Frank Auciello v. Minister of National Revenue, [1989] 1 CTC 2001, 88 DTC 1739

Sarchuk, T.CJ.:—The appeal of Frank Auciello is with respect to a reassessment of tax for his 1981 taxation year.

The circumstances giving rise to the reassessment can be briefly summarized. In or about 1966 the appellant and his wife acquired, at a price of $13,900, a house located at 205 Bain Avenue in the City of Toronto for use as their principal residence. In May 1973 the appellant and his wife ceased to use the Bain property as their principal residence and commenced to use it as a rental property. In May 1981 the appellant and his spouse sold the property for $80,000.

In his income tax return for taxation year 1981 the appellant reported the adjusted cost base of the property as being $69,900 and the outlays and expenses as being $4,487.50. The capital gain disclosed by the appellant in his income tax return was $5,612.50, of which one-half was reported as a capital gain taxable in his hands. The other half of the taxable gain was reported by his spouse.

By notice of reassessment dated November 12, 1985, the respondent reassessed the appellant's 1981 taxation year to calculate the capital gain derived from the sale of the property as being $45,512.50, one-half of which, i.e. $22,756.25 was the appellant’s share. In so reassessing the appellant, the respondent assumed that as of May 1973 the fair market value of the property at 205 Bain Avenue was $30,000.

For the purposes of computing income in such circumstances, reference must be made to section 45 of the Income Tax Act (the Act). This section in general terms provides that where a taxpayer having acquired property for some other purpose has commenced at a later time to use it for the purpose of gaining or producing income therefrom, he shall be deemed to have disposed of it at that later time for proceeds equal to its fair market value at that later time and immediately thereafter reacquired it at a cost equal to the fair market value. Although there was a change in use in 1973, no election was made by the appellant pursuant to subsection 45(2) of the Act. Accordingly, for the purposes of calculating the appellant’s cost base on the ultimate disposition of the property in 1981, it was necessary for the appellant to establish the fair market value as of May 1973.

In support of his claim that the adjusted cost base of $69,900 was correct the appellant testified that at some point of time in 1972 he and his wife had purchased another residence. Although no steps were taken by him to sell the subject property, it was his recollection that in March or April of 1973:

. . . some people knocked on the door and I let them in. I didn't know them. They wanted to see how the house was done. I didn't know that one of them was a real estate [agent]. . . . After two or three days I received an offer from an agent . . . I don't remember exactly but I think it was Canada Trust for sure. They brought me an offer with a cheque, signed. They asked me if I wanted to sell. The amount of the offer was $46,900.00.

Mr. Auciello further stated that although he wished to sell the subject property his wife did not and "We had a few arguments with the wife and what have you.” Ultimately he said "So I made her happy and I did not sign the offer.” No copy of the offer to purchase was produced, Auciello stating that he never retained the offer which had been presented to them for signature.

To account for the balance of the adjusted cost base amounting to some $23,000 Auciello testified that following the rejection of the offer they built a garage, "a sunny kitchen”, and a new bathroom. Although he was not able to calculate the costs incurred exactly because the work was done at various times and because he had no bills he estimated that his total capital expenditure amounted to approximately $23,000. He further advised the Court that he generally figured the expenses in relation to all of the things "we done extra to the house" to arrive at the amounts ultimately claimed in his income tax return.

The appellant's wife Michela Auciello also testified. Her evidence was not a great deal of assistance and in particular her recollection of the alleged offer in 1973 was vague and imprecise.

No other evidence was presented by the appellant in relation to the fair market value of the subject property.

I have concluded that the evidence presented by Mr. Auciello is not sufficient to permit me to find that the adjusted cost base arrived at by the respondent was wrong. The onus is on the appellant not only to establish that fact but also to establish that the adjusted cost base of $69,900 asserted by him is correct.

The testimony of Mr. Auciello and that of his wife as to the value of the Bain Avenue property in 1973 was imprecise and was unsupported by any records or documents. It is also totally at odds with the evidence of an appraiser, Mr. R. Blaauw, who testified on behalf of the respondent. Mr. Blaauw completed his final examinations at the Royal Institution of Chartered Surveyors in England in 1971 and obtained his accredited Appraiser designation with the Appraisal Institute of Canada in 1975. He was a real estate appraiser with Inland Revenue, London, England, from 1969 to 1972 and with Revenue Canada from 1972 to the present time. He remains an Accredited Member of the Appraisal Institute of Canada and is an Associated Member of the Royal Institution of Chartered Surveyors.

He described the subject property as being on the south side of Bain Avenue between Logan Avenue and Carla Avenue, and is bounded by Danforth Avenue, Pape Avenue, Gerrard Street and Broadview Avenue. Within this residential area there are pockets of commercial and convenience stores. As at the date of valuation the property was zoned R2Z2, a residential zoning. The improvements consisted of a two-storey semi-detached building which was erected in approximately 1908. The building foundation was constructed of brick, the exterior front wall with brick and the remainder exterior walls with insul-brick. There is a gable roof which is covered with asphalt shingles. A forced air gas furnace provides the heating. The building has a gross floor area of 1,248 square feet with an additional 124 square feet in the basement. The improvements were considered to have been in average condition at the date of valuation. It was understood by Mr. Blaauw that there was a garage at the rear of the site but at the time of inspection this had been demolished and removed.

Of the three traditional approaches to estimating fair market value, being the income approach, the cost approach and the market data approach, Mr. Blaauw accepted and used the market data approach. He rejected the income approach due to a lack of rental data for the date of valuation. With respect to the cost approach he stated that the subject property was built in 1908 and it was his view that with a building of this age, there are inevitably weaknesses in accurately determining the depreciation applicable to the building. As a result, this method was also rejected as not being appropriate for the particular property.

The market data approach is a valuation method whereby the property being appraised is compared with other properties that have been sold around the effective date of the appraisal. Since no two properties are exactly alike, adjustments are made to compensate for the differences between the comparables selected and the subject property. Mr. Blaauw reported that this approach is based on the principle of substitution which maintains that a prudent purchaser will not pay more for a property than it would cost to buy an equally desirable substitute property provided there is no undue delay in making the acquisition.

In carrying out his market data analysis, Mr. Blaauw was able to obtain records of 11 sales on Bain Avenue. The information on these sales was correlated and is included in his report. Nine of the sales were in 1973 with the remaining two in 1974. After adjustment for size, utility, location, improvements and time factors, Mr. Blaauw concluded that $24 per square foot of building area represented the estimated value for the subject property, an amount which was rounded off to his final estimated value of $30,000. In reaching this conclusion Mr. Blaauw specifically considered, as an added factor, that the subject property at the date of valuation consisted of a house and a garage and that it had been improved to permit its use as a revenueproducing rental property.

In addition to assessing the subject property as against comparable sales which took place in 1973, Mr. Blaauw noted that seven of those properties were the subject of resale in 1979, 1971 and 1983. As a result, he correlated the resale values to determine the increases on a comparable basis and concluded that they too were consistent with his conclusion of value of $30,000 in May 1973.

In cross-examination and in argument Mr. Auciello suggested that Mr. Blaauw, as an employee of the respondent, was obliged to maintain his employer's position in this appeal and that any opinion received from him would perforce be biased. I reject this allegation as totally unfounded. I have carefully reviewed Mr. Blaauw's testimony and his report and I am satisfied that there was no bias on his part. His attitude and the manner in which he responded to questions indicated to me a thorough knowledge of his duties and responsibilities as an expert witness. His analysis of the comparables impressed me as being completely objective and fair. There is nothing in his evidence or in his report which would remotely suggest the existence of bias.

I am satisfied that Mr. Blaauw selected the proper method, being the comparative or market data approach. In this particular case there was reliable evidence of a number of sales of comparable properties and there is no evidence to suggest that those sale prices were not reached as a result of negotiations between informed and willing buyers and sellers, none of whom were under any form of compulsion. Mr. Blaauw exercised good judgment in selecting the comparables used and this reflects favourably on his competence and integrity as an appraiser. Finally, Mr. Blaauw made the necessary adjustments, in particular taking into account the existence of a garage at the relevant time as well as the added value of the property as a potential rental unit.

Taking all of these facts into consideration, I find that the respondent's valuation and therefore his reassessment was correct, and accordingly the appeal is dismissed.

Appeal dismissed