Gaspar Mitosinka v. Minister of National Revenue, [1977] CTC 2014

Roland St-Onge (orally: November 19, 1976):—The appeal of Gaspar Mitosinka came before me on November 17, 1976 at the City of Winnipeg, Manitoba, and it deals with the disposition of a property by the appellant for the price of $90,000 in his 1973 taxation year.

The admitted facts are as follows, and I read from the Notice of Appeal:

1. The Appellant resides at the City of Winnipeg, Province of Manitoba. 2. The Appellant, for a number of years and including years prior to the year 1971, was the owner of certain real property commonly known as 1615 Regent Avenue, Transcona, Winnipeg, Manitoba.

3. The aforesaid property contained a duplex housing unit situate on the land which land was less than one acre in area. . . .

6. Upon assessment for purposes of taxation (dated June 18, 1975), the Respondent calculated or determined that the Appellant received a capital gain of $34,243.00 in respect of the said disposition, assumed that one-half

(‘/2) thereof or $17,121.50 was allocable to the personal residence of the Appellant and included in income one-half ( /2) of the remaining balance or $8,560.75 as a taxable capital gain.

The Respondent further included in the Appellant’s income recapture of depreciation of $3,421.88 and disallowed as a deduction claimed by the Appellant the sum of $5,086.80 pertaining to a terminal loss.

The appellant contends that the purchaser did not buy the building situated on the land and therefore no part of the proceeds of the disposition can be allocated to the said building. He also contends that the real property in question constituted a principal residence of the appellant, and that the calculations by the respondent in respect of the allocation of proceeds of disposition should be made only to the extent of the depreciable property disposed of, in respect of which the proceeds were nil.

The respondent reassessed the appellant on the assumption that:

(1) Both the land and the premises thereon were sold by the appellant to the purchaser; The residential building on the said lands was a side- by-side duplex and only one-half of the said lands and premises constituted the principal residence of the appellant.

(2) The Appellant had claimed capital cost allowance in previous years on the one-half of the said premises, rented to tenants in the amount of $3,421.88, utilizing as a capital cost for this portion of the said premises the amount of $8,000.

At the hearing the appellant explained the following facts. In 1957 he acquired vacant land measuring 74x419 feet from his father and built thereon a home which cost him some $20,000. Prior to buying this, the appellant had lived with his parents since 1950 on an adjacent property, and his father had sold this property to a Mr Oldrich and the property was later expropriated. Consequently, the property under discussion became a corner property.

The appellant supervised the building of his home. At that time, his intention was to construct a family home in which to house not only his own family but also his father and mother. There was an interior partition dividing the house in two, but both sides could communicate from their respective kitchens and enter the other premises via the basement. Also, there was a little window in the kitchen, so that both families could use the common telephone and also could speak directly to each other.

Each side had two bedrooms, a kitchen and a livingroom, as well as a private entrance. The house therefore looks like a side-by-side duplex, one side occupied by the appellant and the other by his parents.

Appellant’s father died in 1959 and his mother in 1962. After his mother’s death, his parents’ side of the house was rented to different tenants, but apparently it did not yield any net income. The occupant of each half paid his own heating and electrical expenses, having his own heating system and meter. One-half of the property taxes and the repairs were claimed by the appellant as deductions from the rental income. The appellant also claimed capital cost allowance on one-half of the building. There was a garage built on the appellant’s side, and therefore the tenant’s side of the house was situated near the boundary line of the property.

There was vacant land at the rear, and both the owner and the tenants could use this, even if only the landlord had to pay for the upkeep.

As already mentioned, the property was sold in 1973 for $90,000. A Mr Eastfield came to see the appellant several times to know if the property was for sale, but the latter did not want to sell. The prospective purchaser offered some $40,000, but the appellant refused and sent him to his lawyer. Finally, the appellant accepted an offer of $90,000, and specified that he was not selling the building and refused to move it somewhere else. As a matter of fact, the said house remained on neighbouring vacant land for a year before being moved some 65 miles away.

The appellant testified that, after he sold the property, he received a phone call to move the house. According to the written option, there were three different prices mentioned: $40,000, $80,000 and $90,000. The appellant explained that at no time were there any discussions as to the value of the house, and there was talk of the possibility of moving the house but he refused to do so because the cost was too high.

He also stated that he had made no attempt to sell the house, and what he received from Foodex Limited was $90,000 for the land.

On cross-examination, the appellant explained that his wife had looked after renting his parents’ side; that he never earned any net income; that he was never interested in selling the house, because his intention was to turn it into one residence; and that he refused to pay a commission to the real estate agent who had appaiently been hired by the buyer.

The offer to purchase, filed as Exhibit A-7, mentioned that both the land and the buildings thereon were to be sold, and that the insurance proceeds would go to the purchaser of the property. Even though the appellant signed this document, he says he was never told of these stipulations.

The respondent called as a witness Mr R B Grant, an employee of the Department of National Revenue. In 1970 he became an AACI and in 1971 an AAM. For 13 years he made municipal evaluations and he filed his appraisal report as Exhibit R-1. On cross-examination, he stated that he was called twice to make an appraisal: first in 1974 for Valuation Day purposes; and secondly in October 1976 for an appraisal of the property for the 1973 taxation year.

For this second appraisal, he took $90,000 as the departure point and put a value of $34,400 on the building and appraised the land at $55,600. When asked why he valued the building first, he answered that it was an unusual transaction, and that properties in that region were sold by willing sellers at from $0.77 to $1.22 per square foot.

He also admitted that the subject residential property did not conform to the area, which was zoned as light industrial, and that no one would buy a house in that district in 1973 unless it was for future development. Mr Grant was referred to his written appraisal and, more particularly, to the phrase “unique land and buildings” to show that this building was out of place. He also admitted that the property would never produce any kind of revenue because of the size of the property and the design of the building.

It was also mentioned that the purchaser gave the house to the real estate agent in lieu of a commission of $3,700, and that the house was sold for some $18,000 to a new owner, who installed it some 65 miles away from Winnipeg, and that therefore the valuation of $34,400 for the building was not too high, especially when the superstructure was sold for $18,500 without the basement which had cost $6,000 and the two heating and hot-water systems.

It was also mentioned that Foodex Limited had already bought the adjacent property and was ready to pay $90,000 for the appellant’s land, and that, in Mr Grant’s appraisal report, the comparable figures show an increase from $0.54 to $0.88 per square foot, in which case the figure of $90,000 for the land, only, could have been reasonable.

Counsel for the appellant argued that Foodex Limited did not want the building but was ready to pay, and actually paid, $90,000 for the land; that the appellant had the purchaser’s permission to remove the building if he wished but refused to do so because he thought the operation was too expensive; that, according to Mr Grant’s report, the appellant could have sold the house for at least $18,500 and, consequently, lost that amount which could have been his in addition to the $90,000 he received for the land.

He also argued that, because Mr Grant was an employee of the respondent and did not seem to have tried to get all the information, he could not prepare a fair apportionment of the property, especially since he started with the given figure of $90,000 for the property sold. He also argued that, if the building had not been on the land, the purchaser would still have paid $90,000 for the property because the land was zoned as part of a light industrial area, where there was no reason to have a residence, and because the restaurant to be built thereon by the purchaser was a “light industrial operation”.

Referring again to the appraiser’s report, and more specifically to the unique set of facts, counsel for the appellant said that the building was removed from an area which was zoned as light industrial, which did not allow the existence of any residential property.

Counsel for the appellant referred the Board to section 68 of the new Act as authority for saying that the proceeds of disposition could be for the land only, irrespective of the form or legal effect of the contract or the agreement, and argued that all the cases cited against the appellant dealt with commercial buildings.

As to the ‘principal residence’’ concept, he referred to paragraph 54(g) of the Act which says that

(g) “principal residence” of a taxpayer for a taxation year means a housing unit, a leasehold interest therein, or . . . that was,

(i) ordinarily inhabited by the taxpayer in the year, . . .

except that . . . in no case shall any such housing unit, interest or share, as the case may be, be considered to be a taxpayer’s principal residence for a year

(iii) unless it has been designated by him in prescribed manner to be his principal residence for that year and no other property has been so designated by him for that year, . . .

and for the purposes of this paragraph the “principal residence” of a taxpayer for a taxation year shall be deemed to include, except where the property consists of a share of the capital stock of a co-operative housing corporation, the land subjacent to the housing unit and such portion of any immediately contiguous land as may reasonably be regarded as contributing to the taxpayer’s use and enjoyment of the housing unit as a residence, except . . . .

He terminated his argument by saying that the respondent had no authority to make any allocation with regard to this building, as it was a family home with the European approach; that the special facts of this case do not disturb the concept of “principal residence”; that the appellant had the use and enjoyment of the land surrounding his home because of the nature of the house and grounds; and that, as there was no precise definition of “principal residence”, the appellant should consequently receive the benefits of this vague definition.

Respondent’s counsel argued that the matter at issue was not only a question of fact but also a question of law because of the existing jurisprudence, and he referred to the following cases: MNR v Malloney’s Studio Ltd, [1975] CTC 542; 75 DTC 5377; Robert Adolphe Stanley v MNR, [1969] CTC 430; 69 DTC 5286; Werle v MNR, 40 Tax ABC 337; 66 DTC 210; and Fielder v MNR, 36 Tax ABC 1; 64 DTC 454. (As pointed out by counsel for the appellant, it has to be noted that most of those cases deal with commercial buildings.) It was also argued for the respondent that no one gives away a building: that there was no evidence that the $90,000 was a poor price; that the same purchasers had already bought the adjoining land for $1.32 a square foot and therefore $90,000 for the land only was an exorbitant price in the circumstances.

As to the ‘principal residence’’ concept, he argued that an apartment block with many tenants could be considered as a principal residence if the owner had a suite therein; but the tenants also had the use of the land, and, consequently, the whole thing should not be considered as a principal residence but only the suite actually occupied by the owner.

In the present appeal, the Board has to decide whether this sum of $90,000 was paid for the land alone or for the land and building. It is in evidence that this 16-year-old residential building stood almost alone in a light industrial district and, for many years, had produced no net rental income. It is also in evidence that this building was erected as a residence for the appellant and his father and mother in a form designed to please both families; and that, because of the death of the parents, it was rented at a loss. Consequently, it could not be regarded as a paying proposition or a commercial enterprise. It is clear that the entire property was more in the nature of a principal residence than of a commercial enterprise, since it did not yield any net rental income.

How can a building be considered to have economic value when it doesn’t earn any income? In all the cases cited to me, the buildings had either a substantial rental income and an economic value, or else were very old and had no economic value. In the case at bar, the building is not that old but yet it does not produce any income.

Furthermore, the respondent’s appraiser testified that the building was unique due to its internal design and location, and therefore he could not use the comparable or income approach to arrive at an appraisal value. It appears that, as an employee of the Department, he was presented with the figure of $90,000 as the value of the property as a whole and was told to allocate an appropriate portion of this amount as the value of the building. At the time of his second valuation, which took place in October 1975, he was not even aware that Foodex Limited had already acquired the adjoining lot, a factor which was certainly bound to increase the value of the appellant’s land.

In the circumstances of this appeal, the Board cannot rely too much on the appraisal report. Due to the peculiar facts of this appeal, I consider that the building had no economic value and that, consequently, the sum of $90,000 was paid for the land only; that the intention of the appellant from the beginning was to provide a residence for his entire family, and that what happened after the death of the appellant’s mother did not prevent the appellant from considering the whole structure as his principal residence.

Consequently, for these reasons the appeal is allowed, and the matter is referred back to the respondent for reassessment accordingly.

Appeal allowed.