Jacob P. Schellenberg, Ruth Schellenberg v. Minister of National Revenue, [1986] 1 CTC 2608, 86 DTC 1463

Christie, A.C.J.T.C.:—These appeals were heard on common evidence. In each the appellant’s 1981 taxation year is involved. Initially both incorpo rated two like questions. The first is whether the respondent acted on a proper legal premise in reassessing the appellants’ liability to tax by increasing the proceeds reported by them to have been received on the sale of real estate. The second question appertained to what constituted the principal residence of the appellants in 1981. The second issue was abandoned at the commencement of the hearing. It had not been raised in the notices of objection.

Two parcels of land are involved. They are contiguous and located on South Fraser Way, Matsqui, British Columbia. in these reasons they will be referred to as Lot A and Lot 11.

Pursuant to an unsolicited offer the lots were sold together on March 20, 1981, for $375,000. The contract did not allocate the proceeds of disposition between the two lots. At this time the appellants resided on Lot A and had done so since 1964. In their returns of income for 1981 each appellant, in calculating the taxable capital gain pertaining to Lot 11, allocated proceeds of disposition of $77,000 for a total of $154,000. This meant that the proceeds of disposition in relation to Lot A was set by them at $221,000. It being their principal residence, the capital gain on the sale of this lot did not attract tax. In notices of reassessment mailed on July 16, 1984 (Ruth Schellenberg) and on August 20, 1984 (Jacob P. Schellenberg), the respondent reversed the figures. This is to say he allocated $221,000 as the total proceeds of disposition for Lot 11 and calculated a taxable capital gain by each appellant on that basis.

There is at the outset a matter that I regard as conclusive against the respondent. It is that what is before me in these proceedings indicates that in reassessing no consideration was given to or reliance placed upon section 68 of the Income Tax Act (“the Act’’). As I understand it this section is the legislative authority on which the respondent must rely if he is to lawfully make a substitution, in the manner described, of the allocation of the proceeds of disposition from the sale of Lots A and 11 made by the appellants in their returns of income for 1981. Section 68 provides:

68. Where an amount can reasonably be regarded as being in part the consideration for the disposition of any property of a taxpayer and as being in part consideration for something else, the part of the amount that can reasonably be regarded as being the consideration for such disposition shall be deemed to be proceeds of disposition of that property irrespective of the form or legal effect of the contract or agreement; and the person to whom the property was disposed of shall be deemed to have acquired the property at the same part of that amount.

In Golden v. The Queen, [1983] C.T.C. 112; 83 D.T.C. 5138 (F.C.A.), the appellant and others in an arm’s length transaction sold real estate for $5,850,000 which was allocated in the contract in this way: $5,100,000 to land and the balance of $750,000 to “equipment, buildings, roads, sidewalks, etc.” Relying on section 68 the Minister of National Revenue reassessed by decreasing the allocation for land. The taxpayer appealed to the Federal Court — Trial Division and it referred the matter back to the Minister for further reassessment on the basis that the consideration for the disposition of the land alone was $2,320,000: [1980] C.T.C. 488 at 491; 80 D.T.C. 6378 at 6381. The taxpayer appealed to the Federal Court of Appeal which held that the phrase "something else” in section 68 meant a different thing than property as defined in subsection 248(1) of the Act which is a definition of very considerable scope. Mr. Justice Heald, with whom Verchere, D.J. concurred, said at 114 (D.T.C. 5140):

It seems to me that section 68 can only apply in circumstances where an amount received by a taxpayer can reasonably be regarded as being in part the considéra- tion for the disposition of any property and as being in part consideration for something else other than any property.

[Emphasis by Heald, J.]

This interpretation of section 68 was sufficient to dispose of the appeal in favour of the appellant. Nevertheless His Lordship went on to review a number of authorities and concluded that, even if section 68 were applicable, the apportionment contended for by the appellant was correct. He said at 116 (D.T.C. 5142):

It is my opinion that the correct approach to a section 68 determination would be, as suggested by the above authorities, to consider the matter from the viewpoint of both the vendor and the purchaser* [1] and to consider all of the relevant circumstances surrounding the transaction. Where, as in this case, as found by the trial judge, the transaction is at arm's length and is not a mere sham or subterfuge, the apportionment made by the parties in the applicable agreement is certainly an important circumstance and one which is entitled to considerable weight. Furthermore, in this case, the trial judge made a specific finding of fact (AB p. 159) that the figure of $5,100,000 which the parties apportioned to land in the agreement was not an unreasonable price for the purchaser to pay for the land alone in March, 1973. Accordingly, based on that specific finding and on the other circumstances appearing from the evidence and addressing the question from the point of view of both the appellant and its purchaser, I am of the opinion that the amount that can reasonably be regarded as having been paid and received for the land apart from the buildings, etc., was $5,100,000 and for the buildings, equipment, roads, sidewalk, etc., was $750,000.

As the parties had throughout acted on the assumption that section 68 applied until the Court of Appeal, ex proprio motu, raised the issue whether it did, Mr. Justice Thurlow chose not to rest his opinion on this issue, but preferred to decide the appeal on the question whether, accepting that section 68 applied, the apportionment made by the parties to the contract of sale and purchase was correct. He concluded that it was. He said at 118 (D.T.C. 5144):

Given that the agreement was reached between parties who were dealing at arm’s length and that it is not a sham or subterfuge, it appears to me that, notwithstanding the evidence of respective values on which the learned trial judge relied, the amount that can reasonably be regarded as the proceeds of disposition of the depreciable assets included in the transaction, irrespective of the form or legal effect of the contract, operating as it does only to govern the rights of the parties inter se, was the $750,000 for which the vendors agreed to sell and the purchaser agreed to purchase them.

The Crown appealed to the Supreme Court of Canada. The appeal was heard by seven judges. They divided four to three in respect of the section 68 issue. Mr. justice Estey who delivered the reasons for judgment of the majority concluded that it did apply to the transaction before the court: [1986] 1 C.T.C. 274; 86 D.T.C. 6138. He said at 277 (D.T.C. 6140):

In Stubart Investments Limited v. The Queen, [1984] 1 S.C.R. 536, at 573-9; [1984] C.T.C. 294 at 313-17 the Court recognized that in the construction of taxation statutes the law is not confined to a literal and virtually meaningless interpretation of the Act where the words will support on a broader construction a conclusion which is workable and in harmony with the evident purposes of the Act in question. Strict construction in the historic sense no longer finds a place in the canons of interpretation applicable to taxation statutes in an era such as the present, where taxation serves many purposes in addition to the old and traditional object of raising the cost of government from a somewhat unenthusiastic public.

It would therefore seem to me that the expression “something else” must be given the widest meaning reasonably assignable, which would include different items and classes of property as well as the rarer class of non-property. This interpretation would justify the inclusion of section 68 in the “Rules Relating to Computation of Income”, as the section would have a wide and useful application in the determination of taxability across the commercial spectrum.

He went on to find that the allocation of the purchase price was "reasonable"' within the meaning of section 68. In this regard he gave specific approval to the reasons for judgment of Thurlow, C.J. and Heald, J. in the Court below.

Madame Justice Wilson in delivering the reasons for judgment of the minority disagreed with Mr. Justice Estey regarding the interpretation of section 68, and therefore came to the conclusion that the allocation agreed upon by the parties must stand.

The decision of the Supreme Court affirms the applicability of section 68 to the reassessments under consideration.

The notifications of confirmation of the reassessments by the Minister, both of which are dated November 28, 1984, make no mention of section 68 although a number of other provisions in the Act are cited, namely: "sections 3, 53 and 54, and paragraphs 38(a), 39(1 )(a) and 40(1)(a).”

Paragraph 6 in each of the replies to the notices of appeal filed on behalf of the respondent with the Registrar of this Court read:

6. In so reassessing the Appellant for the 1981 taxation year the Respondent relied upon, inter alia, the following assumptions:

(a) The proceeds of disposition of the principal residence at 31832 South Fraser Way, Matsqui, British Columbia, and the adjacent property at 31824 South Fraser Way, Matsqui, British Columbia, as at April 10, 1981,* [2] the date of disposition represented fair market value in the amount of $375,000.

(b) The fair market value of the property situated at 31824 South Fraser Way, as

of April 10, 1981, the date of disposition, was no less than $221,000.

(c) The disposition of the aforesaid properties yielded a taxable capital gain in

the amount of $16,364.17 for the Appellant in the 1981 taxation year.

(d) None of the property pertaining to 31824 South Fraser Way, Matsqui, British Columbia, could reasonably be regarded as contributing to the Appellant’s use and enjoyment of the principal residence at 31832 South Fraser Way or necessary thereto.

Paragraph 7 in each reply, which appears under the heading "THE STATUTORY PROVISIONS UPON WHICH THE RESPONDENT RELIES AND THE REASONS HE INTENDS TO SUBMIT", reads:

7. The Respondent relies, inter alia, upon Sections 3, 53, and 54, and Paragraphs 38(a), 39(1)(a) and 40(1)(a) of the Income Tax Act.

To the foregoing is added that the conclusion to be drawn from what was said by counsel for the respondent at the hearing is that section 6Î is regarded as irrelevant.

There is no dispute respecting paragraph 6(a) in the replies to the notices of appeal. Paragraph 6(c) is a conclusion of law or mixed law and fact and paragraph 6(d) pertains to that portion of the appeals which has been abandoned. Paragraph 6 therefore comes to this. In reassessing, the respondent relied, apart from what is conceded to be the sale price of $375,000, on the assumption that the fair market value of Lot 11 at the date of disposition was not less than $221,000. The phrase “fair market value” and the words "amount that can reasonably be regarded as being the consideration for such disposition” in section 68 are not synonymous. This section appears in Part 1, Division B, subdivision f of the Act which contains the “Rules Relating to Computation of Income”. Parliament has used the phrase “fair market value” on numerous occasions in subdivision f. It appears four times in subsection 69(1) alone. If synonymity was intended then presumably the legislators would have cast the section accordingly. The jurisprudence also supports this view. In Golden Chief Justice Thurlow said this at 117 (D.T.C. 5143):

For this purpose [i.e. determining the amount that could reasonably be regarded as the proceeds of disposition of the depreciable property] the respective values of land alone and depreciable assets alone are no doubt relevant and may be taken into account in reaching a conclusion but it is to be remembered that the inquiry is not one as to reasonable value but as to proceeds of disposition. It is open to an owner to dispose of this property as he sees fit and for that purpose it is open to him, when he sees it to be to his advantage, to realize on the full potential of an asset of one kind even if as a result the greatest potential of a related asset cannot be realized in the transaction.

See also what the learned Chief Justice said in Klondike Helicopters Limited et al. v. M.N.R., [1965] C.T.C. 427 at 436-37; 65 D.T.C. 5253 at 5258 and the observations of Mr. Justice Noël in Herb Payne Transport Ltd. v. M.N.R., [1963] C.T.C. 116 at 122-23; 63 D.T.C. 1075 at 1079. Both authorities are cited with approval by Mr. Justice Heald in Golden at 116 (D.T.C. 5141 and 5142).

It may be that in some cases, having regard to their particular facts, the amount that can reasonably be regarded as the consideration for disposition and fair market value will correspond. Even assuming the existence of that possibility in these appeals — or even if it could be regarded as a probability — this could not, in my opinion, obviate the necessity that section 68 should have been applied in the reassessment process. This failure is sufficient to dispose of these appeals.

Nonetheless, I append this. The boundary lines of Lots A and 11 are very irregular. This arises because of the peculiar nature of the line dividing the lots. As already said they are contiguous. The front portion of each faces north. Lot A lies to the east of Lot 11. The dividing line commences on Fraser Way 16.4' east of the western boundary of Lot 11. It moves south for 38.5' then east for 53.8' then southeast for 190’ and finally northeast for 37.9' where it intersects the eastern boundary of Lot A. This dividing line is the western boundary of Lot A. It plus a line running south for 161.8’ from the intersection just mentioned is the eastern boundary of Lot 11. The eastern boundary of Lot A runs south from Fraser Way for 272.2' again to the point of intersection referred to. The western boundary of Lot 11 is 330.6’. The rear of Lot A is the 37.9' referred to and the rear of Lot 11 is 132.8’. Lot 11 consists of .84 acres or 36,590.4 square feet and Lot A is .38 acres or 16,552.8 square feet. For present purposes the primary significance of the shape of the lots is that frontage of Lot 11 is 16.4' while the frontage of Lot A is 126.7'. Notwithstanding the configuration of the lots, there was no legal impediment to their being sold separately both as to time and purchasers although, as stated, they were sold as a package.

Mr. Malcolm A. Meadow, a senior real estate appraiser employed by Revenue Canada was the only witness called on behalf of the respondent. He testified as an expert. He made no attempt to establish the fair market value of Lot 11. His starting point was "that the $375,000 represented the fair market value of the property (i.e. Lots A and 11) as a commercial develop- ment site” I do not believe that there can be any dispute that the fair market value of the two lots when sold was $375,000. It was an arm's length transaction and there is no suggestion that anything other than market forces set the price. At the time of the sale the lots were zoned as one and two-family residential although there was good reason to believe that rezoning for commercial purposes was a very authentic expectation. Therefore what in fact was sold by the appellants was two residential lots on one of which was their residence and on the other a modest dwelling house.

Meadow presumed that what motivated the purchaser to agree to pay $375,000 for the two lots was their potential for commercial development. With this potential in mind he said he did not assign any value to the appellants' residence on Lot A or the home on Lot 11. This estimation of the purchaser's motivation may very well be correct but, of course, this is regarding the matter entirely from the purchaser's point of view. Meadow insisted that the intent of the purchaser precluded giving any independent consideration to Lot 11 in attributing a value to it. In this regard he said: “It seemed to me to be totally unrealistic to value the one lot in isolation as both parcels sold in one transaction and the intent was obviously as one single parcel for redevelopment, the intent of the purchaser, so it didn't seem logical to separate them.” Another reason for dealing with the two lots as if they were a single vacant lot is that because of Lot 11's 16.4'frontage it could not, in Meadow's opinion, be commercially developed on its own as intended by the purchaser. Again this is regarding the matter from the perspective of the purchaser.

Meadow assigned a value of $258,200 to Lot 11. He arrived at this number by simply dividing the purchase price ($375,000) by the total square footage of both lots (53,143.2), the quotient being $7.06 per square foot. He then multiplied this by the square footage of Lot 11 (36,590.4), the product being $258,200.

I believe it is clear that in allocating $258,200 to Lot 11, Meadow did this by treating the matter from the point of view of the purchaser alone. It is equally clear from the passage previously quoted from the reasons for judgment delivered by Heald, J. in Golden and from reading the authorities cited by him in coming to the conclusions therein that in making a determination under section 68 the matter is to be considered from the viewpoint of both the vendor and the purchaser. The consequence is that, even if it could be said that section 68 was taken into account in making the reassessments, it was misconstrued and misapplied.

As I see it the proper disposition of this litigation is to adopt what was done by the Supreme Court of Canada in disposing of the appeal in Stubart Investments Limited v. The Queen, [1984] C.T.C. 294 at 318; 84 D.T.C. 6305 at 6324-25. The appeals are allowed and the notices of reassessment in question are vacated. The appellants are not entitled to any relief regarding the grounds of appeal pertaining to principal residence. They are entitled to party and party costs.

Appeals allowed.