Terrence M. Kelly v. Minister of National Health and Welfare, [1988] 2 CTC 2350, 88 DTC 1577

Bonner, T.C.J.: —By letter dated March 2, 1988, the appellant appealed to a tribunal established under subsection 18(1) of the Old Age Security Act (hereinafter "the Act") from a decision of the respondent reducing the supplement payable under subsection 10(1) of the Act. Subsection 18(1) provides:

Where a person is dissatisfied with a decision or determination made under this Act that no pension may be paid to him or that no supplement may be paid to him, or as to the amount of any pension or supplement that may be paid to him, he may appeal against such decision or determination to a tribunal to be established and conducted in accordance with the regulations, and the decision of such tribunal, subject only to variation by such tribunal upon application made to it by that person or the Minister based on evidence not previously considered by it, is final and binding and is not subject to appeal or review by any court.

It was the appellant's position that the respondent erred in calculating the supplement to which he was entitled under subsection 10(1). Subsection 10(1) provides for the reduction of the payment which would otherwise be made by . . . one dollar for each full two dollars of his monthly base income . . . ”. So far as is relevant for present purposes subsection 10(2) of the Act defines "monthly base income” as . . . one twelfth of the income of that person for the base calendar year . . . ”. Provision is made in section 11 of the Act for the calculation of the income of a person for a calendar year. For present purposes it is sufficient to note that section 11 requires that such income be . . . computed in accordance with the Income Tax Act. . . ”.

The respondent in a letter to the appellant dated February 9, 1988, which letter constitutes the decision under appeal, stated in part:

. . . in October 1987 we received a report from the Department of National Revenue that your actual 1986 income was $19,791.00 made up of interest of $791.00 and a capital gain of $19,000.00 We understand that the capital gain resulted from the sale of land to a relative for $1.00 but National Revenue requires that fair market value must be reported thus resulting in the capital gain of $19,000.00. . . . Since the Department of National Revenue has included the capital gain as income for income tax purposes, it must be considered income for guaranteed income supplement purposes . . . . [1]

In his appeal from that decision the appellant took the position that the respondent's decision as to his income was incorrect. Accordingly, by virtue of subsection 18(2) of the Act the appeal on that ground was referred for decision to this Court. Subsection 18(2) reads:

Where, on an appeal under this Act it is a ground of the appeal that a decision or determination made by the Minister as to the income or income from a particular source or sources of an applicant or beneficiary or of the spouse of such applicant or beneficiary was incorrectly made, the appeal on that ground shall, in accordance with the regulations, be referred for decision to the Tax Court of Canada constituted by the Tax Court of Canada Act, whose decision thereon, subject only to variation by the Tax Court in accordance with any decision on an appeal under that Act relevant to the appeal under this Act, is final and binding for all purposes of the appeal under this Act.

In his notice of appeal the appellant stated:

In December 18, 1986 I sold a piece of land to my Godson, John Northcott, for the total sum of $1.00 (one dollar). This was simply a gift from me to him with no economic gain to myself.

National Revenue Canada states if a parcel of land is sold the actual value of this land has to be listed on your tax return, not the actual amount of money which exchanged hands.

The Minister of National Health and Welfare filed a reply to the notice of appeal in which he denied those allegations. [2]

A hearing was held at St. John’s, Newfoundland, on August 8, 1988. Evidence was given by Cheryl Northcott, wife of John Northcott. She testi- fied that for many years the appellant had been a friend of her husband's family. The appellant is however unrelated to Mr. Northcott. Eventually the appellant went to live with Mr. and Mrs. Northcott. Time passed and Mr. Kelly recognized that he had reached an advanced age. He decided to make a gift of his land to Mr. Northcott. The land was described as “agricultural ground”. The area of the parcel was 16 '/2 acres. The consideration recited in the transfer was natural love and affection and the sum of one dollar. Mrs. Northcott stated that she was not certain exactly when the appellant had acquired the land but she believed that the acquisition took place before 1972.

The sale was reported by the appellant in his return of income for the 1986 taxation year. He reported a taxable capital gain of $19,000 on the theory that the fair market value of the land at the time of the transfer was $38,000. Subparagraph 69(1)(b)(ii) of the Income Tax Act provides:

(1) Except as expressly otherwise provided in this Act, . . .

(b) where a taxpayer has disposed of anything

(ii) to any person by way of gift inter vivos,

he shall be deemed to have received proceeds of disposition therefor equal to that fair market value; and . . .

Thus fair market value is deemed to have been received. However an error appears to have been made. There was no attempt to follow the rule laid down by section 40 of the Income Tax Act which provides that the gain from the disposition of property is the amount by which proceeds of disposition exceed the aggregate of the adjusted cost base of the property and expenses incurred for the purpose of making the disposition.

Mrs. Northcott was unable to explain the reasoning which led to the reporting of the transaction in the manner which I have described. She indicated that Mr. Kelly was a man of modest means and that he possessed no property of any consequence apart from the land transferred to Mr. Northcott. It is possible therefore that the appellant considered or was told that any conceivable taxable capital gain realized on the disposition of the land would be exempt from tax by virtue of section 110.6 of the Income Tax Act, and that there was nothing to gain by attempting to ascertain the adjusted cost base of the property and to deduct it.

In any event, the uncontradicted evidence of Mrs. Northcott suggests that the appellant acquired the land some time before 1972 at a cost which was not known to her. There was no evidence to suggest either that the actual cost to Mr. Kelly of acquisition of the land or the fair market value thereof on Valuation Day was nil. Counsel for the respondent did not suggest any basis for proceeding on the unlikely assumption that in the computation of the capital gain or loss realized by the appellant the adjusted cost base should be taken to be nil. Accordingly I have concluded that the capital gain, if any, realized by the appellant on the disposition of the land was less than $38,000. The resultant $19,000 taxable capital gain figure was reported by the Minister of National Revenue to the Respondent as forming part of the appellant's income. That report, according to the material transmitted to this Court, [3] formed the basis for the decision now under appeal. It is in error. Because there is no evidence on which I am able to reach a conclusion as to the amount of the adjusted cost base of the land it is impossible to vary the decision under appeal by giving a precise direction as to the correct income figure. Judgment will therefore go allowing the appeal and varying the respondent's decision by directing that in the computation of the appellant's income the capital gain, if any, realized on the disposition of the land is to be made in accordance with the rules laid down in section 40 of the Income Tax Act.

Appeal allowed.