Beatrice Wideman v. Minister of National Revenue, [1983] CTC 2589

The Chairman:—This taxpayer appeals from an assessment of income tax for the 1978 taxation Year. Land belonging to her was expropriated under the Expropriation Act for purposes of a proposed airport at Pickering, Ontario.

In her 1978 return she reported a taxable capital gain of $3,400 from the expropriation. By notice of reassessment dated May 10, 1983 (Exhibit A-5) the respondent added to the appellant’s income an amount of $75,667.36 as the taxable gain that should have been reported.

In the respondent’s assessment, proceeds of disposition in the amount of $305,557.07 were allocated as follows:

In the notice of appeal and at the hearing, the appellant contended that the disturbance allowance in the amount of $4,255 was not correctly prorated in applying $553 to the residence and $3,702 to the excess farmland. Counsel for the respondent having been authorized by her client, consented to the allocation of the total disturbance allowance to the principal residence. The appeal on that point will therefore be allowed.

The appellant established that legal expenses incurred in the amount of $2,702 in 1978 were reimbursed in May 1979 (Exhibit A-2). Counsel for the respondent admitted that the legal expenses were therefore deductible in 1978 and the appeal will also be allowed on that additional point.

With respect to the principal issue the respondent’s position was that the 5% interest paid under section 32 of the Expropriation Act and was part of the total proceeds from the expropriation.

The appellant did not advance any argument which justified her assertion that the $59,248.82 was something other than interest. The amount clearly was paid as interest under subsection 32(1) of the Expropriation Act which reads as follows:

Interest at the rate of five per cent per annum may be allowed on such compensation money from the time when the land or property was acquired, taken or injuriously affected to the date when judgment is given; but no person to whom has been tendered a sum equal to or greater than the amount to which the Court finds him entitled shall be allowed any interest on such compensation money for any time subsequent to the date of such tender.

The $59,248.82 can only be interest on the compensation within the ordinary meaning of the word “interest”.

Interest is, in general terms, the return or compensation for the use or retention by one person of a sum of money belonging to, in a colloquial sense, or owed to another.

I cannot accept the appellant’s contention that the amount was interest on damages or a windfall.

Counsel for the respondent submitted that “expropriation” comes under the definition of property under paragraph 13(21 )(c) and 13(21)(d) of the Income Tax Act, SC 1970-71-72, c 63, as amended. The subject is not depreciable property and it seems to me that the applicable definition of “pro ceeds of disposition” for purposes of computing capital gains is to be found in section 54 of the Income Tax Act which reads in part as follows:

54. In this subdivision,

(h) “proceeds of disposition” of property includes,

(iv) compensation for property taken under statutory or the sale price of property sold to a person by whom notice of an intention to take it under statutory authority was given.

I see no difficulty in accepting that compensations from expropriations are indeed proceeds of disposition. The problem, as I see it, is whether interest paid on compensation from an expropriation can be included in the appellant’s proceeds of disposition for purposes of the computation of her capital gains.

I was not referred to, nor was I able to find, in the Expropriation Act or in the Income Tax Act any provision which would permit the inclusion of interest in the proceeds of disposition. Nor was I made aware of any reason why interest payments arising from an expropriation be treated any differently from that of any other source of interest income.

Although, for reasons quite different from those advanced by the appellant, I must come to the conclusion that the respondent erred in including in the proceeds of disposition an amount of $59,248.82 received by the appellant as interest payment on the proceeds of disposition. As a result, the Minister’s assessment of the appellant’s taxable capital gain is, in my opinion, too high.

The respondent did not raise the question as to the taxability of. the $59,248.82 as interest income under paragraph 12(1 )(c) of the Income Tax Act nor was any reference made to the accounting method used by the appellant in determining her yearly profits which would be necessary to determine the appellant’s interest income for the 1978 taxation year. The Court cannot as the result of its decision cause the appellant’s tax liability to be increased and I do not propose to consider that aspect of the issue.

Having found that the respondent’s assessment of the appellant’s taxable capital gain is too high, I must allow the appeal on that further point.

Counsel for the respondent referred the Court to an Order-in-Counsel: “Mirabel and Pickering Tax on Interest Remission Order” under the Financial Administration Act (SI/80-55 dated February 27, 1980). Section 3 of the Order-in-Counsel reads as follows:

Remissions of Income Taxes

3. Remission of income tax is hereby granted in favour of each taxpayer equal to the amount by which the amount of income tax payable by him exceeds the amount that would have been payable by him if all amounts received as interest in respect of the expropriation had not been so received.

While the Order-in-Council dated February 27, 1980 may ultimately provide some comfort to the appellant, it has no bearing on the only question before the Court which is whether the respondent correctly assessed the appellant on her income in 1978.

The Minister, who does have authority to give effect to the remission order, might wish to consider it in reviewing the appellant’s tax liability for 1978.

Although the evidence is unclear as to how the basic amount of compensation was negotiated, it is common ground that the offer was accepted by the appellant. Counsel for the appellant filed as Exhibit A-1 Bulletin#18 issued by the Department of Public Works dated January 12, 1978, as well as a Communiqué on the “home for home” provision which reads in part as follows:

Owners who had finally settled their claims through negotiation or the Federal Court will receive a statement showing calculations under the new policy. The government decided it was equitable to adjust these settled cases and is proceeding under special ex-gratia authority; in these cases there can be no reference to the Federal Court to arbitrate the amount of ex-gratia.

Counsel appeared to be arguing that the appellant had not benefited from the higher compensation adjustment provided for in the “home for home” provision and that fact should somehow be considered by the Court in rendering its decision. In this appeal the Court can only consider the Minister’s assessment with respect to the taxable capital gain on the total proceeds of $305,557.07 received by the appellant as compensation for expropriation in 1978. Any other amount in any other taxation year which the appellant may receive as additional compensation is of course irrelevant to the present issue.

For purposes of computing the capital gain, the respondent established the fair market value of the appellant’s property as of December 31, 1971 at $136,000 and allocated a value of $25,000 for the principal residence plus one acre of land and $111,000 for the excess farmland. By subtracting the value of the principal residence and the one acre of land, established at $43,222.34, from the total proceeds of disposition, the respondent arrived at a figure of $262,334.73. Subtracting the V-Day value of the land and farm buildings therefrom the capital gain realized was $151,334.73, the taxable capital gain therefore being $75,667.36.

The appellant submitted that the V-Day value allocated to the principal residence and the acre of land, the V-Day value of the excess farmland and that portion of the proceeds of disposition allocated to the principal residence and the adjacent land contributing to the use and enjoyment of the principal residence were all established by the respondent at too low a figure.

In attempting to satisfy the onus and establish that the respondent’s V- Day values were too low, the appellant filed as Exhibit A-4 two purchase and sale agreements. One was unsigned and had no probative value whatever. The other was signed and dated May 22, 1969 in which J S L Properties Limited agreed to purchase the appellant’s property for $203,000 with a $3,000 down payment, the closing date being October 15, 1969. The prospective buyer sought to obtain an extension for the date of closing. It is alleged that the appellant changed her mind about selling the property and refused to grant the extension. The agreement was not executed and the deposit forfeited. This agreement might conceivably have been considered as an indication of value and could have been useful in arriving at a fair market value of the appellant’s property on December 31, 1971, had it been accompanied by other comparable sales and other factors normally considered in such evaluations. Standing alone, the unexecuted agreement has, in my opinion, very little if any weight in establishing the V-Day value of the subject. Mrs Kathleen Walmark, the real estate agent involved in the agreement of purchase and sale (Exhibit A-4), gave no evidence whatever as to value of the subject or that of any of the surrounding properties.

The appellant called as an expert witness Mr Kunio Hidaka, a retired land economist who had been a planning consultant in the County of Markham which is adjacent to the County of Pickering. Mr Hidaka made no claim of being an appraiser and although his comments on the basic elements of value of land and zoning by-laws in the general area of Pickering were interesting, he could not nor did he offer an opinion as to the V-Day value of the property. The appellant’s counsel had no appraisal report made of the subject and indeed did not suggest any figure that he considered to be the fair market value for the land and for the principal residence as of December 31, 1971.

The principal residence is situated almost in the centre of the property and some distance from two municipal roads running parallel to the subject and circling one end of the property (Exhibits A-7 and A-8). The distance from the house to either of the roads ws not indicated. It ws Mr Hadaka’s evidence that the zoning by-law 3037 for the area in December 1971 permitted the severence of the property and provided that agricultural lots were to consist of 10 acres and have 500 ft frontage; the residential lots were to consist of 2 acres with a 200 ft frontage.

It was contended by the appellant that what was being considered here was an agricultural lot and that 10 acres and 500 ft frontage were necessary for the appellant’s use and enjoyment of her principal residence. Counsel did not explain however why the lot should be considered agricultural or why 10 acres of surrounding land were necessry to the appellant’s use and enjoyment of the principal residence.

It would appear to me on the basis of the evidence that we are clearly dealing with a residential lot. Although the exact distance of the principal residence from the municipal or county road was not brought in evidence, the by-law requiring that residential lot consist of two acres and 200 ft frontage appears to me to be not only reasonable but, in instances such as this one, necessary for the access as well as the use and enjoyment of the principal residence. The municipal by-law, with respect to the size of residential lots, should in my opinion be applied here and the allocation of land to the principal residence should be 2 acres with a 200 ft frontage on one of the roads.

This appeal is somewhat unusual in that counsel for the appellant failed completely to establish any value for the property as of December 31, 1971. Although he had been reminded on very many occasions during the hearing that he had the onus of proving that the assumptions on which the respondent relied in his assessment were wrong, counsel for the appellant was, in all evidence, taken aback when counsel for the respondent did not call as witness the departmental evaluator and did not table the appraisal report, a copy of which had been forwarded to the appellant some two weeks before the hearing.

Indeed the appellant vainly sought to have the respondent’s appraisal report tabled. Of course, just as the exchange of appraisal reports between the parties in evaluation cases before this Court can only be on consent and is not mandatory, there is no obligation whatever on either party to table or to call evidence at the hearing with respect to the appraisal reports that may have been so exchanged.

In the circumstances, the appellant’s position was in no way prejudiced by the respondent’s decision not to call any evidence. The appellant simply had no evidence as to the V-Day value of the subject and, consequently, failed to establish how and why the fair market value of the land and principal residence on December 31, 1971, used by the respondent in computing the appellant’s taxable gain, was wrong.

Conclusion

For these reasons judgment will go allowing the appeal and referring the matter back to the Minister of reconsideration and reassessment on the basis that the disturbance allowance of $4,255.00 be allocated to the principal residence; that legal expenses in the amount of $2,702.00 be allowed in the appellant’s 1978 taxation year and that interest in the amount of $59,248.82 be deducted from the total proceeds of disposition in the computation of the appellant’s capital gain. The appellant can be awarded no further relief.

Appeal allowed in part.