. Even if the purchaser had been a public institution, the judgment of the Court of Appeal in Les Immeubles Cataraqui Inc. indicates to me that the land would also have been appraised on this basis. In any event, the evidence showed very clearly that on December 31, 1971 there were no discussions for sale to public institutions. Even in 1978, there had still not been any offer to purchase from public institutions, if we refer to the judgment of the Quebec Court of Appeal, cited above, concerning the municipal assessment.
What is the probative value of the expropriation judgment? An expropriation judgment may be considered by the Court and in my opinion the position adopted by Mr. Justice Gillis in Dickson v. Nova Scotia (1971), 5 N.S.R. (2d) 89; 3 L.C.R. 169, clearly expresses the weight that the Court may give to it:
The preferable proposition, in my view, is that the evidence of settlements subsequent to expropriation of neighbouring properties, is admissible and relevant with the weight of such evidence depending upon the surrounding circumstances.
On this point, I would refer to The Law of Expropriation and Compensation in Canada, Eric C.E. Todd (1976), page 161, in the chapter entitled "Settlements and Awards". I do not believe in the circumstances that the expropriation judgment was representative of the fair market value of the property. It was not a sale by mutual agreement and the expropriated parcel was relatively small, 38,411 square feet, while the total area is 416,583 square feet.
With respect to the built-up property, I also do not believe that it can be said that there were no comparable houses in the vicinity. The house was nice, but it was a single-family home of normal size. Other nice houses in the immediate vicinity had been sold. I believe the testimony of the respondent's appraiser on this point.
I accept his appraisal of the house, and following the principles set out in the two cases cited above, I also accept his appraisal of the land. I believe that the premises on which the appellant's appraiser based his opinion were incorrect, that is, that there were no comparable houses in the vicinity and that the lot had to be appraised according to the principle of subdivision. I believe that there were comparable houses in the vicinity and that the lot could not be appraised on the basis of subdivision, in view of the existing zoning by-law.
The other questions to be determined for the purposes of the appeal concern property taxes and professional fees.
Property taxes
With respect to the inclusion of property taxes in the adjusted cost base of the properties under paragraph 53(1)(h) of the Act, I agree with the reasoning of my colleague Judge Bonner in Horst Bauerle v. M.N.R., [1986] 1 C.T.C. 2175; 86 D.T.C. 1131. Property taxes may be included in calculating the adjusted cost base to the extent that they were not deductible under subsection 18(2) in computing income from land or a business. The evidence indicated that the properties in question were not a source of income from land or a business for the appellant and they were therefore not subject to the restriction relating to certain property taxes under subsection 18(2) of the Act. Accordingly, the property taxes cannot be included in calculating the adjusted cost base of the properties in question.
Professional fees
The professional fees for contesting the municipal assessment and for the action to cancel the zoning are claimed either under section 53 as part of the adjusted cost base or under paragraph 40(1)(a) as expenses or outlays that may be added to the adjusted cost base.
Counsel for the appellant argued that the present paragraph 53(1)(n) simply entrenched a pre-existing accounting principle in the Act in 1985, and that the reasonable expenses incurred by the taxpayer in having the property appraised and in disposing of it must be considered in calculating the adjusted cost base. She argued that the expenses in question were incurred for the appraisal of the properties. I do not believe that all the professional fees in question in the present case are expenses related to the appraisal within the meaning of the present paragraph 53(1)(n), but in any event this paragraph did not exist in 1981 and because she could refer me to no cases or interpretation bulletins that would corroborate her interpretation, I do not accept the argument that these fees may be included in calculating the adjusted cost base using this reasoning.
In respect of including these fees in the adjusted cost base under subparagraph 40(1)(a)(i), which reads as follows:
. . . any outlays and expenses to the extent that they were made or incurred by him [the taxpayer] for the purpose of making the disposition . . . .
While the evidence is somewhat confused on this point, it would seem that the professional fees in issue were incurred either in order to contest the municipal assessment or for the action to cancel the municipal by-law. What was the purpose of contesting the municipal assessment and of the action to cancel the zoning by-law? On this point I quote the testimony of Jean-Luc Samson:
[Translation]
A. In '73 we asked the Board of Revision to change the assessment. This was refused, and we went to Superior Court, and it was refused; and in '78 we obtained a favourable judgment from the Court of Appeal on the assessment. You have to understand . . .
Q. And so you started to contest it in 1973.
A. Yes. According to my notes, but they refer to documents that . . . Q. Could you tell us why you first contested it?
A. It was quite simple: since '63 we were zoned PA; when that happened no one reacted, that is: Well, listen . . . we knew that we could not live there forever after, that's obvious, that it cost a lot to live there and maintain it, nor did we consider abandoning it, so we had to sell it.
You will remember that the Estate had been in existence since ’61. In '63 there was a zoning change; Perfect, the government will buy it, and then . . . nothing happened. The years went by. By '73 we said: “It doesn't make sense to be paying taxes on it!" And then we were still waiting for the government to make us an offer or approach us. And so to save money, strictly for that, we said, "Well, at least if we were paying less tax we might be able to last a little longer." It was done from that point of view, there was nothing else.
Q. Could you recall for us the result of this dispute? I would advise the Court that the judgment of the Court of Appeal has been filed as Exhibit 1-3.
R. Well, there are perhaps two things in that judgment that I would like to bring to the attention of the Court. First, is that it in no way judges the market value of the land, but we were arguing much more on the fairness of things, that is, that we could not dispose of the land and that, on the other hand, the municipality that had created the zoning was pocketing money. The judgment is much more against that at that point and that is why there was a change in the assessment.
But on the other hand there was a very important element in that, which is that we were told that the zoning by-law could be disputed in court, and that we would have . . . we were given to understand that we would have a chance of success. So at that point we said: "Listen a minute, this judgment was in '78, the zoning has existed for fifteen years already”, and we said: “Listen, it seems that they're telling us that we should perhaps . . . and at that point if we can change the zoning we will be able to dispose of it.” And so it was at that point that we started proceedings and said: "We're going to change the zoning.”
The Superior Court told us in '78: "You waited too long!" That turned things around.
With respect to the professional fees incurred in disputing the zoning bylaw, counsel for the respondent argued that the relevant portion of subparagraph 40(1)(a)(i),
. . . any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition . . .
clearly shows that it is referring to a disposition that has taken place. He emphasized the use of the definite article "the" before the word “disposition” and argued that there must be some connection or relationship between the expenses and the disposition. This latter aspect appears to me to be the most valid. I would refer also to the decision of the Federal Court of Appeal in The Queen v. Geoffrey Stirling, [1985] 1 C.T.C. 275 ; 85 D.T.C. 5199, in which Mr. Justice Pratte stated, at page 276 (D.T.C. 5200):
. . I any expense that he may have incurred in order to put himself in a position to pay that price or to keep the property afterwards.
The expense relating to the action to cancel the zoning by-law is not related to maintaining the property or financing the purchase price. In my view, it is an expense which, in certain circumstances, depending on the evidence, may be considered to be incurred for the disposition of a property. In this case, according to the evidence that I have heard, this was the purpose of the dispute. Since the public authorities were not buying, it was hoped to change the zoning so as to be able to dispose of it more easily to individuals. I am therefore of the opinion that the professional fees related to the zoning dispute fall within the terms of subparagraph 40(1)a)(i).
My conclusion is not the same with respect to the professional fees relating to the dispute of the municipal assessment. This was an expense related to the maintenance of the property which does not fall within the terms of subparagraph 40(1)(a)(i).
The appeal is allowed without costs and the assessment is referred back to the Minister for reconsideration and reassessment in accordance with the admissions and the foregoing reasons.
Appeal allowed in part.