Dimitri Burcevski v. The Minister of National Revenue, [1994] 2 CTC 2040, 94 DTC 1889

Hamlyn, J.T.C.C.:—The essence of these appeals lies with the taxpayer’s disagreement with the fair market value determined by Revenue Canada on real properties transferred, as well as, in particular whether the appellant had a beneficial interest in two of the real properties transferred.

By notices of reassessment dated January 27, 1982 the respondent added $220,284 to the appellant’s 1977 taxation year for unreported income from sale of real estate. The respondent added $163,150 to the appellant's 1978 taxation year for unreported income from sale of real estate and the respondent added $127,880 to the appellant's 1979 taxation year for unreported income from sale of real estate.

The appellant filed notices of objection for the reassessments for taxation years 1977, 1978, and 1979 dated April 21, 1982.

By notices of reassessment dated February 1, 1984 the respondent again reassessed the appellant for the said unreported income and added $197,493.21 to the appellant’s 1977 tax year, $46,025 to the appellant’s 1978 taxation year and $16,000 to the appellant's 1979 taxation year.

It is to be noted from the first taxation year in issue to the hearing of these appeals some 17 years have elapsed. During this period of time the appellant's retained property appraiser died. At trial, the appellant submitted he was unable to obtain new appraisals. Further, from the filing of the notice of appeal (1984) to the filing of the reply to notice of appeal (1990) to the actual appeal hearing (1994) some ten years had elapsed.

The appellant’s evidence was brief and limited in scope. He stated the reason behind the purchases was to obtain properties capable of generating rental income or farm income. He also stated for each property what he saw as specific detriments to diminish the respondent's appraisals including lot sizes, "set back” provisions, deteriorated buildings, use limitations, topographical problems and pollution sources. He maintained that during the period of time of his property ownership, property prices were not escalating. In relation to two of the properties (see below 3507 and 1911) he testified the transfers were as a result of a divorce settlement between himself and his ex-spouse and that he had no beneficial interest in the ultimate gain.

The respondent's evidence was that of an expert who provided the Court with real property appraisals and value opinions, as well as with evidence about zoning, set backs and land use for the properties in question. This appraiser's evidence was contrary to the appellant’s evidence in terms of escalating property prices. The market data comparison approach used by the appraiser showed throughout for all properties that property market prices were escalating.

The property transfers in question are:

Facts

The appellant at one time or another owned all the properties in question.

In January 1977 the appellant incorporated the company VooDoo Enterprises Ltd. ("VooDoo").

In March 1977 the appellant transferred the following properties to VooDoo: 1904, 4703, 4707, 1619, 2309, 1913, NE-3 and SE-11.

A section 85 rollover election (transfer of property to a corporation by shareholders) was never filed on behalf of the appellant or the corporation.

The 1977 capital gains assessment was calculated from a fair market value determination of the properties, at the time of the transfer to VooDoo, by Revenue Canada.

In 1978, property 3507 was transferred to the appellant's ex-spouse as part of a divorce settlement.

In 1978, property 2309 (previously transferred to VooDoo) as well as property 2301, the appellant's principal residence, were transferred to a third party (Two-Bit Developments Ltd.).

In 1979, property 1911 was transferred to the appellant’s ex-spouse as an additional part of the divorce settlement.

Analysis [1]

Property 1904

As stated in the schedule prepared and submitted by both parties, the assigned values of this property in 1977 were:

Assessed Gain $51,000 - $40,000 (A.C.B.) = $11,000

The stated initial acquisition purpose for the purchase of this property was for rental income.

The appellant maintained the property was of limited use because it was subject to a "set back” and this “set back" affected any future use of the land.

The evidence from the appraiser for the Minister of National Revenue (the "Minister") was the "set back” was not in place at the time of the transfer. The property when acquired was in the path of multi-residential development in the location area. Moreover, the market data comparison approach showed the property value had a continuous increase in value during the period of holding. The expert's appraisal withstood the testing of the trial process. The appellant's contentions were not proven and the Minister’s reassessment stands as assessed. The appeal is dismissed for property 1904.

Properties 4703, 4707 and 1619

As stated in the schedule prepared and submitted by both parties, the assigned values of these properties in 1977 were:

Property 4703:

Taxpayer's Value	$56,788
Minister’s Value	$56,200
Respondent's Appraisal	$62,200
Assessed Gain $56,200 — $52,500 (A.C.B.)	$3,700
Property 4707:
Taxpayer's Value	$56,788
Minister’s Value	$56,200
Respondent's Appraisal	$62,200

Assessed Gain $56,200 - $52,500 (A.C.B.) = $3,700

Property 1619:

Taxpayer's Value	$56,788
Minister’s Value	$79,500
Respondent's Appraisal	$64,200
Assessed Gain $79,500 — $74,127 (A.C.B.)	$5,373

At the conclusion of the hearing, the appellant’s counsel advised the Court (for the 1977 taxation year) that the appellant accepted the assessments for the above noted properties. The appeals therefore in relation to these properties are dismissed.

Property 2309 — Properties 2301/2309

As stated in the schedule prepared and submitted by both parties, the assigned values of property 2309 in 1977 were:

Assessed Gain $135,000 - $47,000 (A.C.B.) = $88,000

In 1977, 2309 was transferred to VooDoo.

Property 2309 was purchased in July 1973, together with an adjacent lot, being 2301, for a combined price of $94,000. The appellant's lawyer assigned $47,000 for each lot.

The assigned value allocation of both properties 2301 and 2309 in 1978 were: Taxpayer and VooDoo sell both for $332,500

The appellant stated he acquired both properties with the intention 2301 would be his principal residence and that 2309 was part of the transaction because the vendor made the purchase of the property very attractive to the appellant.

Both properties (2301 and 2309) were eventually sold in 1978 by the appellant and VooDoo to Two-Bit Developments Ltd.

The taxpayer testified that 2309 was a property that had a “massive” but “useless” hill and the hill detracted from the development value of the property. He further stated the building on the property was a shack of little value and could only be used seasonally. He maintained 2309 was insignificant in terms of use when compared to the adjoining lot that was the appellant's principal residence.

The Minister’s expert witness, Mr. Lee, found from research that this property was sloped but not a "massive" hill. He also found the property to be located in an area in a state of transition and in the path of spreading multi-residential development. He further testified by way of comparison analysis that, during the period in question, property prices in the area were escalating.

The transactions of purchase and sale of 2301 and 2309 in 1978 to Two-Bit Developments Ltd. were at arm's length, and both the vendor and purchaser assigned the values for these properties. However, the appraisals of the respondent's expert show that the actual values were not as alleged by the appellant.

In both transactions the valuator’s evidence for property 2309 as tested by the trial process remained unassailed.

The appeal is dismissed in relation to 2309 for 1977. For the 1978 taxation year the appeal is allowed only to reflect the valuator's appraisal of $169,000; regarding 2301, for the 1978 taxation year the value assigned is $163,500.

Property 1913

As stated in the schedule prepared and submitted by both parties, the assigned values of this property in 1977 were:

The appellant testified he bought this property to be a rental property. He stated the property was a “cheap” buy. The taxpayer's position was the sale price was a mistake, that little negotiation took place and this property was not in an escalating property market. The appellant’s attempts to downplay the value of the property did not displace the appraiser’s evaluation by the use of comparatives and his accompanying explanations. The property in this area was in an escalating property market.

The expert appraiser found the property's best use was that of commercial use. Once again the appraiser used the market data comparison approach.

This property was in the path of commercial development.

The appeal is allowed for 1977 in relation to the property 1913 to reflect the valuator’s appraisal of $38,300.

Properties NE-3 and SE-11 ("the farm properties")

As stated in the schedule prepared and submitted by both parties, the assigned values of these properties in 1977 were:

Property NE-3:

Ta xpayer's Va I ue	$124,000
Minister’s Value	$192,000
Respondent's Appraisal	$176,000

Assessed Gain $192,000 — $167,530.31 (A.C.B.) = $24,469.69

Property SE-11 :

Taxpayer's Value	$ 95,040
Minister’s Value	$157,850
Respondent's Appraisal	$143,500

Assessed Gain $157,850 — $106,599.48 (A.C.B.) = $51,250.52

The appellant testified he wanted to sell his houses in Calgary and buy farm properties and live on a farm. He stated he was guided by acreage cost factors and therefore bought the two properties in a less attractive area (i.e., close to a "sour gas" plant and a sulphur plant and with pipelines running across the farm property). In the words of the appellant the properties were polluted with sulphur debris and were not visually pleasing. Moreover, the area was permeated by unpleasant smells.

He testified that one of the properties could grow 40 acres of wheat and that the properties could sustain a pig farm operation.

The facts reveal, however, that upon acquisition one property was leased back for a five-year term to the vendor and the other property was leased out to a new tenant. On cross-examination it was shown after the purchase of the farm properties the appellant acquired six more properties in the City of Calgary.

The expert appraiser for the Minister stated his research showed the properties were quite acceptable for farming, including crops and animals. The land was not likely to be annexed by a nearby municipality. The land could possibly have an industrial future and could be used for residential use, but in the opinion of the witness chances for such development were somewhat slim. He also advised that at the time of the appellant’s acquisition there was equal or cheaper farm land available in the general area.

The appraiser chose the market data comparison approach as the best valuation approach.

The Court and counsel questioned the appraiser on the issue of aesthetics in relation to the adjoining land uses, that is, whether from an aesthetic point of view this land was not desirable.

The appraiser discounted aesthetics as a factor on the basis that there were other properties in this area, including a comparable close to the appellant's property, which were in full view of the sour gas and sulphur installations. The evaluation was not affected. His view was there is no aesthetic problem because the properties maintain their full farm use.

In conclusion it would appear the appellant could have bought other properties further from the site for the same or less money. The appellant, while maintaining he wished to sell the Calgary holdings to live on the farm properties, actually leased out the farm properties and purchased and continued to buy thereafter other properties in Calgary.

The appraiser’s evaluation remains unassailed after testing by the trial process. The appeals are allowed for the 1977 taxation year in relation to NE-3 and SE-11 only to reflect the valuator’s appraisal for NE-3 of $176,000 and for SE-11 of $143,500.

Property 2301

As stated in the schedule prepared and submitted by both parties, the assessment of this property in 1978 was:

Assessed Gain $160,000 — $47,000 (A.C.B.) = $113,000

$113,000 X 1/8 (Rental Use) = $14,125

2301 was the principal residence of the appellant. The Minister reassessed the capital gain on the sale of the principal residence on the basis that one-eighth of the residence was converted into a rental unit.

The appellant advised that the house on 2301 had a double garage under it. The appellant put windows on the garage and rented it out to tenants for six months. Within that period of time a gas heater in the unit exploded, resulting in smoke damage and an order from the fire department to stop using that area for rental accommodation. The appellant complied and thereafter used the area for personal storage. This rental space conversion was very limited in time use and was really insignificant in terms of space use. The small closed out rental operation because of these limitations was not sufficient to materially affect the full use of the property as a principal residence.

The appeal on this issue is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the gain referable to the property rental area was nil.

Property 3507

As stated in the schedule prepared and submitted by both parties, no appraisal was filed by either counsel for this property.

In 1978 the fair market value was determined by the Minister to be $56,900. The cost base was $25,000. For the 1978 taxation year, the Minister assessed the appellant $31,900 as a capital gain as a result of a transfer of this property.

The appellant did not specifically plead this property transfer assessment in his pleadings. The Minister in his reply to notice of appeal filed some six years after the filing of the notice of appeal pleaded this transaction as part of his assumptions for the 1978 taxation year as the appellant had put in issue part of the capital gain assessment for 1978.

The appellant asked this Court at the hearing of the appeals to consider this part of the assessment. Given the age of the appeals and the respondent's apparent knowledge of the transaction, this Court agreed to hear the evidence of the parties but without the benefit of further adjournment. The appellant testified the transaction in question was part of a divorce settlement between himself and his ex-wife. He stated there was no gain and all proceeds received in a later transaction went to his ex-spouse. This transaction had some apparent similarities with the consent appeal for 1979 for 1911-34th Ave. S.W. (see below).

Given those facts I conclude the appellant did not receive a capital gain on the disposition of this property.

The appeal is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the capital gain was a payment to the appellant’s ex-spouse and not a benefit to the appellant.

Property 1911

On consent of both parties the appeal for the 1979 taxation year for the capital gains assessment on the transfer or 1911 is allowed on the basis that the capital gain amount of $16,000 was a payment to the appellant's ex-spouse, Monyca Cummings, and not a benefit to the appellant.

Summary and Decision

The appeal with respect to property 1904 for the 1977 taxation year is dismissed.

The appeals with respect to properties 4703, 4707 and 1619 for the 1977 taxation year are dismissed.

The appeal with respect to property 2309 for the 1977 taxation year is dismissed.

The appeal with respect to property 1913 for the 1977 taxation year is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the value of the time of the disposition was $38,300.

The appeals with respect to properties NE-3 and SE-11 for the 1977 taxation year are allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the value at the time of the respective dispositions was $176,000 and $143,500.

The appeal with respect to property 2301 for the 1978 taxation year is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the gain referable to the property rental area was nil.

The appeal with respect to property 2309 for the 1978 taxation year is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the value at the time of the disposition was $169,000.

The appeal with respect to property 3507 for the 1978 taxation year is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the capital gain was a payment to the appellant's ex-spouse and not a benefit to the appellant.

The appeal with respect to property 1911 for the 1979 taxation year is allowed and referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the capital gain of $16,000 was a payment to the appellant's ex-spouse and not a benefit to the appellant.

For all appeals, there will be no order as to costs.

Appeal allowed in part.