Her Majesty the Queen v. William Baziuk, [1976] CTC 787

Dube, J:—This is an appeal from a decision of the Tax Review Board allowing the appeal of the defendant from an assessment for his 1971 taxation year. The Minister of National Revenue in reassessing the defendant for that year disallowed the claimed terminal loss of $11,321.62 and added the sum of $23,078.38 to his income in recaptured capital cost allowance.

The Minister acted on the following assumptions of fact as outlined in the Statement of Claim:

i. The Defendant and his wife Doris Baziuk owned property municipally Known as 64 South Cumberland Street, Thunder Bay, which consisted of land and a building from which the Defendant had derived rental income;

ii. By sale agreement dated August 27, 1971, the Defendant and the said Doris Baziuk, after the commencement of expropriation proceedings, agreed to sell the said property to the Urban Renewal authority for $40,000.00;

iii. In addition to the said sum, the Urban Renewal authority agreed to pay the Defendant and his said wife the sum of $7,950.00 for the demolition of the building located on the said property;

iv. The said building was demolished prior to the date of closing, which closing occurred on December 31, 1971;

v. The Defendant has claimed that the purchase price of $40,000.00 for the Said property was in consideration for the sale of land only, and in filing his income tax return for 1971, he claimed a terminal loss of $11,321.62 being the undepreciated capital cost of the building as at December 31,

vi. The Plaintiff assumed that the said $40,000.00 is reasonably to be regarded as being in part consideration for the disposition of depreciable property and in part consideration for the disposition of real property;

vii. The Plaintiff assumed that the proper allocation of the said consideration is as follows:

Land		$ 5,600.00
Building	-.	34,400.00

with the result that the Defendant recaptured capital cost allowance as follows:

Total sale consideration received for

land and building	$40,000.00
Deduct: fair market value of land	9,60
Residual value of Class 3 building	$34,000.00
Recorded UCC of Class 3 asset at date
of disposition	11,321.62
Capital cost recapture of Class 3 asset	$23,078.38

and in fact incurred no terminal loss in the amount of $11,321.62, or in any amount, in respect of the sale of the said property.

The issue to be determined is whether or not any part of the $40,000 paid to the defendant by the City of Thunder Bay can be reasonably regarded as having been paid for his building under paragraph 20(6)(g) of the Income Tax Act* [1] and, in the affirmative, what part. The paragraph reads:

20. (6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the following rules apply:

(g) where an amount can reasonably be regarded as being in part the consideration for disposition of depreciable property of a taxpayer of a prescribed class 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 the proceeds of disposition of depreciable property of that class irrespective of the form or legal effect of the contract or agreement; and the person to whom the depreciablie property was disposed of shall be deemed to have acquired the property at a capital cost to him equal to the same part of that amount;

Defendant alleges, of course, that the purchase price of $40,000 was in consideration of land only, and that at no time was any portion of the sale price considered to be in respect of the building.

It appears that the defendant and his wife, who modestly described herself as a bookkeeper, but sounded more like a very articulate business manager, bought 64 South Cumberland Street in the nineteen- fifties as an investment. There is no evidence as to how much was paid for the Merrick Block, as it was called.

The Merrick Block was a three-storey, full basement, brick building built in 1909. The main floor was occupied by a pool room, a barbershop and a small taxi office. The second and third floors were subdivided into small apartments and rooms. The neighbourhood was described as the oldest commercial area in Port Arthur, decorated with old hotels, warehouses, secondhand stores, taverns and a retail wine outlet. It was a blighted area with skid row type accommodations visited by winoes and assorted derelicts. The Merrick Block blended well with the environment: both had known better days.

In the nineteen-sixties, the then City of Port Arthur initiated negotiations with the two senior levels of government with a view to launch an urban renewal program to restore the area. In 1967, the Baziuks wrote to the mayor with a view to dispose of their property: the block was a poor investment and they wanted to dispose of it. In 1969, the City caused appraisals to be made, including an appraisal of the Merrick Block by Lou L Levine of Aronovitch & Leipsic Limited, who estimated the subject property, land and building, as follows: under the cost approach, $53,500, the income approach, $42,500, and the market data approach, $45,500.

On January 6, 1971, Douglas R Anderson, administrative and relocation officer, visited the Baziuks and extended them an offer of $40,000 based on the Levine appraisal. On his return the officer wrote the following memorandum which reveals the pith and substance of the matter:

At 11:30 am I visited Mr & Mrs Baziuk at 158 Cottonwood Crescent to extend them an offer of $40,000.00 for their building on 64 South Cumberland Street.

They indicated this would not be enough as they felt the property was worth $65,000. During our discussion he indicated he would settle if we paid him $40,000 for the land and he would give us the building. They felt that by doing it this way they could benefit from the Income Tax angle. They mentioned their lawyer and accountant had told them this. I told them I would let them Know but in my own opinion this could not be done.

Negotiations ensued and finally both parties agreed. On August 27, 1971 the Baziuks signed an offer to sell to the City for $40,000 “conditional upon The Corporation of the City of Thunder Bay obtaining the necessary Federal, Provincial and Municipal approvals” and upon other conditions including the following:

The Vendors shall, prior to the date of closing, demolish the building situate upon the premises. The City shall pay to the Vendors, upon closing, the actual cost to the Vendors of the demolition of the said building or the sum of Seven Thousand, Nine Hundred and Fifty ($7,950.00), whichever is the esser,

With a view to accommodate this particular transaction (it being the only one of the kind amongst more than a hundred purchases for the renewal project), the City of Thunder Bay passed a special by-law on September 28, 1971, the title of which reads as follows:

THE CORPORATION OF THE CITY OF THUNDER BAY

BY-LAW NUMBER 171-1971

A By-law to approve the purchase of certain lands from William Baziuk and Doris Baziuk.

In his capacity as relocation officer, Mr Anderson also took steps to locate suitable premises for the poolroom. It appears that the operator of the poolroom, Joe Kowalchuk, and the defendant intended to form a partnership with a view to operate a larger billiards establishment. On October 7, 1971, Anderson wrote in a memo that “as a result of the relocation progressing favourably Mr Baziuk felt he would like to have his building demolished by October”. As it turned out, the defendant did not go into the relocated venture with Kowalchuk because the new premises could not accommodate a sufficient number of tables.

The transaction closed on December 31, 1971, and the sum of $47,950, including the demolition allowance of $7,950, was paid to the defendant.

In MNR v Malloney’s Studio Limited, [1975] CTC 542; 75 DTC 5377, I reviewed some of the leading cases and held that a part of the purchase price paid by the taxpayer could be reasonably regarded as having been paid in respect of a building which previously stood on the land, but was demolished by the taxpayer before the purchaser completed the transaction and took possession. I said that the proper test was not the value to the purchaser, but to the owner. And Malloney’s Studio, a recently renovated restaurant with a liquor licence, obviously had some value, indeed much value to the owner.

lt cannot be said, of course, that the Merrick Block represented the same degree of value, but I cannot find that it had no value whatsoever to the owner. The building was maintained, the premises were fully occupied, and the defendant derived revenue from it. According to the appraisal it had a remaining economic lifespan of twenty-five years. Mrs Baziuk did say that she considered giving the place away to one of her favourite charities. She did not impress me, however, as being a person who would give away $40,000 unless she intended to detach the three-storey brick building from the land, a rather delicate operation.

In order to estimate the land value, realtor Levine compiled data on six sales of land in the immediate area between 1961 and 1967. The subject property has a frontage of 25 feet and a depth of 132 feet for a gross land area of 3,300 square feet. The best comparable of the six is the sale of a lot immediately opposite the subject property. Being a corner lot and a much larger parcel (82.5 feet by 132 feet) it makes it more desirable, but it is offset by the fact that the sale took place in 1967. It sold for $1.56 per square foot or $5,148 for the subject property). The other five sales range between 86¢ and $2.84 per square foot (the latter with improvements).

In his report, the appraiser suggests that the most valid method to value property (land and building) is the market data approach because it relates directly to market activity in the area. In the case of the subject property, however, it proved difficult to obtain enough sales that would stand as worthy comparables. It is therefore the opinion of the appraiser that in this case, it being basically an income-producing property, the income approach should be of greater significance.

In order to arrive at an estimate of value by the income approach the appraiser interviewed Mrs Baziuk for an examination of the operating statements of the property. From these data, Levine arrived at an estimated gross annual income of $11,841, less vacancy allowance of 5%, or $592, for an effective gross annual income of $11,259 [should read $11,249]. Deducting therefrom $5,331 in expenses he arrived at the estimated net income of $5,928 [should read $5,918],

At the trial, however, Mrs Baziuk stated that she did not remember having ever met, much less having provided data to, Mr Levine. She also declared that the figures she used for her income tax report were different, with revenue for 1969 at $8,377 and expense at $6,205.99, for a declared net income of $2,171.11. Her declared net income for the preceding taxation year was $2,501.39.

She very candidly explained that the true figures were the ones used for income tax purposes, but that she may have inflated the revenue and deflated the expense data provided to Levine in order to impress possible buyers. She produced a personal record book showing the income tax figures, not the Levine figures, but admitted that these entries were booked, not as rentals were collected and expenses paid, but yearly at income tax filing time. Unfortunately for her, she cannot have it both ways.

Defendant did not call an appraiser either to submit an alternative value to the land and building, or to rebut the expertise of realtor Levine. The latter’s appraisal appearing to me to be fair and competent, I accept his estimate of $42,500 for the property.

However, in apportioning the respective value of land and building, I must take into consideration the fact that defendant did not receive $42,500, but only $40,000. It must also be borne in mind that the appraisal was carried out before July 1969, whereas the sale was concluded on the last day of 1971. During that period of more than two years, the building’s residual life decreased from twenty-five to less than twenty-three years, and the value of the land in the urban renewal area would have increased. Under the circumstances, I find that the part of the price paid by the City of Thunder Bay to the defendant that can be reasonably regarded as having been paid in respect of the building to be $30,000.

The appeal therefore is allowed with costs and the assessment is referred back to the Minister for reconsideration and reassessment on the basis that $30,000 is the value of the depreciable property here in question.