Hubert Munday v. Minister of National Revenue, [1971] CTC 585, 71 DTC 5321

DUMOULIN, J.:—This appeal from the decision of the Tax Appeal Board, dated September 10, 1969, [1969] Tax A.B.C. 944, was heard and argued before the undersigned on May 31 of the current year, ultimate day of the erstwhile Exchequer Court’s legal existence and remains to be decided under the aegis of the newly-created Federal Court of Canada.

Hubert Munday who, together with other beneficiaries, derives income (one-eleventh of the total yield) from the estate of the late Henry E. Munday, deceased on January 26, 1954, unsuccessfully appealed the income tax assessment issued January 25, 1968 with respect to taxation years 1964, 1965 and 1966.

In 1964, Henry E. Munday’s state ‘‘sold property upon which was erected a building known as the ‘Columbia Rooms’, situate at the south-east corner of Pandora and Broad Streets in the City of Victoria, Province of British Columbia’’. (Vide notice of appeal, sec. 2.)

This property was purchased by a British Columbia company ‘under the name and style of Pandora Enterprises Limited” for a price of $65,000 cash, “and no allocation was made by the Vendor and Purchaser between land and buildings, both Vendor and Purchaser have alleged that land only was sold and purchased” (notice of appeal, sec. 3).

Approximately two months after acquisition, the building on this property was demolished by the purchaser.

As can be conjectured from the few preceding lines, the divergence of opinion between the litigants bears upon the correctness of a re-assessment allocating a portion of this $65,000 sale price to depreciable property, namely to the former Columbia Rooms building.

The issue, it may be said, is a test case common, I was told, to appeals also instituted by the estate of one Edwin Munday and Frances M. Munday.

Appellant’s contention “that a sale of land only took place” rests upon the joint allegations that the purchaser merely intended to acquire land, that the building sold was an old one without any improvements in recent years, that it was not fully rented and not economically exploitable as an investment. Lastly, the appellant asserts ‘‘that a prudent investor would not have purchased the Columbia Rooms as an investment and all proceeds from sale should be allocated to land only’’ (notice of appeal, sec. 13).

In spite of appellant’s opinion, as aforesaid, the respondent, viewing the matter in a different light, increased the former’s income tax assessment by $151.48 in 1964, by $143.91 in 1965 and $136.71 in 1966. For so doing, the respondent alleges that “of the sum of $65,000.00 for which lands and premises constituting the Columbia Rooms were sold, an amount of at least the $33,324.37 capital cost of depreciable property of Class 3 to Schedule B of the Income Tax Regulations can reasonably be regarded as being in consideration for the disposition of such depreciable property for the purposes of paragraph (g) of subsection (6) of Section 20 of the Income Tax Act aforementioned” (vide reply to notice of appeal, sec. 13).

Previous to hearing the several witnesses cited, the parties made the undergoing agreements: (1) that the undepreciated capital cost of the depreciable assets, viz. the Columbia Rooms edifice, amounted, in 1964, to $19,962.62; (2) that, in 1954, the capital cost of this building, as then valued by the Department of National Revenue, reached the figure of $33,324.37; and

(3) an admission that during the last year of ownership by the estate the structure in question had a $27,000 fire insurance coverage.

Also, before the oral evidence, respondent filed as Exhibit R-1 a letter, dated January 25, 1968, addressed to Mr. Hubert Munday, and signed by J. Howard Harman for the purchasers Harman & Company.

In his capacity of sole director of Pandora Enterprises Limited’’, Harman specifies that:

The purpose of the purchase was solely to provide parking space for customers of the purchaser and the building, standing on the land at time of purchase, was demolished for this purpose as soon as existing leases and tenancies permitted. (Italics not in text. )

These italicized words would tend to show, with some additional substantiation, the possibility of a revenue bearing asset when owned and operated by the vendors, but about this more later on.

In the following paragraph cf this letter, the signer proceeds to explain that:

Since the purpose of purchase was for parking purposes the Purchaser has not claimed capital cost allowance in respect of the demolished structure notwithstanding that it was obligated to purchase the building in order to obtain the land.

I cannot entertain a shade of a doubt concerning the veracity of the facts stated in this letter, but, solely reporting the buyer’s intents and purposes, they are, insofar, alien to the pith and substance of the case: whether or not the rented premises, when in the estate’s patrimony, properly constituted a depreciable property in the eyes of the pertinent law.

Appellant’s witnesses were as one in depreciating the structure, ‘‘built in 1908 or 1910”, testifies the last tenant, Ralph Wherry, an Esquimault taxidermist, whose tenancy began in 1945, 19 years before the disposal of the building, and continued in spite of its age and ‘‘the frittering down of bricks and mortar’’. “The plumbing’’, says the deponent, ‘‘ was inadequate and in very poor condition, no hot water. The upper rooms were sub-let at $6 to $8 per week and most of the time they remained vacant’’. Wherry, at the request of respondent’s counsel, files Exhibit R-2, a photo of the Columbia Rooms depicting on the outside a rather impressive edifice, showing no outward signs of deterioration, neither do four other photos, Exhibits A-l in bulk, taken by the witness himself ‘‘before and during demolition’’. Should Mr. Wherry’s memory serve him right when he claims his ‘‘father could have bought the property in or about 1919 for $1,200 in lieu of taxes, he might be pardonable to respectfully regret such a windfall was allowed to pass by.

William John Mauch, a former builder and real estate agent, transacted, in 1964, the sale to Pandora Enterprises. ‘‘The building ’ reports Mr. Mauch, ‘ was in very, very poor condition, completely depreciated, its heating system no good and the electric one as bad’’. The witness believes ‘‘no sane person would be interested in obtaining it’’.

Hubert Munday, the appellant, a Victoria merchant, produces as Exhibit A-2 a rental revenue list of Columbia Rooms for the period of 1954 to 1963 inclusive, which shows a gross revenue of $4,524.52 and a net cash income of $2,178 for the former year compared with a gross yield of $4,295 and a net revenue of $2,916.88 in 1963.

‘A very old building’’, asserts the witness, ‘‘with frequent vacancies and quite hard to rent. We could not interest people to rent; the store accommodations were not favourable viewed. We did not repair them nor any of the rooms. ’ ’

From 1954 up to 1964, Hubert Munday visited the Columbia Rooms on three occasions only, and never advertised the property for sale.

Two previous but unsatisfactory offers of purchase were made to Mr. Munday.

The last witness called by the appellant was a general demolition contractor, William Mattison, whose firm undertook the wrecking job in 1964. According to this man, ‘‘the building’s condition was probably the worst of all those we had torn down. Nothing could be salvaged for future reconditioned use; bricks were very weathered and crumbling. The wooden beams seemed worthless’’.

Cited by the respondent, Cranston Browning, of Oak Bay, is senior appraiser for the City of Victoria Taxation Department.

On March 8, 1961 this civic official “visited the Columbia Rooms and found they were of an old type of construction; common brick walls and heated by means of a hot water heating system. The main floor comprised five stores in very poor condition. The building was nevertheless, structually sound but had been considerably let go and lacked necessary repairs’’.

Mr. Browning, in 1961, assessed the Columbia Rooms, in keeping with the Equalization Act of British Columbia, at 50% of their market value resulting in a land assessment of $7,340 and for improvements (i.e., the building) $24,200, a total appreciation of $31,540.

This initial assessment was reduced as follows in 1962 : land, $6,120; building, $20,260, totalling $26,380.

Assuming this latter assessment at 50% of the market value to be reasonably reliable, the full market value would be in the vicinity of $12,240 for the land and $40,520 for the Columbia Rooms, adding up to a grand total of $52,760.

Exaggerated or not, no evidence was adduced that the Munday estate made any attempt to contest these figures, which remained unaltered during 1963 and 1964, the transaction year concerned.

“The structure’’, concludes Mr. Browning, ‘‘was in a good location spot, the area static but offering fair prospects for the future since the value of real estate persisted to increase’’.

Another expert, Allan Keenleyside, of Port Coquitlam, a real estate appraiser, next testified at respondent’s request, filing, under number R-3, his appraisal report of the property that he examined in 1971, on or about March 3.

“The subject land is a lot, 60’ x 60’, or 3,600 sq. ft. It is at the date of my viewing for this report, developed as a parking lot for Douglas Hotel patrons. There was a building on the land which, it must here be noted, was not inspected as it had been razed, in or about 1965” (exactly in 1964), vide R-3, page 3.

Further, on the same page, we read the following lines:

While the building was not inspected, for obvious reasons, and only a picture of the building is available, it is impossible to do a complete comparative analysis.

Made available to me was a statement of rental income pertaining to the building.

This report is attached to Exhibit R-3 as Appendix B, says Mr. Keenleyside, and it ‘‘had the same character as given under oath ’ ’.

The expert resorted to a more or less empirical method of determining a building’s value, known in the appraisal community as the Gross Rent Multipliers, obtained by multiplying the total gross monthly rental by 12 (months).

Applied to the 10-year cycle 1954-1963, this technique gave the hypothetical result hereunder :

1. The market value of the property, as of April 3, 1964, was:

THIRTY-SEVEN THOUSAND DOLLARS ($37,000)

2. The market value of the land as of April 3, 1964, was:

SIXTEEN THOUSAND, TWO HUNDRED DOLLARS ($16,200)

3. The market value of the building, as of April 3, 1964, was:

TWENTY THOUSAND, EIGHT HUNDRED DOLLARS

($20,800)

À 1971 valuation of a structure torn down in 1964 must needs be cautiously looked at, yet it is not devoid of some admissible information, especially when it falls within a bracket inferior by $6,200 to the known fire insurance coverage of $27,000 that the owners would have claimed in the event of a complete destruction.

I am of the opinion that the income tax text most in line with a proper appreciation of this issue is to be found in paragraph

(g) of subsection (6) of Section 20 thus worded (in part) :

(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 [i.e. Class 3 of Schedule B of the Regulations] 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; . . .

(italics not in text.)

It may be noted, without further ado, that this exclusion of the legal import which would otherwise attach to ‘‘the form or legal effect of the contract or agreement”? invalidates the statement of intent expressed in Exhibit R-1, Howard Harman’s letter to Hubert Munday of January 25, 1968.

The question in need of an objective answer may be implied from the textual quotation cited above, to wit : can the sale price of the Columbia Rooms, amounting to $65,000, be reasonably regarded ‘‘as being in part the consideration for disposition of depreciable property of a taxpayer ’ ’ ? Once again, let us bear in mind that the vendor alone is to be considered.

If so, then, a building, wtih a net income yield of $2,916.88 in 1963, and insured against fire risk in the sum of $27,000, was surely an appreciable asset to the owners who, it should be presumed, computed the loss of this revenue when estimating a purchase price offer of $65,000.

Otherwise said, Pandora Enterprises Limited may have intended to buy nothing else than land, still it seems hard to deny that the Henry Munday estate sold both the land and income bearing structure thereon erected, notwithstanding its neglected condition.

For the reasons stated, I am in complete agreement with the learned Chairman of the Tax Appeal Board, whose concluding paragraph, on page 948, I approvingly quote :

All in all and after earnest consideration, I am unable to find that the respondent did not proceed reasonably in allocating the purchase price, under Section 20(6) (g) of the Income Tax Act, by the method chosen and think that the appeal [s] failfs] and that the relevant assessments should not be disturbed.

The appeal being dismissed, the respondent will be entitled to recover the taxable costs.