Peppino Bassani v. Minister of National Revenue, [1991] 2 CTC 2388, 91 DTC 1084

Mogan, T.C.J.: —In August 1969, the appellant and one Charles Mitchell purchased 159 acres of land (a quarter section) 4 miles west of the Edmonton City limits. The purchase price was $76,000. The land was in an agricultural area and adjoined the south side of a county road which was the extension of 118th Avenue in Edmonton but still a few miles west of any urban development. The prior owner had operated a small pit near the road from which clay and granular fill had been extracted. Although the agreement of purchase and sale was signed in August 1969, the transfer of ownership was not recorded until February 1972. Prior to that time, the appellant and Mitchell had agreed to divide the land on a rough basis of 50-50. In March 1972, the northern half of the land (the 75 acres immediately south of the road) was transferred to the appellant and Mitchell retained the most southerly 84 acres. Mitchell received a few extra acres because the appellant's land contained the pit.

In 1982, the Province of Alberta (Department of Highways) expropriated a strip of land along the road comprising 16.95 acres and paid to the appellant $475,000 as the principal consideration. A further amount of $130,000 was paid in 1984. The first issue in this appeal is the fair market value of the 16.95 acres of land on December 31, 1971 (the "V-Day value”). The second issue is the taxation year or years when the appellant should be taxed on the capital gain resulting from the expropriation. The only year under appeal is 1982.

When filing his income tax return for the 1982 taxation year, the appellant reported a taxable capital gain of $56,250 with respect to the 16.95 acres computed as follows:

When issuing the reassessment under appeal for the 1982 taxation year, the respondent computed the capital gain with respect to the 16.95 acres as follows:

At trial, the respondent adjusted his determination of the V-Day value upwards from $9,325 to $11,018 and accepted the consequential adjustments to the computation of the taxable capital gain. Therefore, the primary issue before the Court is whether the V-Day value of the subject land is $250,000 as claimed by the appellant or $11,018 as claimed by the respondent or some amount in between.

Immediately after the purchase in 1969, the appellant and Mitchell made an informal agreement that the appellant would have the north half and Mitchell would have the south half. Acting on that agreement, the appellant built a house on the site for his family. According to the appellant's own testimony, he did not have any other use for the property. There was a pit near the road from. which people could haul away clay fill and granular fill but they did not pay for it and so the appellant put up a big metal gate and chained off the area. There was nothing sold out of the pit from 1970 to 1981 when the appellant executed a lease with Western Excavators Ltd.

The appellant's claimed V-Day value of $250,000 is dependent upon a finding that the clay fill and granular fill had a value in December 1971 of approximately $240,000. A qualified appraiser (Edward Shaske) retained by the appellant in 1985 prepared a report dated September 16, 1985 expressing the opinion that the 16.95 acres had a V-Day value of $9,325 (a valuation which was accepted by the respondent until the commencement of the hearing of this appeal) and that the mineral rights on the subject land had a V-Day value of $352,000. Mr. Shaske was not called as a witness but his report of September 16, 1985 to the appellant was entered as Exhibit 14 along with three other reports (Exhibits 13, 15 and 16) dated June 2, 1982; August 25, 1982; and February 16, 1984 respectively which he prepared for the Alberta Department of Highways in connection with its expropriation of the 16.95 acres.

The fatal flaw in Exhibit 14 is an assumption by Mr. Shaske that the resource material (granular and clay fill) could be economically retrieved. That assumption is destroyed by a wealth of other evidence. Dennis Lindberg, an expert witness (consulting engineer) called on behalf of the appellant identified a report which he had signed and his firm (Thurber Consultants) had prepared for the appellant in March 1983 stating that the granular material on the subject property was "of a poorly sorted and poorly bedded nature". Mr. Lindberg's report quantified the resource material (505,000 cubic yards of granular fill and 1,579,000 cubic yards of clay fill) but did not value it. Richard Orrell, an expert witness (professional engineer) called on behalf of the respondent identified his report prepared for the Department of Highways in February 1982 in which he estimated a value of $92,000 for the granular fill and no value to the clay fill. Mr. Orrell was not concerned with the V-Day value and, in the ten years between V-Day and 1982, there had been urban growth on the west side of Edmonton bringing urban development closer to the subject land. Other evidence indicated that there was an abundance of clay fill available in that particular area.

The material evidence which is most harmful to Mr. Shaske's assumption is the conduct of the appellant himself. He regarded the pit as a nuisance. He never had the content of the pit (granular and clay fill) tested, quantified or appraised until he received the notice of expropriation in 1982. He put up a gate to keep people from using the pit. And in the partition of the original 159 acres, the appellant gave Mitchell an extra four or five acres (at a value of $500 per acre) because the pit was on the appellant's portion (the 75 acres which he retained).

Counsel for the appellant placed great emphasis upon an oral offer made to the appellant around 1970 by a Mr. Charlton to pay 25 cents a yard for granular or clay fill removed from the pit. The only evidence of that offer was a casual statement made by the appellant himself. There was no covenant by Charlton or obligation upon him to remove a minimum quantity of fill each year. There was nothing in the Charlton proposal that induced the appellant to hire someone to record the quantity of fill that would be hauled away. In deciding this appeal, I place the same weight on the Charlton proposal which the appellant placed on it back in 1970. He ignored it! I have no difficulty in concluding that Mr. Shaske's assumption concerning the retrieval of the resource material is not well founded. Indeed, in his last report to the Alberta Department of Highways (Exhibit 16 — February 16, 1984), Mr. Shaske stated at page 4 ”. . . the deposits located within the taking could not be economically excavated and marketed”. In my view, the resource material within the subject land had no significant value in December 1971.

Carol Buchanan, an expert real estate appraiser testified on behalf of the respondent. Her report (Exhibit 19) dated June 11, 1991 was an appraisal of the 16.95 acres as at December 31, 1971. She used a direct sales comparison to establish market value and she assumed that the highest and best use of the subject property was future country residential subdivision. Her report disclosed seven comparable sales including the purchase by the appellant and Mitchell of the 159 acres in 1969. In her opinion, the fair market value of the 16.95 acres at December 31, 1971 was $650 per acre or an aggregate value of $11,018. As a matter of interest, she also considered certain other sales of property for their content of granular material (a better quality of sand and gravel than in the subject property) and concluded that values of property for sand and gravel content were lower per acre than values for country residential purposes.

Carol Buchanan was the only expert witness who gave direct evidence of fair market value at December 31, 1971. Her testimony was not discredited in cross- examination. The only evidence of value in support of the appellant was indirect: (i) Mr. Shaske's report of September 16, 1985 which was based on an erroneous assumption and was inconsistent with statements made by Mr. Shaske in other reports; (ii) Mr. Orrell's appraisal of the resource material in February 1982; and (iii) the Charlton proposal which the appellant ignored. I find that the fair market value of the 16.95 acres at December 31, 1971 was $11,018.

The second issue arises in connection with subsection 44(2) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"), the relevant provisions of which are as follows:

44.(2) For the purposes of this Act, the time at which a taxpayer has disposed of a property for which there are proceeds of disposition as described in subparagraph . . . 54(h)(ii),(iii) or (iv), and the time at which an amount, in respect of those proceeds of disposition has become receivable by the taxpayer shall be deemed to be the earliest of

(a) the day the taxpayer has agreed to an amount as full compensation to him for the property lost, destroyed, taken or sold,

and he shall be deemed to have owned the property continuously until the time so determined.

The Alberta Department of Highways paid $475,000 to the appellant in 1982 and an additional $130,000 in 1984 in connection with the expropriation. If both of those amounts were proceeds for the disposition of the 16.95 acres and if the appellant did not agree to the full amount of proceeds until 1984, then it would appear from subsection 44(2) that 1984 was the earliest year when the appellant was required to report those amounts for income tax purposes. In order to apply the provisions of subsection 44(2), it is necessary to characterize the two amounts received by the appellant.

According to the documentary evidence, the expropriation events occurred in the following order.

1. February 5, 1982, an inquiry officer reported that the proposed expropriation was fair, sound and reasonably necessary for the highway expansion.

2. March 8, 1982, the Alberta Minister of Transportation signed a certificate approving the proposed expropriation.

3. March 17, 1982, the Certificate of Approval was registered.

4. April 1, 1982, the Alberta Minister of Transportation served a Notice of Expropriation on the appellant and his wife.

5. June 2, 1982, Edward Shaske, a qualified appraiser reported to the Alberta Minister of Transportation that $475,000 was appropriate compensation for the land contained in the 16.95 acres.

6. June 15, 1982 there were served on the appellant and his wife (i) a Notice of Proposed Payment; and (ii) a copy of Mr. Shaske's appraisal dated June 2, 1982.

7. Soon after June 15, 1982, the Alberta Highway Department paid $475,000 to the appellant and his wife.

8. August 25, 1982, Edward Shaske reported to the Alberta Minister of Transportation that $122,500 was appropriate compensation for the granular fill and clay fill which was deposited in the 16.95 acres.

9. June 14, 1983, the lawyer representing the appellant and his wife filed an ‘Application for Determination of Compensation" with the Land Compensation Board for the Province of Alberta.

10. July 4, 1983, the lawyer representing the Alberta Minister of Transportation filed with the Land Compensation Board a Reply which responded to the various allegations in the Application referred to in item 9 above.

11. February 16, 1984, Edward Shaske reported to the Alberta Minister of Transportation that he had new information and that the granular fill and clay fill deposited in the 16.95 acres had no value.

12. February 21, 1984, the Alberta Minister of Transportation wrote to the appellant's lawyer enclosing a copy of the Shaske Report referred to in item 11 above and stating that an outstanding prior offer would be withdrawn if not accepted by a specific date.

13. May 30, 1984, the appellant executed a Release acknowledging receipt of two payments in the amounts of $130,000 and $475,000 with respect to the expropriation.

Although 1982 is the only taxation year under appeal, the appellant's income tax returns for 1982 and 1984 were filed as exhibits showing that he reported one-half of $475,000 in 1982 and one-half of approximately $130,000 in 1984. As stated above, it is necessary to characterize those two amounts in terms of why they were paid. The relevant provisions of the A/berta Expropriation Act, R.S.A. 1980 c. E-16 are as follows:

42.(1) When land is expropriated, the expropriating authority shall pay the owner such compensation as is determined in accordance with this Act.

(2) When land is expropriated, the compensation payable to the owner shall be based on

(a) the market value of the land,

(b) the damages attributable to disturbance,

(c) the value to the owner of any element of special economic advantage to him arising out of or incidental to his occupation of the land to the extent that no other provision is made for its inclusion, and

(d) damages for injurious affection.

56. When part only of an owner's land is taken, compensation shall be given for

(a) injurious affection, including

(i) severance damage, and

(ii) any reduction in market value to the remaining land, and

(b) incidental damages,

if the injurious affection and incidental damages result from or are likely to result from the taking or from the construction or use of the works for which the land is acquired.

In their application to the Land Compensation Board (item 9 above), the appellant and his wife claimed compensation under the following headings:

In the reply (item 10 above), the Alberta Minister of Transportation offered compensation under the following headings:

The Land Compensation Board was never required to decide the dispute concerning compensation because the matter was resolved through negotiation. Therefore, although the pleadings (Application and Reply) filed with the Land Compensation Board identified certain types of compensation consistent with the provisions of the Alberta Expropriation Act, the character of the two amounts paid by the Highway Department and received by the appellant and his wife will depend upon the agreement that was in fact negotiated to resolve the dispute.

The Alberta Minister of Transportation had retained Edward Shaske to advise him on market value in connection with the expropriation. In his report of June 2, 1982 (Exhibit 13) Mr. Shaske expressed his opinion that the 16.95 acres as raw land had a fair market value of $475,000. Mr. Shaske never deviated from that opinion and the Minister of Transportation obviously adopted it because in his notice of proposed payment dated June 15, 1982, the following statements appear:

2. The Minister of Transportation has had an appraisal made of the interest in the lands expropriated as more particularly described in the Notice of Expropriation and a written copy of such appraisal is attached hereto.

3. Based upon such written appraisal the Minister of Transportation proposes to pay to you the amount of Four Hundred and Seventy-five Thousand ($475,000) dollars in full satisfaction of any claim which you may have with respect to the lands expropriated. The said amount is determined as follows:

Land—16.95 acres (6.86 ha.)

$475,000

Soon after June 15, 1982, the Minister actually paid $475,000 to the appellant and his wife. I am satisfied that the Minister as payor thought he was paying for the land alone and not for the deposit of any granular ana clay fill contained in the land.

In their application to the Land Compensation Board, the appellant and his wife had claimed compensation of $508,500 as the market value of the land alone and $831,500 as the value of the fill which they could have sold. Although the lease with Western Excavators Ltd. was signed on June 14, 1981, before the expropriation proceedings, it appears from the Shaske Reports that Western Excavators could not obtain a provincial license to excavate any material from the subject property because the Province was not going to permit the excava tion of a larger pit on property which would later have to be filled in when expanding the highway.

In trying to determine what the appellant was thinking, I conclude that the appellant had persuaded himself that the granular fill and clay fill on his property had an excessively high value because (i) the report of Thurber Consultants quantified the material at 2,084,000 cubic yards; and (ii) the report of Mr. Orrell prepared for the Province appraised the granular fill at $92,000 without giving any value to the clay fill. The appellant probably thought that the Orrell Report was a "low ball” appraisal because it was prepared for the purchaser while negotiations were in progress. In my view, it is not a coincidence that the application to the Land Compensation Board filed on behalf of the appellant and his wife on June 14, 1983 claimed $508,500 for the land alone and $831,500 for the deposit of granular and clay fill. That application reflected the appellants expectations at that time.

What changed the appellant's mind and reversed his thinking with respect to the relative values of the land and its contained deposits was the Shaske Report of February 16, 1984 (Exhibit 16) stating that the deposits of granular and clay fill had no commercial value. Set out below is the letter which the lawyer representing the Alberta Minister of Transportation sent to the appellant's lawyer on February 21, 1984:

Further to your telephone discussions of yesterday with Art Hnatiuk, enclosed please find a copy of the Shaske & Associates Ltd., letter of February 16, 1984 updating their opinion as to the value of the granular deposits found on the Bassani Property.

With respect to the offer of settlement previously conveyed to you and confirmed yesterday afternoon, that offer will remain open for acceptance up to 12 o’clock noon February 22, 1984.

The lawyer representing the Minister of Transportation obviously felt confident when he wrote that letter imposing a short deadline.

None of the prior correspondence between the parties was entered in evidence. The appellant has or should have access to the correspondence between his lawyer and the Alberta Minister of Transportation reflecting the actual negotiation between the parties in 1983/84 but none of that correspondence was brought to the Court. There is no document which shows the origin of the amount $130,000. I am required to infer that the amount $130,000 grew out of the Shaske Report of August 25, 1982 (item 8 above) stating that the granular and clay deposits had a value of $122,500. If it is the appellant's position that the amount of $130,000 represented all or part of the consideration for the land alone, the burden was on the appellant to prove that fact but the evidence falls far short of such proof. To the contrary, the evidence indicates that the larger amount ($475,000) was compensation for the land alone and the smaller amount ($130,000) was some form of incidental damages for the profit which the appellant could have derived from his lease with Western Excavators Ltd. The relevant words of the release are:

IN CONSIDERATION of the payment of the sum of One Hundred Thirty Thousand Dollars ($130,000), receipt of which is hereby acknowledged, PEPPINO BASSANI (hereinafter called "Bassani"), for himself, his heirs, executors, administrators and assigns, hereby RELEASES AND FOREVER DISCHARGES Her Majesty the Queen in Right of the Province of Alberta, as represented by The Minister of Transportation, from any and all claims for compensation pursuant to the provisions of the Expropriation Act, arising from the taking by the said Minister of Bassani's interest as lessor of (land description follows).

And Bassani does hereby acknowledge the further sum of FOUR HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($475,000) in final settlement of all claims pursuant to the Expropriation Act referred to herein in settlement whereof.

The release links the amount of $130,000 with "Bassani's interest as lessor". This indicates that the $130,000 was compensation for some loss or damage different from Bassani's interest as owner of the expropriated land. The resource material (granular and clay fill) was deposited in an area beyond the limits of the strip of expropriated land although more than 50 per cent of the deposit was within that strip. Therefore, the lease to Western Excavators must have covered an area greater than the strip of expropriated land. I am left to infer that, after the expropriation, there was not enough resource material left in the appellant's retained land to justify the cost of excavation and sale.

It is significant to me that, in the Reply filed with the Land Compensation Board (item 10 above), the Minister of Transportation offered the amount of $122,500 as "incidental damages"; a phrase appearing in section 56 but not in section 42 of the Alberta Expropriation Act. In other words, incidental damages may relate to the portion of land which the owner retains when only part of his land is taken by expropriation. Similarly, the amount of $130,000 could be regarded as "injurious affection, including severance damage" within the meaning of section 56 of the Expropriation Act because the remaining deposit of granular and clay fill in the appellant's retained land was probably not large enough to excavate after the expropriation. If the amount of $130,000 could be characterized as "compensation for property injuriously affected . . .” within the meaning of subparagraph 54(h)(v) of the Income Tax Act, then subsection 44(2) of the Income Tax Act would have no application whatsoever to that amount.

I am also influenced by the fact that the parties were really not far apart on the market value of the land in their respective pleadings before the Land Compensation Board. The appellant and his wife claimed $508,500 whereas the Province offered $474,600. The appellant's claim was only seven per cent greater than the amount offered by the Province. For all practical purposes, the parties had agreed upon the market value of the land and the compensation to be paid therefor when the appellant and his wife accepted the payment of $475,000 in the summer of 1982. The only outstanding dispute after that time was the amount of damages (if any) suffered by the appellant and his wife resulting from their inability to excavate and sell the granular and clay fill deposited mainly on the expropriated land but also partly on the retained land. For the purposes of paragraph 44(2)(a) of the Income Tax Act, I think the appellant had agreed in 1982 to the amount of full compensation for the land actually sold to the Province. What remained in dispute after 1982 was the amount of the appellant's incidental damages or compensation for injurious affection including severance damage within the meaning of section 56 of the Expropriation Act.

I have concluded that in the minds of the payor (Alberta Minister of Transportation) and the payee (the appellant) the amount of $475,000 was the market value of the 16.95 acres of land at the time of expropriation; and the amount of $130,000 was a negotiated quantum of compensation for the profit which the appellant could have derived from his lease with Western Excavators Ltd. (not restricted to the expropriated strip of land). The claims of the payor and payee as set out in the pleadings before the Alberta Land Compensation Board were probably drafted with the provisions of the Expropriation Act (sections 42 and 56) in mind but, when the dispute was resolved by negotiation, it was not necessary for the parties to identify a particular amount with a particular category of compensation.

For the purpose of applying subsection 44(2) of the Income Tax Act, I hold that the amount $475,000 received in 1982 was proceeds of disposition for the land alone and, therefore, that amount was correctly reported by the appellant in his 1982 tax return. I further hold that the amount $130,000 was compensa- tion for property injuriously affected (i.e., the appellant's rights under his lease with Western Excavators Ltd. covering an area greater than the strip of expropriated land). Subsection 44(2) does not apply to the amount $130,000 because it falls within subparagraph 54(h)(v) of the Income Tax Act; and that amount was correctly reported in 1984.

Counsel for both parties were in agreement that the appellant's 1984 taxation year was not under objection or appeal and was accordingly statute barred. Counsel for the respondent relied on the decisions in Hnatiuk v. The Queen, [1976] C.T.C. 632; 76 D.T.C. 6376 and Wilchar Construction Ltd. v. The Queen, [1981] C.T.C. 415; 81 D.T.C. 5318 at 420 (D.T.C. 5321) to argue that the appellant was estopped from claiming that the amount $475,000 should be reported and taxed in 1984 and not in 1982 because such claim was made (in an amended notice of appeal) only after the year 1984 was in fact statute barred. Counsel for the appellant relied on the quotation from Phipson on Evidence at page 419 (D.T.C. 5321) of the Wilchar decision to argue that the provisions of subsection 44(2) would override any estoppel. Having concluded that the amount $475,000 was the sale price of property sold and the amount $130,000 was compensation for property injuriously affected, I am not required to determine the estoppel argument.

Having regard to the concession which the respondent made at the commencement of the hearing concerning the V-Day value of the subject property, the appeal is allowed and the assessment for 1982 is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the proceeds of disposition for the 16.95 acres of land was $475,000 and the fair market value of that land on December 31, 1971 was not more than $11,018. The appellant is not entitled to any further relief.

Appeal allowed.