Date: 19971223
Docket: 97-1498-IT-I
BETWEEN:
THÉRÈSE CÔTÉ-SICÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
TREMBLAY, J.T.C.C.
[1] This appeal was heard on November 12, 1997, at Montréal, Quebec.
Issue
[2] According to the Notice of Appeal and the Reply to the Notice of Appeal, the issue is whether the appellant is correct in maintaining that she is not jointly and severally liable for $2,669.11 under section 160 of the Income Tax Act (“the Act”) in respect of her spouse’s liability.
[3] According to the respondent, the appellant’s spouse sold her his principal residence at 665, rue de Provence, Longueuil, on August 23, 1993, for $84,376.29 even though it was worth $128,000 ($88,350 according to the appraiser, Pierre Fortin) and also transferred to her a commercial building at 899, rue Verchères, Longueuil, the following September 8 for $45,000 even though it was, the respondent claims, worth $73,000 ($32,000 according to the appraiser, Pierre Fortin).
[4] The appraisal reports by the appraiser, Pierre Fortin, state that the fair market value (hereinafter “FMV”) of the residence for which $84,376 was paid was $88,350, and not $128,000 as claimed by the respondent, and that the FMV of the commercial building for which $45,000 was paid was $32,000, and not $73,000 as claimed by the respondent. At the time of the sales, the spouse owed $5,668.60 in taxes.
[5] According to the respondent, given that the vendor and purchaser are married and that the sale prices are below the real values, the consideration paid by the appellant is at least equal to the spouse’s tax liability.
[6] The appellant argued that the FMVs relied on by the respondent, namely $128,000 and $73,000, are grossly exaggerated and unfounded. The appellant said that she hired an appraiser to determine the FMV of the immovables and that the price paid was equal to the FMV.
Burden of proof
[7] The appellant bears the burden of showing that the respondent’s assessments are wrong. This burden of proof derives from a number of judicial decisions, including the decision of the Supreme Court of Canada in Johnston v. Minister of National Revenue.[1]
[8] In Johnston, the Court held that the facts assumed by the respondent to support assessments or reassessments are also presumed to be true until proven otherwise. In the case at bar, the facts assumed by the respondent are described in subparagraphs (a) to (h) of paragraph 17 of the Reply to the Notice of Appeal. That paragraph reads as follows:
[TRANSLATION]
17. In making the assessment of August 28, 1996, notice of which is numbered 01568, the Minister of National Revenue assumed the following facts, inter alia:
(a) on August 25, 1993, Michel Sicé sold the appellant the principal residence located at 665, rue de Provence, Longueuil, for $84,376.29;
(b) on September 8, 1993, Michel Sicé sold the appellant a commercial building located at 899, rue Verchères, Longueuil, for $45,000;
(c) at the time of the sales, the appellant was married to the vendor, Michel Sicé, under the regime of separation as to property pursuant to a marriage contract entered into on July 31, 1951;
(d) at the time of the sales, the fair market value of the immovable at 665, rue de Provence, Longueuil, was $128,000 and the fair market value of the immovable at 899, rue Verchères, Longueuil, was $73,000;
(e) moreover, Michel Sicé owed $5,668.60 in taxes at the time of the sales;
(f) the appellant was related to Michel Sicé at the time of the sales, since she was his spouse;
(g) the fair market value of the immovables sold was higher than the consideration paid by the appellant, and the difference between that fair market value and the consideration paid by the appellant is at least equal to Michel Sicé’s tax liability;
(h) the appellant is jointly and severally liable for $2,669.11 of the taxes owed by the transferor of the immovable property referred to above.
[9] The appellant admitted subparagraphs (a) to (f) of paragraph 17 of the Reply to the Notice of Appeal and denied subparagraphs (g) and (h).
Facts in evidence
[10] After the above admissions were made, the evidence was completed by the testimony of Pierre Fortin, a chartered appraiser from the firm of Fortin, Duchesneau & Associés Inc., Michel Sicé, a surveyor, and the appellant, and by Exhibits A-1 to A-11 and I-1.
[11] Mr. Fortin studied the two properties in issue, which are in Longueuil. Mr. Fortin is quite familiar with that city, since he owns four residential properties there. He worked for the city for two years doing property appraisals. During that time, he appraised 3,000 dwellings. He therefore has special knowledge of the residential market in Longueuil.
[12] The appraisal report for the residence at 665, rue de Provence, Longueuil, was filed as Exhibit A-1. After visiting the premises and taking numerous photographs of both the exterior and the interior (Exhibit A-3), the appraiser noted a number of defects: cracked foundation and basement floor, furnace needing replacement, windows needing replacement, land in poor condition. The interior of the house is not even up to the standards of the time it was built. The house, which was built in 1962 using limestone brick, and which is thus of lower quality, has not undergone any major renovations, unlike three other similar houses, two of which are on the same street. Mr. Fortin appraised the house at $95,000. He argued that the municipal assessment of $127,000 ($55,600 for the land and $71,500 for the building) in no way reflects the property’s value. He also argued that the municipal assessment is not itself representative of the FMV. He referred, inter alia, to an immovable in St-Antoine de Longueuil for which the municipal assessment was $1,684,800 and the property taxes were $49,772. The immovable was sold for $400,000 (Exhibit A-5). He also referred to a residential property on boulevard Lafayette in Longueuil for which the municipal assessment was $733,000 and which was sold for $250,000. A study of the market at the time of the sale is what determines the fair market value (Exhibit A-4).
[13] According to Mr. Fortin, the $95,000 value represents the sale price that a vendor not under any compulsion to sell could have obtained for the item being appraised on August 25, 1993. A seven percent commission would have had to be paid to the broker, resulting in a net sale price of $88,350.
[14] The appraisal report for the second property sold, which is located at 899, rue Verchères, Longueuil, was filed as Exhibit A-2. According to the municipality, the value of the land is $38,900 and the value of the building is $34,100.
[15] The permitted uses are as follows:
C-2 retail business
C-3 heavy retail business
C-4 heavy service business
C-5 recreation business
[16] The current zoning does not authorize the construction of new residences or the redevelopment of existing premises for residential purposes.
[17] The property in question is made up of 6,174 square feet of land on which a former residence now used as a workshop and a garage and shed have been built.
[18] The main building is a one-storey wooden building with aluminum siding and sliding vinyl windows. It was built in 1949 on concrete block foundations with a tar and gravel roof.
[19] The building measures 21 feet by 29 feet, which means that it has a living space of 609 square feet.
Potential use
[20] The property under consideration is a former residence converted to a workshop by a land surveying firm.
[21] The appraisal of the property must be based on its highest and best use.
[22] Determining its potential use is problematic for the following reasons:
- the main building is now used as a workshop;
the layout of the building is not functional and does not in any way meet modern standards for use as a workshop or office;
the heterogeneous neighbourhood, in which car and motorcycle repair businesses predominate, is not conducive to use as a workshop or office;
- the current building is designed for low-end residential purposes but is being used for commercial purposes;
despite the existing residential layout of the building, the current zoning apparently does not authorize reconversion to residential use.
[23] According to the appraiser, there is no question that the highest and best use would be to demolish the improvements to the land and the existing buildings so that a new building could be built and used for a business appropriate to the neighbourhood, probably in the field of car or motorcycle repairs.
[24] To appraise the property, Mr. Fortin chose the direct comparison approach after justifiably rejecting the cost approach and the income approach. For this purpose, he used 13 sales of similar properties, four of which were rejected and nine of which were retained. He allotted $6 a square foot to the land, which resulted in a value of $37,000, from which he subtracted $5,000 for the demolition of the three existing buildings: [TRANSLATION] “The presence of those buildings limits the highest and best use of the land in question.” According to Mr. Fortin, the FMV is therefore $32,000.
[25] A second scenario was considered involving the commercial use of the existing buildings, having regard to a list of five property sales of low-end residences in Longueuil. He came up with an appraisal of $34,400. Under this scenario as well, the appraiser factored in a seven percent real estate brokerage fee, which left the vendor with a net sale price of $32,000.
[26] The respondent did not submit an appraisal report. She based her assessment on the $128,000 municipal assessment for the house at 665, rue de Provence, Longueuil, and the $73,000 municipal assessment for the immovable at 899, rue Verchères, Longueuil.
Testimony of Michel Sicé
[27] Michel Sicé, a land surveyor and the appellant’s spouse, purchased the residence at 665, rue de Provence, Longueuil, for $74,800 on January 29, 1982. The purchase of the house was financed in part by a $47,000 loan from the Caisse populaire de Montréal sud and in part by a $27,800 loan from the appellant, his spouse, at 13 percent interest (Exhibit A-6). When he sold the residence to his spouse in 1993, the hypothec from the Caisse populaire amounted to $56,573.29. In addition, he had never paid his spouse any interest or principal in connection with the $27,800. The appellant confirmed this in her testimony. After he had a heart attack in 1993, the witness was no longer able to meet his financial obligations. He would have had to give the immovable to the Caisse in payment of the hypothec. He would likewise have had to give the immovable on rue Verchères to the National Bank if his spouse had not taken everything in hand.
[28] The National Bank of Canada had a $45,000 hypothec (Exhibit A-10) on the land and buildings at 899, rue Verchères, Longueuil, Quebec, that were sold on September 8, 1993. A hypothecary guarantee in favour of the National Bank was registered the same day in Thérèse Côté’s name (Exhibit A-9), and a release was granted to Michel Sicé on October 1, 1993 (Exhibit A-8).
[29] The renunciation of partition of the family patrimony signed by Michel Sicé and Thérèse Côté on August 2, 1990, in accordance with articles 462.1 to 462.13 of the Civil Code of Québec, was filed as Exhibit A-11.
[30] To comply with section 9 of the Act respecting duties on transfers of immovables, the parties to the sales in question declared that the amount of the consideration was $120,160 for the immovable on rue de Provence (Exhibit A-7) and $73,000 for the immovable at 899, rue Verchères.
[31] While cross-examining Mr. Sicé, the respondent filed Mr. Sicé’s balance sheet as of November 30, 1992. According to that balance sheet, the family home was appraised at $125,000, with a $75,000 first-ranking hypothec and a $28,000 second-ranking hypothec, and the office land at 899, rue Verchères was appraised at $40,000.
[32] The appellant testified that she was never paid any interest on the $27,800 she had loaned, which ranked second. She also said that the money she loaned was her own money.
Analysis
[33] After hearing the evidence, the Court is of the view that the studies of the two immovables by the appraiser, Pierre Fortin, and the resulting opinions as to their value are correct.
[34] The respondent’s reliance on the municipal value alone, without an appraisal report, cannot legitimately contradict the detailed studies by the appellant’s appraiser.
[35] The respondent’s closely conducted cross-examination did not demolish the appraiser’s study. However, the Court does not agree with the appraiser that the seven percent paid to the broker must be considered in determining the FMV for the vendor. The FMV must be the same for the purchaser and the vendor. If additions or subtractions have to be made thereafter for whatever reason, this cannot, in my view, affect the fair market value.
[36] The Court cannot objectively take account of the consideration of $120,160 for the residence and $73,000 for the commercial building that the parties stated in the contracts to comply with section 9 of the Act respecting duties on transfers of immovables (Bill 47). Those figures have no scientific value.
[37] For the principal residence, it is the Court’s opinion that the appellant paid more than $56,576.29, that is, the first-ranking hypothec that existed at the time in favour of the Caisse populaire Desjardins Montréal-Sud; she also paid the $27,800 principal on the second-ranking hypothec in favour of the appellant herself at 13 percent compound interest; over 11 years, the interest would have come to $39,754 if it had been simple interest only.
[38] The respondent, who was unaware of the above-mentioned interest, argued that, on the basis of this first transaction, the appellant must pay $4,073.81 of her spouse’s liability: first, $56,576 + $27,800 = $84,376; this amount must then be subtracted from $88,350, the value arrived at by the appraiser, Mr. Fortin, in Exhibit A-1: $88,350 - $84,376 = $4,073.81.
[39] In fact, to determine the actual amount paid by the appellant, should the Court not take account of the interest she never received? The Court believes that it should.
[40] The respondent also argued that she does not have to consider the second transaction involving the commercial building on September 8, 1993, since it occurred after the transaction involving the principal residence on August 25, 1993. Since the sale of the two immovables resulted from the fact that Mr. Sicé could no longer work and thus generate income because of a heart attack, since the two immovables would in any event have been given to the hypothecary creditors in payment and, finally, since there was only a short time between August 25 and September 8, 1993, it should be concluded that the two transactions must be considered as a single event.
[41] The appraisal report on the industrial immovable (Exhibit A-2) stated that it had an FMV of $32,000 ($34,400 if we ignore the seven percent fee) when it was sold rather than $73,000 as suggested by the respondent. The appellant paid $45,000 for it (hypothec from the National Bank of Canada), and hence $10,400 too much. Even if no account is taken of the $39,754 in simple interest that the appellant never received in the transaction involving the residence, the amount paid by the appellant would still be higher than the value of the immovables in question taken as a whole. This is because $34,400 must be added to $95,000 (see end of [38]), resulting in an FMV of $129,400, and $45,000 must be added to $84,376 (price actually paid) = $129,376 (price paid). Therefore, the appellant would have paid $24 less ($129,400 - $129,376), without considering the interest owed by the vendor. If that interest did not have to be considered, the Court would say, in a case of this kind, that for the $24 “De minimis non curat praetor”. The appellant cannot be liable in respect of Michel Sicé’s tax liability.
Conclusion
[42] The appeal is allowed with party and party costs, including the fees of the appellant’s appraiser, and the assessment is vacated.
Signed at Québec, Quebec, this 23rd day of December 1997.
“Guy Tremblay”
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
Translation certified true on this 16th day of November 1998.
Kathryn Barnard, Revisor