Margaret Adelman v. Minister of National Revenue, [1979] CTC 3034, 79 DTC 825

Delmer E Taylor:—This appeal, heard in the City of Toronto, Ontario, on September 21, 1979, is against an income tax assessment for the year 1972 in which the Minister of National Revenue increased the taxable income of the appellant by an amount of $25,104.81, providing the following explanation:

ITAR 42 has been calculated on the recapture of $25,104.81 and taxed at a separate rate.

In assessing the appellant, the respondent relied, inter alia, on sections 13, 49 and paragraph 69(1 )(b) of the Income Tax Act, RSC 1952, Chapter 148, as amended by section 1, SC 1970-71-72, chapter 63.

Background

The following was taken directly from the Minister’s reply to notice of appeal, and it was the Board’s impression that it accurately reflected the facts which were agreed:

On or about August 30,1972 the Appellant sold a property at 1 Highland Avenue in the City of Toronto (“The Highland Avenue Property’’), which was comprised of land and a building thereupon, which building had been rented by the appellant, and with respect to which capital cost allowance claims had been made during the years of ownership, one such capital cost allowance claim having been with respect to Class 8 Assets (chattels, furniture, fixtures, etc).

In computing her income for the 1972 the Appellant claimed the Undepreciated Capital Cost with respect to the Class 8 Assets from the Highland Avenue property in the amount of $8,348.29 as a terminal loss on the basis that she had not received any consideration for the Class 8 Assets in the sale of the Highland Avenue property.

In assessing the Appellant for tax for her 1973* taxation year, the Respondent disallowed the terminal loss claimed by the Appellant on the basis that the Respondent had received consideration for the Class 8 Assets in the total proceeds received on the sale of the Highland Avenue property.

In 1966 the Appellant borrowed money from her brother-in-law, Allan Adelman, and used such borrowed funds to purchase a property located at 51 Wells Hill Avenue in the City of Toronto (“The Wells Hill Property”) for a purchase price of $80,000.

At the time the Appellant borrowed the money from her brother-in-law, she agreed verbally that her brother-in-law and his spouse, Katherine Adelman, would have the option to purchase the Wells Hill Property for $80,000.

In 1968 a written agreement was drawn up to give effect to the verbal agreement referred to (above), in which agreement the Appellant also leased the Wells Hill Property to Allan and Katherine Adelman.

In October 1972, Allan and Katherine Adelman exercised their option to purchase and purchased the Wells Hill Property from the Appellant for $80,000.

During the period from 1966 until the sale of the property in October 1972, the Appellant had claimed capital cost allowance pursuant to Class 3 with respect to the building, and in computing her income for her 1973* [1] taxation year the Appellant claimed a terminal loss of $4,659.72 with respect to the Class 3 building on the Wells Hill Property.

In assessing the Appellant for tax for her 1973* taxation year with respect to the Wells Hill Property, the Respondent included the amount of $10,375.81 in the Appellant’s income as recapture with respect to the Class 3 building on the Wells Hill Property.

Contentions

The notice of appeal states the appellant’s position as:

The allocation of proceeds of disposal and calculation of terminal losses and depreciation recapture were reasonable and based on agreements were (sic) applicable.

The assertions of the respondent were as follows:

The proceeds received by the Appellant upon the sale of the Highland Avenue Property were in consideration for all assets thereby sold, which included the land, building and the Class 8 Assets, and the consideration received for the Class 8 Assets was at least equal to the Undepreciated Capital Cost of those assets. The fair market value of the Wells Hill Property as of the date of disposition in 1972, to persons with whom she was not dealing at arm’s length, was not less than $110,000, of which the value of the building was not less than $75,000, an amount in excess of the original capital cost of the property.

Evidence

The agent for the appellant pointed out that he agreed there had not been a terminal loss in the Class 8 Assets at Highland Avenue, with the exception of the carpets. According to him, the carpets had not been part of the sale, and could have been removed by the appellant. This was not done because it proved to be uneconomical to do so—therefore the carpets should be regarded as worthless.

Regarding the Wells Hill property, the agent presented the memorandum of agreement which included the “option” clause as follows:

The Lessee shall have an option upon three months notice to purchase the property for $80,000 total price, assuming any existing mortgages and paying the balance in cash, providing the property is restored by the owner for use as a Single family residence including the replacement of the main stair wall, including all wall panelling as per the original design, the restoration of the second floor bathroom, and the removal of sundry partitions in the basement, first floor and second floor as required by the Lessee which were added by the Lessor subsequent to the purchase of the property in 1966. The Lessee shall be responsible for Supervising and paying for the restoration if the option to purchase is exercised, providing such changes are approved by the Lessor. The costs of the restoration will be credited towards the purchase price.

According to the agent, the cost of “restoration to a single family dwelling” was $15,862.62.

Argument

The main objection of the appellant was that since she had not received the amount of $110,000 calculated as fair market value by the Minister, such fair market value should be the $80,000 (probably less the $15,862.62 noted above) which had been established by the option agreement.

While counsel for the Minister acknowledged that under certain sets of circumstances, particularly when an option price had been established between parties dealing at arm’s length, such an amount had significance, subsection 69(1) of the Act prevented any such consideration under the circumstances in this case.

Findings

Clearly the amounts of $8,348.29, $4,659.72 and $10,375.81 quoted in the Minister’s reply to notice of appeal do not total $25,104.81 referenced in the assessment, and no viable explanation was provided to the Board for the difference, by either the appellant or the respondent. Neither was it made clear to the Board that any or all of these three separate amounts necessarily formed part of the greater amount. It is at least questionable that the amount of disallowed terminal loss should be grouped with any “recaptured capital cost allowance” in any reassessment in this way, and accordingly the Board is less than certain that even the amounts noted in the reply to notice of appeal have been dealt with properly. The relevance of the $75,000 figure attributed to the Wells Hill building in October 1972 is somewhat in doubt since the reassessments do not indicate that income tax has been levied on any “gain” either on capital or income account. Yet the matter of the value of the real property for income tax purposes under paragraph 69(1)(b) of the Act (whether $80,000 or $110,000) for some reason appeared to be in dispute between the parties. Nevertheless, none of these matters would detract from the grounds put forward by the Minister in the reply to notice of appeal or the basis for the assessment in question. The Minister’s assertions are as follows:

Highland Avenue—The appellant did not suffer a terminal loss on the sale of the Class 8 assets.

Wells Hill—The appellant disposed of the property to a person with whom she was not dealing at arm’s length for proceeds less than the fair market value at that time.

—The deemed proceeds for the building are in excess of the original capital cost.

Conclusion

The appellant has failed to demonstrate the basis upon which she claims the assessment of income tax is in error since there is no satisfactory evidence to distinguish the carpets from any other Class 8 asset in the Highland property; and it is certain that the transaction surrounding Wells Hill was not at arm’s length.

Decision

The appeal is dismissed.

Appeal dismissed.