Gesina Hiltemann v. Minister of National Revenue, [1986] 2 CTC 2279, 86 DTC 1716

Bonner, T.C.J.:—This is an appeal from an assessment of income tax for the appellant’s 1979 taxation year. On assessment the respondent included in the computation of income the sum of $103,812 which he described as “taxable portion of death benefit?" The benefit was found to have been conferred by the sale to the appellant of a residence located at 32 Holyrood Avenue, Oakville, Ontario, at a price less than market value. The sale price was $135,000. The parties have now agreed that the market value at the time of the sale was $195,000.

The vendor of the property was Holderbank Technical Services Limited (hereinafter “Holderbank''). The appellant’s late husband John Hiltemann had been president of that company from 1963 until his death in 1978.

The respondent, in assessing, relied on subparagraph 56(1 )(a)(iii) of the Income Tax Act which reads:

56 (1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year,

(a) any amount received in the year as, on account or in lieu of payment of, or in satisfaction of,

(iii) a death benefit, . . .

and on the subsection 248(1) definition of the term “death benefit” which reads:

248 (1) In this Act, “death benefit” for a taxation year means the amount or amounts received in the year by any person upon or after the death of an employee in recognition of his service in an office or employment minus

(a) where the amount or amounts were received by his widow, the lesser of

Arguments were also advanced based on subsection 245(2) of the Income Tax Act. It will not be necessary to consider them.

The primary position of the appellant was that the benefit had not been received “in recognition of” Mr. Hiltemann's service in an office or employment within the meaning of the statutory definition. The sale price was arrived at, it was said, after consideration of market value, of a defect in the property, of improvements made to the property by the deceased at his own expense and of the fact that real estate commission would not be payable on a sale to the appellant. Counsel made alternative submissions as to the quantum of the benefit, details of which will follow.

The relationship between John Hiltemann and Holderbank was described in evidence given by Leslie Thomas who served as secretary-treasurer of that company from the time of its formation in 1963 until his retirement in September of 1979. John Hiltemann moved to Canada in the mid-1950s. He was employed by St. Lawrence Cement Company (hereinafter “St. Lawrence”) as chief engineer responsible for the construction of cement plants in the province of Quebec and subsequently in the province of Ontario. For that purpose Mr. Hiltemann assembled and St. Lawrence employed a group of persons who possessed expertise in the field of engineering. Some time later the parent company of St. Lawrence decided that the group should be kept in existence and utilized to engage in engineering projects, but separated from St. Lawrence. In 1963 the parent formed a second subsidiary, Holderbank, for that purpose. As previously mentioned, Mr. Hiltemann became president. Between 1956 and 1963 the property at 32 Holyrood Avenue was owned by St. Lawrence and occupied by Mr. Hiltemann as tenant. In 1963 title to the property was transferred to Holderbank. Mr. Hiltemann continued to reside there as tenant until the time of his death.

Mr. Hiltemann and his family made improvements to the property during the period while they lived there. At the outset, according to the witness Henry Kingsman, the property was completely barren save for one oak tree. Mr. Hiltemann improved the property by constructing several large berms of soil, by creating fifty feet of rock garden and by planting a hedge and many trees. Mr. Kingsman expressed the opinion that the landscaping would cost about $25,000. I regard this as little more than a guess for Mr. Kingsman did not give any supporting details nor did he identify the period of time applicable to the estimate. Mr. Kingsman conceded on cross- examination that he was not suggesting that the $25,000 figure was the cost to Mr. Hiltemann of the landscaping which the latter had done.

The property was situated on the shore of Lake Ontario. Mr. Hiltemann and his sons built gabions in an effort to prevent shoreline erosion. In addition they built a badminton court.

Following her husband’s death Mrs. Hiltemann approached Holderbank with a view to buying the property. Mr. Thomas then proceeded to secure an estimate of the current market value from a real estate firm. The estimate given to him was $207,500 as of September 20, 1978. It is significant that the real estate agent's report supporting the figure noted the following:

Upon examination of the dwelling, it was very apparent that there is a serious damp problem existing in the basement level rooms, which adversely affects the use of the bedrooms on that level. The cause would appear to be the grading of the land at the front of the house causing pools of water to gather. There is a subsidence of the concrete walk and seepage through the concrete blocks into the basement.

After receiving the estimate of value Mr. Thomas formed his own judgment that:

. . . in the case that we were considering, selling the house to Mrs. Hiltemann, and since no real estate commissions would be involved, that $180,000.00 would be my best expectation of what the property would fetch.

He stated that he felt that the real estate agent was overly optimistic in arriving at a $207,500 figure. Mr. Thomas explained that he recognized that real estate commission would not be payable on a sale to Mrs. Hiltemann. Two other factors influenced him in arriving at the $135,000 figure. First, there was the flooding in the basement, a problem which he believed would be “an expensive thing to correct". Mr. Thomas secured a report on remedial work and concluded that the cost of such work would be about $25,000. Secondly, he took into account the efforts which Mr. Hiltemann and his sons had made at their own cost in landscaping the property and in attempting to protect it from erosion.

Max Peters, chairman of Holderbank and a resident of Switzerland, had some influence on the transaction. A memo to Mr. Peters from Mr. Thomas dated February 23, 1979, recites that Mr. Peters had suggested a price between book value and “offered price". The latter term was not explained. The memo states in part:

I believe, especially after my conversations with the agent, that it is reasonable to assume an offer close to $200,000 could be obtained, let us say $180,000.

On the other hand, to look in the direction of the written down value of $44,000 takes no account of the $50,000/$60,000 operating cost (difference between rent and expenses of taxes, maintenance and heating fuel) the Company experienced.

Therefore, we would suggest that you are looking to decide on a point somewhere between $100,000 and $180,000.

A further memo from Mr. Thomas to Mr. Peters dated April 2, 1979, reads in part:

I received the following message from your secretary “between $100,000 and $150,000 according to proposal of Mr. Thomas”.

As my proposed range in memo of 23 February last was $100,000 to $180,000, we came to the conclusion that you wished to place a maximum of $150,000 on the price.

We are suggesting to indicate $135,000, partly for the reason that we understand there are serious damp problems in the basement level room, which will require some expenditure on the part of Mrs. Hiltemann, should she wish to eliminate them.

Although Mr. Thomas did not know it at the time, Mr. Peters was seriously ill in early April and he died without responding to the second memo. Thus, the final decision to offer the property at a price of $135,000 was made by Mr. Thomas. The sale at that price took place on August 31, 1979. Holderbank's offer to sell was accepted without any haggling.

The appellant’s counsel approached the case as if the evidence showed that the $135,000 sale price was arrived at by starting with the $207,500 estimate from the real estate agent, reducing it to $180,000 on the basis of a perception that the real estate agent was overly optimistic in making the estimate and on the further basis that no commission would be payable if the property were sold to the appellant, reducing it still further by the cost of repairs needed to correct the wet basement and reducing it yet again to allow for the value of work done by Mr. Hiltemann and his family. He pointed out that none of these considerations involved a recognition of Mr. Hiltemann’s service to Holderbank.

Although the evidence suggests that Mr. Thomas arrived at the figure in the manner just described, it also suggests that he arrived at that figure in the course of a process which gave the appellant a price advantage that would never have been offered to a person dealing with Holderbank as a stranger. Firstly, I note that the company had rented the house to Mr. Hiltemann at rents which were $50,000 to $60,000 less than its operating costs. Secondly, I note that the 'lower limit” referred to in the first memorandum to Mr. Peters was arrived at by adding to book value the amount by which the costs exceeded rent. In the absence of a special relationship between vendor and purchaser considerations relating to book value of real estate are most unlikely to have anything to do with fixing the sale price of the property more than 20 years after its purchase. It is unlikely that a man as astute and experienced as Mr. Thomas obviously was would have employed such a process in arriving at the price to be asked of a stranger. Thirdly, had Mr. Thomas been dealing with a stranger and been doubtful as to the estimate of value made by a real estate firm he would at least, I am sure, have secured a second estimate before rejecting the first. Fourthly, it is inconceivable that Mr. Thomas would have reduced the asking price by the cost of repairing the wet basement when that condition was already reflected in the real estate agent's estimate.

The respondent made the assessment on the basis of an assumption that:

. . . the property was sold to the Appellant at less than fair market value after the death of her husband in recognition of his service in an office or employment at Holderbank.

The evidence adduced does not establish on the balance of probabilities that the assumption was incorrect.

The second argument advanced by counsel for the appellant was that the amount which the company would have paid as commission on sale had it employed a real estate agent should be deducted in the computation of the quantum of the benefit. I disagree. The statutory definition looks to “.. . the amount received in the year . . . .” That amount is not diminished by a cost which Holderbank might have incurred had it chosen to sell the property and to engage a real estate agent for purposes of such sale. The argument confuses two distinct transactions, namely, one in which the marketing cost is incurred in an attempt to secure fair market value and another the nature of which renders such cost unnecessary.

The respondent conceded at the hearing that the fair market value of the property at the time of sale was $195,000 and not a higher figure used on assessment. The appeal will therefore be allowed and the assessment referred back to the respondent for recalculation of the quantum. Save for that concession the appeal was unsuccessful and costs will therefore not be awarded.

Appeal dismissed.