Thomas a Capozzi, Joseph Capozzi v. Minister of National Revenue, [1983] CTC 2623, [1983] DTC 569

Bonner, TCJ:—In 1971 Capozzi Enterprises Ltd (hereinafter called “Enterprises”) paid $160,000 to the appellant Thomas Capozzi as consideration for the purchase of his house. In 1972 Enterprises paid the same amount to the appellant Joseph Capozzi for his house. The respondent found that Enterprises overpaid for the houses and that as a result “benefits” were “received” by the appellants within the meaning of section 6 of the Income Tax Act. The assessments were based on further assumptions that the overpayments to Thomas and Joseph Capozzi amounted to $40,200 and $51,000 respectively, being the excess of sale price over assumed fair market value. Those amounts were added to declared income by the assessments under appeal. The issue in each appeal was the quantum of the benefit conferred if any.

The houses were situated side by side on the shore of Okanagan Lake, just south of Kelowna, British Columbia. Each was built on a lot having a width of about 112 feet and a depth of about 307 feet. There was an abundance of evidence that the beach in front of the houses was equal to or better than any other in the area in terms of qualify of sand, underwater gradient and privacy.

The circumstances surrounding the sales of the houses to Enterprises are ambiguous on the question of value. Thomas Capozzi testified that in 1971 a “beautiful piece of property” became available. He purchased it with a view to moving in in July of 1972. He had an evaluation made of his existing house by a real estate agent, William Gaddes. He caused the house to be listed for sale at $160,000, the price suggested by Mr Gaddes. No written opinion on value was produced. Mr Gaddes was not called as a witness and it was not suggested that he was unavailable.

Enterprises was a company owned, whether directly or indirectly or through companies or trusts, in equal shares by the families of the appellants and of a third brother, Herbert. In 1971 Enterprises sold a winery which it had owned and operated for a number of years. As a result of the sale the company had an abundance of cash. Thomas Capozzi approached his two brothers and proposed that the company buy his house. It did so and a deed conveying the property from Thomas Capozzi to Enterprises was delivered in December 1971 and registered in January 1972.

Joseph Capozzi testified that after the request was may by his brother some “research” was done and a value of $160,000 was “developed” for his brother’s home. If the research resulted in any sort of written document it was not produced at the hearing. Joseph Capozzi added that his home was worth the same amount.

In 1972 Enterprises was approached by a Mr Peacock, one of the principals of K-Bar Ranches Ltd (hereinafter called “K-Bar”). Mr Peacock wanted to sell a large part of a ranch which it owned. The asking price was $100,000. According to Joseph Capozzi the owners of K-Bar said that they wanted to sell because they or the company needed money. Joseph Capozzi testified that the response of the brothers was that they were interested “. . . if they could steal the property”. He testified further that a price of $620,000 was worked out; that at the time both his house and that of Thomas Capozzi were for sale; and finally, that the Capozzi brothers announced to Mr Peacock that there would be a “kicker”, namely, that $320,000 of the purchase price would be payable by transfer of clear title to the houses of Thomas and Joseph Capozzi. The balance was payable in cash. An agreement of purchase and sale reflecting those terms was entered into between K-Bar as vendor and Enterprises as purchaser on May 11, 1972.

The registered title to Joseph Capozzi’s house was never transferred to Enterprises. Instead, in August of 1972 it went directly to R & J Developments Ltd (hereinafter called “R & J”), a company which was a member of the same corporate family as K-Bar.

Events subsequent to the sale of the houses to Enterprises and the resale thereof by Enterprises to K-Bar shed some light on fair market value at the relevant times. Seven months after the sale by Enterprises to K-Bar, R & J transferred the Joseph Capozzi house to Falcon Ridge Holdings Ltd (hereinafter called “Falcon Ridge”). The deed was dated January 24, 1973. Joseph Capozzi, who at one state in his career was a real estate agent, testified that he secured a Teela record and discovered that the $90,000 declared value was made up of $30,000 in commission owed by R & J to W B Jurome, principal of Falcon Ridge, and $60,000 for the transfer to R & J of 1,100 acres of land. Although this was an arm’s length transaction it was suggested that the sale price did not reflect fair market value. Joseph Capozzi testified that he was told by Mr Peacock who, as noted previously, was one of the principals of K-Bar (and presumably also of R & J) that the 1,100 acres controlled the access to land owned by K-Bar. He added that Mr Peacock said that the price at which the 1,100 acres were transferred was not of importance. Surprisingly, counsel for the respondent did not object to this hearsay. It was not suggested that Mr Peacock was unavailable to give evidence in person. In any event no weight can be given to evidence as unreliable as this. It follows that the sale to R & J tends to indicate that Joseph Capozzi’s house was, when sold, worth something less than the amount paid by Enterprises.

The Thomas Capozzi home had been transferred by Enterprises to R & J. R & J in turn sold the property to James F and Gertrude Millar. It appears that the sale took place in the fall of 1973. The deed to Mr and Mrs Millar was received in the land registry office in December of 1973. The declared value was $130,000. This was an arm’s length sale. It was common ground among the experts who testified at the hearing that real estate prices were rising during the relevant period. The R & J sale to Millar would therefore appear, at least on the surface, to indicate that the fair market value of the Thomas Capozzi residence in December 1971 was something less than $130,000.

The appellants attempted to rebut that inference through the evidence of Charles V Peterson, a real estate appraiser. He made enquiries as to the sale. He was told that the vendor wanted a quick cash sale, a fact which in his view warranted a 13% adjustment. He was also told by the same source that the sale to Millar took place in October of 1972.

It would appear that at least some of the information given to Mr Peterson was not accurate. The listing sheet, Exhibit R-3, and the deed to the Millars, Exhibit R-2, indicate that the sale took place in 1973 and not in 1972. Mr Peterson appears to have drawn his information regarding the transaction from an unreliable source. Thus, the sale to Millar stands as one which indicates that the value of the Thomas Capozzi residence at the relevant time some two years prior was substantially less than $130,000.

The appellants’ expert, Charles Peterson, expressed the opinion that the value of the Joseph Capozzi home on August 1, 1972, was $150,000. I do not find that opinion persuasive. Although Mr Peterson’s academic qualifica- tions were of a very high order, his experience in relation to the real estate market in British Columbia in general and Kelowna in particular was scanty. Furthermore, Mr Peterson rested his opinion partly on a market data analysis. He did not explain the interrelationship between his conclusion and the sales which he used. One of the sales to which he said he gave greatest weight was the R & J sale to Millar mentioned previously. When faced with material clearly indicating that the sale took place one year later than he had previously thought Mr Peterson stated that this made no difference to his conclusion. That statement was rather surprising in view of the fact that Mr Peterson had concluded that there was an average annual increase in value of 11.36%. Finally, Mr Peterson did not give any satisfactory explanation for his failure to take into account the one transaction involving an equivalent lakefront home that took place anywhere near the relevant time. I refer to the sale in March of 1970 and resale in November of 1972 of 191 Beach Avenue, relied upon by Mr Macpherson.

Hugh Neil Macpherson, an independent fee appraiser who has carried on business in the Kelowna area since 1968, was called to give evidence for the respondent. Mr Macpherson does not possess extensive academic qualifications, but any deficiencies in this regard are, in my view, offset by his experience. He has done a very large number of appraisals of residential property for lending institutions.

Mr Macpherson prepared an initial report dated June 1, 1978, for each house and subsequently an addendum for each dated August 25, 1983. The addenda were prepared because Mr Macpherson recognized the weaknesses in his first reports. Initially, in utilizing the market data approach, he confined himself to comparables sold in 1971 and 1972. Unfortunately, he was only able to discover one and he was therefore driven to rely more heavily than he would have liked on a depreciated reproduction cost approach to value. Mr Macpherson felt, and I accept his evidence in this regard, that except in times of extreme market activity higher cost homes tend to sell below depreciated replacement cost. Mr Macpherson therefore prepared the addenda in which he did the market data study once more, but utilized sales during an extended period, namely, 1970 to 1974. This involved making greater adjustments for time. Mr Macpherson’s conclusions, which I regard as justified by the evidence, are that the Joseph Capozzi home on August 1, 1972, was worth $112,000 and the Thomas Capozzi home on December 23, 1971, was worth $116,500.

I have no doubt that the appellants sincerely thought that their houses were worth more than the values found by Mr Macpherson. I do not doubt that, as Joseph Capozzi said, he and his brother could have and would have held onto the houses rather than sell them at such prices. However, the fair market value of a house at a time which occurs during a period when the market is inactive and therefore depressed does not rise simply because the owner possesses the ability and the determination to wait for an improvement in the market. Had sufficient demand existed in the market place to support $160,000 prices for the houses it would not have been necessary to foist the Thomas Capozzi house on Enterprises. Equally, it would not have been necessary to demand that K-Bar, a company which Joseph Capozzi regarded as desperate for money, take both houses as partial consideration.

The Thomas Capozzi appeal will therefore be dismissed. The appeal of Joseph Capozzi will be allowed and the assessment referred back to the respondent for reconsideration and reassessment on the basis that the benefit conferred was $48,000.

Appeal of T Capozzi dismissed.

Appeal of J Capozzi allowed in part.