Judgment Accordingly. Lloyd W. Gardiner (In His Capacity as Public Trustee for the Province of Alberta and as Such the Duly Appointed Administrator of the Estate of Gordon Papp, Deceased) v. Minister of National Revenue, [1964] CTC 127

THORSON, P.:—This is an appeal against the estate tax levied in respect of the estate of Gordon Papp, deceased, late of the Town of Peace River, in Alberta so far as it included the amount of $50,000, being the proceeds of a policy of life insurance on the life of the said Gordon Papp paid to his widow Mae Ritter Papp, the beneficiary of the policy.

The basic facts leading to the assessment may be stated briefly. Prior to his death, Gordon Papp, the deceased, and his wife Mae Ritter Papp were the only shareholders of Papp’s Truck Services Limited, hereinafter called the Company, incorporated under the laws of Alberta on February 24, 1956, and having its registered office at the Town of Peace River in Alberta. Of the ten issued shares of the Company Gordon Papp owned nine and his wife one. He was the president and managing director of the Company and his wife the secretary. The Company ran a trucking service,

On January 27, 1958, the Company applied to The Sovereign Life Assurance Company of Canada for a policy of insurance on the life of Gordon Papp in the amount of $50,000, naming his wife, Mae Ritter Papp, as the beneficiary. The policy, No. N162442, was issued on February 6, 1958, the premiums being $67,59 per month, payable in advance monthly. On October 22, 1959, the Company assigned all its right, title and interest in the policy to Mae Ritter Papp. The assignment was recorded in the books of The Sovereign Life Assurance Company on October 28, 1959.

On April 22, 1960, Gordon Papp died. On May 15, 1961, the Minister assessed the Estate of Gordon Papp for estate tax, including therein the sum of $50,000 as the value of the policy of insurance passing on the death of the deceased under Section 3(6) (b) and 3(l)(c) of the Estate Tax Act, Statutes of Canada, 1958, e, 29. The estate objected to the inclusion of the amount of $50,000 in the assessment. The appeal to this Court is confined to the question whether this amount was properly included in the assessment.

The appeal raises questions of importance. In assessing the estate the Minister relied on Sections 3(6) (b), 3(1) (c) and 58(s) of the Act. Section 3(6)(b) of the Act provides:

4 3. (6) For the purpose of this Act,

(b) a disposition made by a corporation controlled by the deceased to or for the benefit of any person connected with the deceased by blood relationship, marriage or adoption shall be deemed to be a disposition made by the deceased to or for the benefit of that person, and, in relation to any such disposition, any act or thing done or effected by that corporation shall be deemed to have been done or effected in all respects as though that corporation were the deceased.”

It is clear that this provision is applicable in the present case. The Company was controlled by Gordon Papp and Mae Ritter Papp was his wife. Consequently, the disposition made by the Company in assigning the policy of insurance to Mae Ritter Papp is deemed to be a disposition made by Gordon Papp to his wife.

That being so, and there cannot be any dispute about it, the Minister relied on Section 3(1) (c) of the Act which provides:

“3. (1) There shall be included in computing the aggregate net value of the property passing on the death of a person the value of all property wherever situated, passing on the death of such person including, without restricting the generality of the foregoing,

(c) property disposed of by the deceased under a disposition operating or purporting to operate as an immediate gift inter vivos, whether by transfer, delivery, declaration of trust or otherwise, made within three years prior to his death;”

The basic issue in the present case is whether the assignment of the insurance policy by the Company to Mae Ritter Papp, which is deemed to be a disposition of property by Gordon Papp to her, was an immediate gift inter vivos within the meaning of the section. If it was it was properly included in the assessment for it was made within three years prior to the death of Gordon Papp.

Counsel for the respondent contended that there had not been a valid assignment of the policy of life insurance. If that could be established it would be decisive against the appellant. The argument was, in brief, that there had never been a meeting of the Company authorizing the making of the assignment. The facts are that, apart from the initial organization meeting of the Company, there had never been any formal meetings of the Company, but Mrs. Papp stated that the assignment was discussed by the insurance agent, Gordon Papp and herself and that it was agreed that the insurance policy was to be assigned to her. If I had to decide whether the assignment was valid or not, I would decide that it was. But it does not matter, in view of the conclusion to which I have come, whether it was valid or not. If it was not valid then the case is free from any difficulty, for then the amount of the insurance would properly be included in the assessment. If, on the other hand, the assignment of the policy was valid, then the issue of whether the amount of $50,000 was properly included in the assessment under appeal can be stated briefly as follows, namely, that the assignment of the insurance policy by the Company to Mae Ritter Papp was a disposition of property by the Company to her, which is deemed by the Act to be a disposition by Gordon Papp to her, and that such disposition was an immediate gift inter vivos by Gordon Papp to his wife, and that its value was properly included in the assessment unless it could be shown that the disposition was made with consideration or that the property had no value and could not, therefore, be considered as an immediate gift inter vivos since it is obvious that there cannot be a gift of nothing. Therefore, the issue resolves itself into two questions, namely: did Mae Ritter Papp give any consideration to the Company, meaning thereby, according to Section 3(6) (b) of the Act, Gordon Papp, or did the policy that was assigned to Mae Ritter Papp have any value?

At the close of the hearing I reserved judgment. Since then I have had the opportunity of reviewing the transcript of the evidence and I have come to the conclusion that Mae Ritter Papp did not give any consideration for the assignment. The assumption that she undertook to pay the premiums on the policy of insurance after it was assigned to her on October 22, 1959, is unwarranted. She said that she was aware that an assignment was being made and that she would assume responsibility for making the payments of the premiums, that there were moneys owing to her by the Company, that she had a surplus in it and that she understood that the payments of the premiums were to be made by the Company and deducted from the amounts owing to her. But I am convinced and I find that Mae Ritter Papp never agreed with the Company, or Gordon Papp, to pay the premiums on the policy. This is clear from the following statements :

'‘Q. Did you make any statement on that occasion to your husband that you would make payments from then on, on this particular policy we are talking about? A. I don’t think I made a statement. It probably was discussed; it would have been an informal discussion.”

And then later, in reply to a question by counsel for the appellant, Mae Ritter Papp said:

“Q. One last question. Did anybody say to you that you would have to pay the instalments? A. I don’t recall.

Q. You don’t recall. And did you say to anybody that you would pay the instalments? A. I don’t think I did, no.”

Moreover, the suggestion that Mae Ritter Papp agreed to make the payments of the premiums by having the Company pay them against the amount owing to her is unwarranted. The evidence of Mr. Alfred Holm makes it clear that he suggested the idea of the assignment to Gordon Papp and never discussed it with Mrs. Papp until after her husband had died. And his evidence was that the Company continued to make the premium payments and claimed them as operating expenses. They were never charged against Mrs. Papp’s account. There was no indication that she had promised to make the premium payments. I find, therefore, that Mae Ritter Papp did not give any consideration to the Company or her husband for the assignment.

It was urged on behalf of the estate that the assignment of the insurance policy had no value. Under its terms it had no surrender value and no loan value and Mr. C. D. Wilson gave evidence that at the time of the assignment it had no market value. But this does not dispose of the matter, for immediately after the assignment of the policy of insurance Mae Ritter Papp had a chose in action. It is true that she could not sell it or borrow on it or get any surrender value for it, but it did have value, for if Gordon Papp had died she would immediately have had the right to receive payment of the amount of the policy.

I find, accordingly, that the assignment of the policy of insurance was a disposition of property and an immediate gift inter vivos within the meaning of Section 3(1) (c) of the Act.

It follows that its value must be determined pursuant to Section 58(1) (s) (ii) of the Act which provides:

“58. (1) In this Act,

(s) 4 value’

(ii) in relation to any other property, means the fair market value of such property,

computed in each ease as of the date of the death of the deceased in respect of whose death such value is relevant or as of such other date as is specified in this Act, without regard to any increase or decrease in such value after that date for any reason.’’

Consequently, the Minister was right in including the amount of $50,000 as the value of the insurance policy in the assessment against which the appeal herein was brought, from which it follows that the appeal must be dismissed with costs.

Judgment accordingly.

MINISTER OF NATIONAL REVENUE, Appellant,

and

STEEN REALTY LIMITED, Respondent.

Exchequer Court of Canada (Ritchie, D.J.), March 4, 1961*, on appeal from a decision of the Tax Appeal Board, reported 25 Tax A.B.C. 161.

Income tax—Federal—Income Tax Act, R.S.C. 1952, c. 148—Sections

The corporation had acquired a piece of real estate in the King Street- University Avenue area of Toronto in 1946 for $132;000. The buildings situated on the land were rented until 1955, when the corporation accepted an offer of $395,000 for vacant possession of the property. Upon, delivery to the purchaser the buildings were demolished and a modern 12-storey office building was erected on the site. The corporation took the view that the purchaser was interested only in the land and that no part of the proceeds should be attributed to the buildings under Section 20(6) (g). The Minister, on the other hand, sought to effect a complete recapture of capital cost allowances claimed since 1948 by deducting the whole capital cost of the buildings from the undepreciated capital cost of the relevant class of depreciable property.

HELD:

(i) That in fixing the price at which it was willing to sell, the corporation had regard only to the land value, and that the offer made by the purchaser was based solely on the value of the land as a site for the new building’;

(ii) That it was not reasonable, in the circumstances, to regard any part of the sale price as proceeds of disposition of the buildings;

(iii) That the appeal be dismissed.

CASE REFERRED to :

Ben’s Limited v. M.N.R., [1955] Ex. C.R. 289 ;' [1955] C.T.C. 249.

G.- D. Watson, Q.C., and T. E. Jackson, for the Appellant.

W. D. Goodman, for the Respondent.

Ritchie, D.J.:—The Minister of National Revenue has appealed from the allowance by the Tax Appeal Board of an appeal of Steen Realty Limited in respect of a re-assessment dated April 24, 1957 by which $4,465.49 was added to its 1955 taxable income. For convenience of reference, the Minister of National Revenue and Steen Realty Limited hereinafter sometimes shall be referred to respectively as ‘‘the Minister’’ and ‘‘the company’’.

As of January 1, 1955, the company owned land with three buildings thereon situate in the King Street and University Avenue area of Toronto. One building was known as 25 Emily Street and the other as 177 King Street West. Emily Street, which is one block west of University Avenue, runs north and south.

The land on which the three buildings stood had street frontages of 217 feet on University Avenue, 56.4 feet on King Street and 76.10 feet on Emily Street. It had been acquired by the company in 1946 at a cost of $132,000. At the time of acquisition the company allocated $32,112 of the purchase price to the land, the remainder of the purchase price was allocated to the buildings. The Minister accepted those allocations.

The entire property, land and buildings, was sold during the 1955 taxation year for a price of $395,000. The issue between the parties is what, if any, portion of the sale price should, reasonably, be attributed to the depreciated value of the buildings standing on the land as of the date of the sale.

Section 11(1) (a) of the Income Tax Act permits deduction from gross income of such part of the capital cost of property as 18 allowed by regulation. Under Schedule B to the Income Tax Regulations the buildings involved herein were classified in 1955 as class 3 and so, under subsection (1), an allowance of 5% of their depreciated capital cost might be deducted by the owner in computing taxable income. Other land with class 3 buildings thereon was owned by the company.

In its income tax return for the 1955 taxation year, the company deducted from its gross income a cost allowance of $4,570.17, being 5 per cent of the amount of $91,403.35 shown on the return as the net capital cost value, for income tax purposes, of Schedule B class 3 property owned by it as of December 31, 1955. The Minister accepted $91,403.35 as the value of that class of property owned by the company as of January 1, 1955 but, for the purpose of determining value as of December 31, 1955, deducted therefrom the sum of $89,309.77 which he ruled had been realized during the taxation year by the sale of the three buildings. The balance of $2,093.58 is the capital cost value on which, in making the re-assessment, the Minister computed $104.68 as the proper capital cost allowance.

Counsel for the Minister explained that $89,309.77 was the undepreciated value of the buildings in 1949, the year in which the present system of capital cost recovery became effective. As Justification for the adoption of that value, he relied on the formula contained in Section 144(1) of the Act.

The computation of 1955 taxable income of the company as determined by the re-assessment is:

Benjamin Richard Steen, the president of the company, testified respecting the 1946 acquisition of the property. The oldest building, 177 King Street, was four stories in height, had a basement and was 130 feet in depth, and was then reputed to have been standing for 60, perhaps 75, years. At the rear of this building was an addition thereto, two stories in height. This addition, which was the second of the three buildings standing on the land at the time of the sale, had been built 25 or 30 years before the company acquired the property. The second building connected with another four storey and basement building which fronted on Emliy Street. The main purpose in acquiring the property was to provide a home for Zenith Electric Supplies, a wholesale merchandising company, which Mr. Steen controlled. The space not required by Zenith was rented to other tenants. At the time of the sale the rentals being derived from the buildings were:

The annual gross income approximated $44,000.00 and the annual net income, before administration expense, was in the vicinity of $22,000. Fire insurance in the amount of $250,000 was carried on the buildings.

On October 4, 1955 one Rudolf Peter offered to purchase the property for the price of $395,000. The offer was conditional on:

(a) permission being obtained for the erection of the building, at least twelve stories in height, to house wholesale and commercial outlets and offices;

(b) the proposed building being permitted to occupy the total area of the land; and

(c) the issue of building permits for the contemplated building.

The Peter offer, which was accepted by the company on October 6, 1955, called for vacant possession not later than May 15, 1956. To secure vacant possession the company paid $3,000 to Stephen Sales and $4,500 to Herbert A. Watts Limited in consideration of their leases being surrendered. The transaction was closed on November 15, 1955. The morning after vacant possession was delivered demolition of the buildings commenced. Erection of the new office building commenced. immediately.

Irwin Armstrong, an employee of The Chartered Trust Company, gave evidence on behalf of the company as an expert on real estate values. He has been dealing with commercial and industrial properties for 25 years and had been appraising that type of property for ten years. Mr. Armstrong testified the value of the property sold by the company to Peter was in the land rather than in the buildings; that there was not sufficient income from the buildings to make the property attractive as an investment proposition; that in the 1955-57 period the University Avenue area was becoming active, land values were rising; that office buildings then were either in course of construction or being planned and at least one hotel was looking for a site in that area; that the price for which the company sold its property was the equivalent of $21.24 per square foot; that he knew of twelve other properties in the immediate area which in the same period had sold respectively for prices equivalent to $32.04, $22.17, $23.26, $27.04, $39.31, $45.35, $42.80, $32.95, $22.16, $18.11, $29.12 and $13.93 per square foot; that because of the value inherent in the land and the conditions under which. the company was using the property, he did not attribute any value to the buildings ; that the property would have sold for as much without the buildings as it did with them; and that, because of the cost of demolishing the buildings, the land would have been more desirable if vacant.

No witnesses were called on behalf of the Minister.

A section of the Act which, in my opinion, has particular application to the issue is Section 20 which applies where. depreciable property of a taxpayer has, in a taxation year, been disposed of. Subsection (6), clause (g) of that section is:

“ (6) For the purpose of this section and regulations made under paragraph (a) of subsection (1) of section 11, the follow- : Ing 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 depreciable 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.’’

The company contends that in 1955, the market value of the property (land and buildings) was confined to what could be realized for the land as the buildings had no market value. It, however, does concede the buildings had some value to it as Zenith Electric, a related company, was the major tenant. I use the term ‘‘related company’’ loosely. The parking problem had caused wholesalers to move from the King Street-University Avenue area. The value of the location as a home for Zenith Electric in 1955 had, in my view, decreased to a point where it no longer justified retention of the property by the company. The parking problem was bound to become progressively worse.

The buildings were old. They had no attraction to an investor seeking income. According to Mr. Armstrong anyone desirous of acquiring the property as an investment would not have paid more than $210,500 for it. I am satisfied the company, in fixing the price at which it was willing to sell, had regard only to the land value. I also am satisfied Mr. Peter regarded the buildings on the land as of no value to him and that his offer of $395,000 was based solely on the value of the land as a site for the modern twelve storey office building he had in mind. The cost of demolition increased his acquisition cost.

In the circumstances surrounding the sale of the property to Peter, it is not reasonable to regard any part of the $395,000 sale price as being the consideration for the disposition of the buildings. See Ben’s Limited v. M.N.R., [1955] Ex. C.R. 289; [1955] C.T.C. 249.

The appeal is dismissed, with costs.

Judgment accordingly.