William Robulak, Emily Vaselenak, Eunice Robulak v. Minister of National Revenue, [1979] CTC 2991, 79 DTC 808

M J Bonner:—On December 31, 1971, the appellants, William Robulak, Emily Vaselenak and Eunice Robulak, each owned an undivided one-third interest in an 80 acre parcel of land lying immediately to the south of the northerly limits of the City of Lethbridge. They sold 2.85 acres of the land on December 1, 1972. They sold the remainder of the land pursuant to an option granted on June 1,1973. The sale price was $440,000 or $5,703 per acre.

The respondent assessed tax for the 1974 and 1975 taxation years of each of the appellants on the basis that the V-Day value of the land was $3,000 per acre. The appellants contended that the value on that day was between $5,000 and $6,000 per acre. The appeals of all three taxpayers were heard together on common evidence. The sole issue was what was the V-Day value of the appellants’ land.

At the end of 1971 the appellants’ land was zoned residential. It was not surveyed, subdivided or serviced. City services, however, did extend to the southerly boundary of the land and a preliminary street layout was shown on a map attached to a zoning by-law. Residential development was taking place in the Winston Churchill development which lay approximately one- half mile to the south of the appellants’ land. That development was moving northerly at a rapid pace. The rate of population growth in Lethbridge was high. The demand for serviced residential building lots exceeded the Supply. It was evident that the appellants’ land would be ripe for subdivision in the very near future.

The only other area of the City in which raw land was then being sold for purposes of early development was in the southeast. There, scattered parcels of 10 acres or less were occasionally available. The views of the appraisers called by the appellants were based on market data derived from Sales in the southeast area.

The views of the appraiser called by the respondent were based in part on sales of larger blocks of land located on the west side of the Oldman River. On V-Day there was, in the City of Lethbridge, no parcel of land which was Suitable for residential development and of comparable size to the appellants’, save on the west side of the river. At the end of 1971 the developed area lay to the east of the river. The river flowed within a ravine which formed a natural barrier to urban expansion in a westerly direction. It was bridged only in one place. A second bridge was planned, but its location was not then fixed.

The City, which at the end of 1971 appears to have been the only developer of large parcels of land, had announced that it would not annex land to the north for further expansion. It was acquiring land to the west of the river for purposes of residential subdivision in the area where the University of Lethbridge was under construction. The decision to expand to the west gave rise to a great deal of opposition. Thus, the only area in which blocks of land comparable in size to the appellants’ were trading was to the west of the river. It is obvious that on V-Day a developer, as purchaser of land suitable for residential use, would find land on the west side of the river much less attractive than land on the east. The demand for the end product of the development process, residential building lots, was clearly present in the northeast where the appellants’ land was located. No such demand was evident for the product on the west side of the river, nor was it likely to arise until access was improved. On the east side of the river there was a clear demand for the product, but the only readily apparent potential buyer of a block of unsubdivided land of the size of the appellants’ parcel was the City.

H B Hudson was called by the appellants to give evidence. In early 1972 he was asked by the appellants to prepare an appraisal of their land. The report was completed early in June of 1972.

Mr Hudson had long experience in the real estate business in Lethbridge. He started as a real estate salesman in 1948. He became an independent agent and broker in 1951. He had engaged in the house-building business. Apparently the houses were built on lands purchased from the City. Although Mr Hudson had pursued no formal appraisal courses, his extensive experience in Lethbridge real estate was, I think, such as to enable him to form a fairly accurate judgment as to the value of much of the land in the City. Unfortunately, however, his experience did not extend to dealings in large parcels of land sold for purposes of development.

Mr Hudson expressed the opinion that the V-Day value of the appellants’ land was $6,000 per acre. He based his opinion on a review of three comparable sales. The largest area involved in the three was 10 acres. He was asked whether small parcels tend to yield higher prices per acre than larger parcels. He acknowledged that they do because, he said, there are more buyers for smaller parcels. As noted before, at the end of 1971 the only major developer of residential land in the City of Lethbridge was the City itself. There was a large building firm, Engineered Homes Limited, active in the City, but it was building on lots purchased from the City and does not appear to have been involved in land development.

Mr Hudson was asked whether sales of small parcels are reliable indicators of the value of larger parcels. His response was that there were no other sales and that therefore he had to proceed on the basis of the available material. He said that in reaching his conclusion as to the value to be assigned to the appellants’ land he made a downward adjustment of $500 per acre* [1] from the sale price of his 10 acre comparable. He did not explain how the $500 figure was arrived at.

I doubt that the adjustment was sufficient. Before entering into the option William Robulak received an offer to purchase at a price less than the value assigned by the appraisal. He spoke to Mr Hudson about it. Mr Robulak testified that Mr Hudson advised him that he was selling the land “too cheap’’. He said Mr Hudson stated that he could get a higher price if Mr Robulak was prepared to hold out, although it might take a year to do so. All appraisal witnesses agreed that land values rose in 1972 and 1973 and that the opinion was entered into eighteen months after V-Day. Mr Hudson’s response could be viewed as suggesting that events subsequent to 1971 established that his appraisal was too high. On the other hand, it is possible that the further year was needed to market the land properly. It is also possible that Mr Hudson’s response was based on the conclusion that rising prices might enable Mr Robulak to obtain a better price later. In any case, little weight can be given to Mr Hudson’s opinion that a $500 per acre adjustment was adequate because of his lack of experience in sales of large blocks for development purposes.

J L Zezulka, a real estate appraiser, gave evidence for the appellants. He is an accredited appraiser of the Appraisal Institute of Canada. His experience included work from 1972 to 1977 as a full time fee appraiser and head of the Appraisal Division of Reliance Agencies at Lethbridge.

It was his view that the value of the appellants’ land on V-Day was $400,000 or $5,000 per acre. His primary approach to valuation was the market data basis. He stated that the optimum use of the appellants’ land was for future residential development, an opinion shared by both Mr Hudson and Mr Smith. The latter was a witness whose evidence will be reviewed later. The market information considered by Mr Zezulka involved five sale transactions of land on the east side of the river. The areas ranged from 4 to 10 acres.

Sales “1” and “2” were of land purchased for industrial development. Mr Zezulka considered the transactions in order to find a relationship between the market value of industrial land and of residential land. He found an average difference between industrial and residential land values of 57%, industrial being the lower. Mr Zezulka did not state what use might be made of this relationship. The exercise seems to have been pointless and, in any case, based on a slim market data base.

Sales “3” “4” and “5” were the only sales considered by Mr Zezulka of lands destined for residential use. The data given in his report was as follows:

(3) Lot 149

—4.5 acres

— No buildings

— Unserviced

— Located in the South East portion, or Lakeview subdivision

—Sold in 1971 for $26,000

—Sale price per acre—$5,777.87

(4) Lots 29 & 30, Plan Lethbridge 4368K

— 10.0 acres

— No building

— Unserviced

— Located in Lakeview subdivision, this parcel was subdivided and developed in 1972

—Sold in 1972 for $65,000

—Sale price per acre—$46,500 (sic)

(5) Lots 1 to 20, Block 7, Plan 6799 JK

—4.60 acres (net)

— No buildings

— Unserviced

— Located in Lakeview subdivision, this property was surveyed for development

prior to sale and was developed into twenty (20) residential building lots

—Sold in 1972 for $40,000

—Sale price per acre—$8,675.65

No “3” was sold pursuant to an agreement of sale, the terms of which were not disclosed. The property was developed in 1975. There was some litigation between vendor and purchaser over the transaction, but the issues were not disclosed. In the end the purchaser received the price named, plus two lots from the resulting subdivision. Mr Zezulka said that he discounted at 8% per annum for four years and arrived at a value of $4,586 per acre, exclusive of the value of the two lots which he said were worth $6,000 to $7,000 each.

No “4” was one on which Mr Zezulka place considerable weight. He did not examine the agreement of purchase and sale, although he did examine the transfer. In his report he said:

As normally, the sale price per acre varies inversely with the parcel size, it follows that the price per acre of sale No 4 should be less than sale No 3. This is not the case. However, considering the time lag of approximately one (1) year between the sales of the two (2) parcels, a value increase of 13% per year is indicated. As this is less than the normal 20% appreciation rate in evidence at that time, the value difference can possibly be attributed, at least partially, to the size difference. Although no specific dollar adjustment for size can be quantified with the information available, it is at least recognized some compensation for this factor should exist.

When Mr Zezulka was asked if he placed weight on Sale No “5” he said that he did so only to get the high end of the range. He was of the view that a discount of $3,600 adequately reflected the fact that the land sold in No “5” was subdivided prior to sale.

It will be seen that the comparables sold for industrial use and comparable No “5” were of little or no utility in the process leading up to Mr Zezulka’s final conclusion. I have difficulty in attributing a great deal of weight to a conclusion based, for all practical purposes, on two sales of parcels so substantially different in size from the subject as were comparables No “3” and “4”.

Mr Zezulka stated that an 80 acre parcel will normally, but not invariably, yield lower unit values than a 5 acre parcel. He said that he selected a value of $5,000 per acre, being the lower end of the scale revealed by his survey, to allow for the difference in size. He argued that a major developer would pay as much per acre for an 80 acre parcel as for a 10 acre parcel because, by purchasing a large parcel he avoids the trouble and expense of assembling a block. This reasoning may be valid in circumstances where developers seek large blocks. However, in the present case it is not apparent that, at the relevent time, there was a developer, with the possible exception of the City, interested in purchasing an 80 acre parcel.

If the twenty percent per annum appreciation rate referred to by Mr Zezulka were applied to the eighteen month period between V-Day and the date of sale, a V-Day value of $4,104 is indicated. It is, I think, permissible to test Mr Zezulka’s evidence in this way. In C Ralph Lipper v Her Majesty the Queen, [1979] CTC 316; 79 DTC 5246, Addy, J, stated at 324 [5252]:

It is obvious that the market value of the films in December 1971 and the likelihood and extent of any future success from a financial standpoint must be judged on the evidence available to prospective investors at that time and not determined ex post facto in the light of subsequent events. However, where, as in the case at Bar, large and totally irreconcilable differences occur in the opinion evidence of various experts, subsequent events can be used to test the accuracy and, at times also, the bona tides of the opinions expressed.

The difference between Mr Zezulka’s conclusion and that of Mr Hudson is large enough. The difference between either of them and the conclusion expressed by Arnold B Smith, an appraiser called by the respondent, that the V-Day value of the appellants’ land was $2,500 per acre is plainly “large and totally irreconcilable”.

Mr Smith was called to give evidence on behalf of the respondent. He was the principal of Howard P Hamilton Appraisal Co (1974) Ltd. His familiarity with real estate valuations in Lethbridge grew from appraisal work done for the City during the period from 1969 to 1977. Mr Smith is a member of the Appraisal Institute of Canada.

He made a market data study and concluded that the value of the appellants’ land was $2,500 per acre.

Mr Smith attempted to use sales of larger parcels. He stated that smaller parcels sell at higher prices per acre. The reason, he thought, was that when developers purchase smaller parcels they can complete the development process and sell more quickly and they are therefore satisfied with smaller profits.

The evidence did not demonstrate that the sales upon which Mr Smith based his conclusion were sales of truly comparable parcels of land. Two of the sales were of lands situate on the flood lain of the river. At least one of those two was at a level lower than the sewage lines. Thus, servicing would be difficult. The danger of flooding would make the lands quite obviously unattractive. Parcels “5” “6” and “7” were situated west of the river and thus they were not nearly as ripe for development as was the appellants’ land. Mr Smith stated that sales of land west of the river were examined to establish the bottom end of the range of value and he did not rely on them, save for that purpose. Certainly I cannot see that any of the transactions referred to so far can have any relevance to the determination of the value of the appellants’ land, save to indicate an absolute minimum rate per acre. Sales “2” and “8” were of lands intended for industrial use. There was no evidence of any relationship between the value of industrial land and the value of residential. The relevance of the transactions has not been established. The only sale mentioned by Mr Smith which might appear pertinent was No “4” which was described by him as follows:

4. Parcel M

Sold May 18,1972 at $2,000 per acre. A 16.77 acre parcel just west of the subject across 13th Street and developed later as a trailer court. A further 19.69 acres (Parcel N) adjoining this site was optioned at the same time at the same per acre price.

Parcel “M” is situated only a few hundred feet west of the west boundary of the appellants’ land. Municipal services extended to the southerly boundary at V-Day. The City had, however, indicated that it was unwilling to install services on the land, but it was prepared to permit the developer to install his own services and connect them to the truck lines of the City. Parcel “M” lay just east of a garbage dump. The unpleasant effect of that land use must have had a more immediate effect on Parcel “M” than on the appellants’ land. Finally, and of greatest importance, abandoned mine workings lay underneath Parcel “M” and not under the appellants’ land. They were apparently situated fairly close to the surface of the land. Cave-ins occurred from time to time. The danger of cave-in would, I think, have a very severe limiting effect on the range of uses to which Parcel “M” could be put. No such limitation existed in the case of the appellants’ land. Mr Smith did not take that limitation into account in reaching his conclusion as to the value of the appellants’ land, even though he was influenced by the sale of Parcel “M” far more than by any of the other sales considered by him. It is quite apparent, therefore, that Mr Smith’s conclusion as to the value of the appellants’ land must be far too low.

Both Mr Smith and Mr Zezulka gave evidence of a mathematical exercise described as the residual valuation technique, whereby value was calculated by computing the gross sale price which might be realized if the appellants’ land were subdivided into lots and deducting servicing costs, carrying charges and developer’s profit. Their results differed because of different assumptions as to the gross sale price per foot front and other factors. I did not understand either to believe that this method was a reliable indicator of value.

Evidence was given by William Robulak and Eunice Robulak as to the circumstances in which the land was sold and their reasons for desiring to sell it. It is not necessary to outline the evidence in detail. It is sufficient to say that it indicated that the appellants did not make undue efforts to realize the highest possible price when the land was sold. On the other hand, it did not indicate that a higher price could have been realized at the time of sale.

In my view the lack of evidence of any sale of substantially similar prop erty indicates that none of the conclusions reached by the valuators is reliable. No comparable used can be regarded as truly similar to the appellants’ land. All fail the similarity test in some material particular, be it location, size or potential use.

The best evidence before me of value is, I think, the sale in June of 1973 by the appellants of their land. General market conditions appeared to have remained unchanged except for an overall increase in real estate prices and for the appearance on the scene of a private developer prepared to make an offer. It is, in my view, permissible to have regard to the subsequent sale when attempting to ascertain the value of V-Day provided that the subsequent sale is, in place, time and circumstances, “logically probative of the fact to be found”*. [2] Allowing for both factors, I have reached the conclusion that the value of the appellants’ land on V-Day was $4,000.

The appeals will therefore be allowed and the assessments referred back to the respondent for reconsideration and reassessment on the basis that the value of the appellants’ land on V-Day was $4,000 per acre.

Appeals allowed.

insurance premium and $1,312 for dental expenses for his children, as part of alimony payments as provided in the written separation agreement. The Department of National Revenue refuses those expenses because, according to its contention, they were not paid on a period basis.

2. Burden of Proof

The burden is on the appellant to show that the respondent’s assessment is incorrect. This burden of proof results especially from several judicial decisions, one of which is including the judgment delivered by the Supreme Court of Canada in R W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. The Facts

3.10 The appellant and his wife separated in October, 1973 and were divorced by way of decree nisi on May 12, 1975, which became absolute on October 17, 1975.

3.02 The decree nisi gave custody of the two children of the marriage to the appellant’s wife, Joan Helen Walley and ordered the appellant to pay $100 per month for the maintenance of each child.

3.03 On May 9, 1975, the appellant and his wife entered into a written separation agreement which provided, inter alia, that:

(a) the appellant would pay to his wife as maintenance for the children of the marriage the sum of $100 per month for each child;

(b) the appellant would maintain the existing insurance policies on his life, the beneficiaries of which policies were his children. Two policies were issued by Equitable Life no 096595 (exhibit A-4); 146334 (exhibit A-5); and one by Confederation Life 2539140 (exhibit A-6);

(c) the appellant would be responsible for the dental treatment of the children.

3.04 The payment of the Insurance premiums were on a monthly basis ($227.33 to Confederation Life) and on an annual basis ($42 and $17 to Equitable Life).

3.05 The payment for the dental treatment for each of the two children was $1,685 and payable by an initial payment of $385 and 26 monthly payments of $50, as provided in letters dated June 8,1976 and September 9,1976 written to the appellant by R N Hicks, specialist in Orthodontics.

3.06 In a return, dated April 26,1977, the appellant duly reported his income for 1976, claiming, inter alia, a deduction for alimony payments of $7,030. This sum included monthly payments of $2,400 made directly to his wife, life insurance premiums of $3,318 and dental expenses of $1,312.

3.07 The figures are not in dispute.

4. Law—Precedent Cases—Comments

4.1 Law

The two main sections of the Income Tax Act involved in the present case were 60(b) and 60.1 which read as follows:

60(b) Alimony payments.—an amount paid by the taxpayer in the year, pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written agreement, as alimony or other allowance payable on a periodic basis for the maintenance of the recipient thereof, children of the marriage, or both the recipient and children of the marriage, if he was living apart from, and was separated pursuant to a divorce, judicial separation or written separation agreement from, his spouse or former spouse to whom he was required to make the payment at the time the payment was made and throughout the remainder of the year;

60.1 Maintenance payments.

Where, after May 6, 1974, a decree, order, judgment or written agreement described in paragraph 60(b) or (c), or any variation thereof, has ben made providing for the periodic payment of an amount by the taxpayer to or for the benefit of his spouse, former spouse or children of the marriage in the custody of the spouse or former spouse, the amount or any part thereof, when paid, shall be deemed to have been paid to and received by the spouse or former spouse if the taxpayer was living apart from the spouse or former spouse at the time the payment was received and throughout the remainder of the year in which the payment was received.

4.2 Precedent Cases and Doctrine

1. Her Majesty the Queen v Morton Pascoe, [1975] CTC 656; 75 DTC 5427;

2. Gerhard Hausmann v MNR, [1978] CTC 3038; 78 DTC 1757;

3. Gordon A Bryce v MNR, [1978] CTC 3144; 78 DTC 1833;

4. Dr W F Shaw v MNR, [1978] CTC 3230; 78 DTC 26;

5. N Golightly v MNR, [1970] Tax ABC 161; 70 DTC 1120.

4.3 Comments

4.3.1 Dental Expenses

According to the evidence, the payments of dental expenses for the benefit of the children were provided in the agreement (paragraph 3.03) and payable on a periodical basis (paragraph 3.04). This meets the wording of the legal sections quoted above. The appeal is allowed.

4.3.2 Insurance Policies

According to the evidence, the payments of the premiums of the insurance policies are payable on a periodical basis (paragraph 3.04). They were also provided in the agreement (paragraph 3.03). This meets the wording of the Act.

Can it be said, however, that the payments are made for the benefit of the two children even if they are the beneficiaries of the policy?

At first glance, it seems to the Board that being the beneficiary of the indemnity of an insurance policy is something very far from having the benefit of the payments of the same insurance policy. Indeed, between the payment of the premiums and the receipt of the indemnity, so many things can happen: the beneficiary can die before the insured; the insured could change the beneficiary of the policy (even if it is with the consent of the beneficiary); the insured can cash the redemption value (even if it is with the consent of the beneficiary).

The Board has a serious doubt that the intention of the legislator was to allow the deduction of such payments. The intention of the legislator, however, does not have to be considered in the interpretation of the Income Tax Act. The wording of the law must be considered. Indeed, what does the word “benefit” mean in section 60.1 quoted above?

According to the Living Webster Encyclopedic Dictionary 1973-1974

edition “benefit” means: “good done or received; a kindness or favour; anything that is for the good of a person or thing; advantage or profit;..

In its ordinary meaning, the word “benefit” does not necesarily seem to mean an immediate advantage. However, as the income tax (and premiums insurance) must be paid every year, what is the benefit for the beneficiaries (the two children) during the year of the payment of the premium? The benefit indeed is the possibility of receiving, the right to receive the insurance indemnity if the appellant died during the year. It is not always certain that beneficiaries will collect indemnity. However, the purpose of life insurance is to protect beneficiaries against the financial disadvantages of death. Who knows the date of a person’s death? Nobody. However, who can say, that it would not be in the current year? Therefore both death and the reception of the indemnity are possibilities. Is the possibility of receiving an indemnity, a benefit? The Board thinks that in insurance, the answer must be in the affirmative.

The Board admits that it is also an advantage for the appellant to deduct the premiums of his life insurance, an advantage he would not have if he were not separated or divorced. However, because it might include an advantage for the appellant, it does not affect the fact, that it remains a benefit for the children. Inasmuch it is a benefit for the children the Board thinks, the expense is deductible within the wording of section 60.1 of the new Act.

From another point of view, the Board knows that the deducted amount will be included in the income of his wife. Is it equitable? The Board does not have to answer that question. It has only to construe the Act within the wording of the legal section.

5. Conclusion

The appeal is allowed and the matter is referred back to the respondent for reassessment in accordance with the above reasons for judgment.

Appeal allowed.