Gerstel Estate v. R., [1998] 3 CTC 2618

Bowman T.C.J.:

This is an appeal from an assessment made under section 160 of the Income Tax Act against the Estate of Sarah Gerstel. Sarah Gerstel died at the age of seventy, shortly before her father, Ben Gerstel, who died at the age of ninety-three, in 1991. He was represented by Mr. Samuel Gerstel.

In 1991, he transferred a property in which he lived to his daughter, Sarah. Evidently, it was in consideration of the moneys that she had spent and the services that she had performed over the years. No point was made of this, although I might say that if that was so, it would indicate that she had some sort of interest in the house, either by way of constructive trust or some such thing as that; however, that point was not pressed. The assumption was that the property was transferred for one dollar; it is not challenged that the property had a value of $175,000 at the time of the transfer.

The property was purchased in 1966 for $36,000. The Minister assumed, on assessing, that the property had a V-day value, (valuation day value) of $36,000; that is to say the assumption was that the property did not increase in value between 1966 and 1971. I am inclined to think that assumption may be wrong, but I have no evidence from which I could conclude, as Mr. Gerstel suggested, that the property had gone up by 10% between 1966 and 1971. It may well have, my common sense tells me it probably did, but I don’t think that I can base any decision on that type of conjecture.

The main issue, however, is this: when Mr. Ben Gerstel transferred the property to his daughter, it gave rise, of course, to a deemed disposition by him, under, I believe, section 69, at fair market value, that is $175,000.

Now the property was a duplex, it had an upstairs where Mr. Gerstel and his daughter lived, a downstairs where tenants lived, two garages in the basement, some storage space, a furnace room and a very small bachelor apartment.

The Minister of National Revenue concluded that the assessment should be based on the premise that two thirds of the property was for commercial use, i.e. non-principal residence, and one third was for personal use and therefore principal residence. That assumption is premised upon the fact that for many years, Mr. Gerstel and subsequently his daughter, I guess, allocated, for the purposes of the Income Tax Act, the expenses of the house, two thirds to the commercial use and one third to the personal use. The Minister came to the conclusion that if Mr. Gerstel was going to allocate the expenses one third and two thirds, the same proportion should be used when he disposed of the property.

Mr. Gerstel, the appellant, Mr. Samuel Gerstel, who represents the Estate, contends that this is illogical, that the mere fact that when they allocate two thirds of the expenses to the commercial use does not necessarily mean that when the property was sold, two thirds of what was sold was a commercial property and one third was a principal residence. He says in effect that there is an illogical comparison of apples and oranges, or to put it perhaps a little more elegantly, this was a non sequitur.

With respect, I agree with him. I think the appropriate allocation is fifty/fifty. It seems to me that he has established that the floor space was 50% personal and 50% commercial. The fact that the expenses may have been, rightly or wrongly, attributed on a two thirds one third basis — I make no finding on that point — does not necessarily imply that a reasonable allocation for the purposes of section 45 should follow the same pattern as the allocation of expenses. After all, there may be expenses, more expenses attributable to the commercial use of the property, but it does not follow, in my respectful view, that when the property was sold, it is reasonable to attribute two thirds to the commercial part of the property.

I conclude that the proper allocation is fifty/fifty, fifty to the commercial, fifty to the principal residence. I should mention one other thing: there appears to be a difference of opinion in this court as to whether one can challenge the underlying assessment of the transferor when a transferee challenges an assessment under section 160. I would say the overwhelming weight of authority in this court is that one can: there have been decisions by myself, by Judge Bell, by Judge Lamarre, Judge Taylor all to that effect; there is a recent decision by Judge Mogan going in the other direction.

However, counsel very fairly agreed that Mr. Gerstel could challenge the assessment, and he has done so successfully to this extent. I think that the assessment should therefore be varied on the basis that the liability of Sam Gerstel for tax should be reduced on the assumption that only 50% of the proceeds of disposition, in 1991 I think it was, should be attributed to commercial use and the other 50% to the principal residence.

The appeal is therefore allowed to give effect for these reasons; the appellant is entitled to its costs if any.

Appeal allowed.