Citation: 2014 TCC 64
Date: 20140228
Docket: 2011-3788(IT)G
BETWEEN:
ESTATE OF STANLEY VINE,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Campbell J.
[1]
Stanley Vine died on
July 1, 2003. Immediately before his death, he owned, among other things:
(a) shares of Kilbarry
Holding Corporation (“Kilbarry”);
(b) an undivided 50
percent beneficial interest in a property municipally known as 3000 Victoria
Park in Toronto (“Victoria Park”); and
(c) all of the shares of
the capital stock of Leadway Apartments Limited (“Leadway”).
[2]
Leadway owned a
property municipally known as 1305 and 1309 Wilson Avenue (“Wilson”) which
consisted of 171 individual rental units contained in two residential
structures located on 2.7 acres of land.
[3]
There are two issues to
be determined in this appeal:
(a) whether, after the
normal reassessment period, the Minister of National Revenue (the “Minister”)
can include recapture of capital cost allowance deductions in the amount of
$1,995,367, relating to the Victoria property, in computing income for the 2003
taxation year; and
(b) whether the Minister
correctly determined the fair market value (“FMV”) of the Wilson property and,
consequently, the FMV of the shares in Leadway, which owned this property.
[4]
At the commencement of
the hearing, the Parties submitted an Agreed Statement of Facts as Exhibit A-2.
I have attached it as a Schedule to my within reasons for ease of reference.
[5]
The following summary
of facts explains how the two issues in this appeal arose.
[6]
Prior to Mr. Vine’s
death in 2003, the accounting firm of Mintz & Partners (“Mintz”) had
maintained a long-standing relationship with Mr. Vine. When he died, his named
executors and trustees, his son-in-law, Norman Glowinsky, and daughter, Lillian
Glowinsky, engaged Mintz to complete, among other things, valuations of
corporate shares and real estate, in respect to the deemed disposition of all
of Mr. Vine’s properties. The terminal return, which the Parties referred
to throughout as the “Original Return”, was filed by the due date of
April 30, 2004 and assessed by the Minister on June 7, 2004.
[7]
Within the first
taxation year with respect to the estate, the Appellant had sustained a capital
loss of $34,148,186 respecting Kilbarry’s shares. Since the Appellant wished to
treat the Kilbarry loss as a capital loss of Mr. Vine for the taxation year in
which he died, pursuant to subsection 164(6) of the Income Tax Act (the
“Act”), an election was filed on September 28, 2004 in order to carry
this loss back to offset capital gains. Consequently, on September 28, 2004,
the Appellant filed an amended tax return (the “Amended Return”) for the
deceased’s 2003 taxation year, which was within the time prescribed pursuant to
subsection 152(6) of the Act.
[8]
In addition, during the
course of amending the Original Return, Mintz discovered a problem with the
Original Return, arising from the firm’s improper characterization of Mr. Vine’s
legal interest in Victoria Park. This property was held, by Mr. Vine and his daughter,
as tenants‑in‑common at the time of his death. However, in the
Original Return, Mintz had incorrectly treated the property as a partnership
without recognizing that, for tax purposes, when disposing of an interest in
property for valuation, reporting the property in this manner would have
different consequences from valuation of an undivided interest held as a
tenancy‑in‑common (as Victoria Park was). The valuation of Victoria
Park did not recognize this distinction in the Original Return, resulting in an
erroneous capital gain being reported. Consequently, the reported capital gain
of $2,915,000 should have instead been reported as a reduced capital gain of
$1,073,970 together with a recapture of capital cost allowance (“CCA”) of
$1,995,367.
[9]
All four witnesses from
Mintz (Harley Mintz, Silvia Jacinto, Steven Rayson and Tom Strezos) knew that
the deceased held this property as a tenant-in-common and not as a partnership.
The problem occurred because, as business valuators and not tax experts, both Mr.
Rayson and Mr. Strezos testified that they did not recognize the distinction in
land ownership for the Victoria Park valuation for tax purposes. Steven Rayson
testified that, after completing the valuation, he did not participate in the completion
of the return. Five months later, when preparing the Amended Return to claim
the loss carryback, Ms. Jacinto and Mr. Mintz realized that the Victoria Park
property had been omitted from the Original Return because the property did not
appear as one of the “line items” on Schedule 3 of that return, which
reports the deemed dispositions of the properties. They testified that the
capital gain of $2,915,000 was actually present within the Original Return and
was included in the line 132 total, but was not listed above the total
separately as a line item (Agreed Statement of Facts, paras 4-5). To correct
this, Mintz properly reported the $1,073,950 capital gain and the $1.9 million
recapture in respect to this property in the Amended Return. However, they
failed to “back out” the initial $2,915,000 capital gain for this property that
had been included in the Original Return. This resulted in a “double-counting”
error in the deemed proceeds of disposition of Victoria Park. While the Amended
Return attempted to correct the problem in the Original Return, the capital
gain was, in fact, over-reported in Schedule 3 because the $2,915,000 was not
“backed out” of the Amended Return. This problem was not discovered until May,
2007, at which time Ms. Jacinto wrote to Joao Pereira, the auditor, to advise
that the totals in Schedule 3 of the Amended Return already contained a capital
gain in respect to Victoria Park.
[10]
The Minister commenced
an audit of the deceased’s terminal year in 2005 due to issues with the FMV
attributed to some of the properties in the Amended Return. In May, 2007, as
the normal reassessment period for the 2003 taxation year was about to expire,
the Minister obtained a waiver from the Appellant. The waiver was in respect to
capital gains but made no reference to the recapture of CCA (Agreed Statement
of Facts, para 21).
[11]
The Reassessment,
completed in June, 2007, recognized, among other things, the Kilbarry capital
loss that had been requested in the Amended Return. It also reduced the
double-counting of capital gain by $2,915,000, in respect to the Victoria property, as requested by Ms. Jacinto in May, 2007. The Minister also
included in the deceased’s income the recapture of CCA deductions in the amount
of $1,995,367 in respect of Victoria Park. It is this inclusion of the
recapture that is at issue and, specifically, whether the Reassessment, which
was beyond the normal reassessment period, can extend to include such recapture
when it was not referenced in the waiver.
[12]
The Reassessment also
determined that the FMV of Wilson was $12 million, resulting in a FMV of
Leadway’s shares, which owned Wilson, of $13.4 million. The Original Return had
listed the FMV of Leadway shares as $9,111,000 for the purposes of the deemed
disposition. The Minister’s valuation of Wilson gives rise to the second issue
that is before me.
THE POSITION OF THE PARTIES ON EACH ISSUE
Issue #1: Recapture of CCA Deductions after Normal Reassessment Period
[13]
According to the
Appellant’s argument, neither the taxpayer, the Estate of Stanley Vine, nor the
person filing the return, the executors, made any misrepresentation
attributable to neglect or carelessness, which would allow the Minister to
reassess beyond the normal reassessment period. The accounting firm that
prepared the return made an honest and simple mistake in the valuation and
reporting of the disposition of the Appellant’s interest in Victoria Park,
characterizing it as a partnership interest when, in fact, it was held as a
tenancy‑in‑common. Mintz discovered this error five months after
the Original Return was filed and corrected it by reporting the recapture,
together with the appropriate capital gain. However, the original capital gain
that was claimed, when the property was incorrectly characterized as a
partnership, was not “backed out” of the calculations on the Amended Return.
[14]
This “double-counting”
of the capital gain that occurred was discovered by Mintz in May, 2007 and this
adjustment was permitted by the auditor without becoming statute-barred because
it was covered in the waiver. The Appellant argued that, since the normal
reassessment period expired on June 7, 2007 and because the waiver that the
Minister obtained did not cover the recapture, the Minister is now precluded
from reassessing the recapture unless it can be established that there was a
misrepresentation, made by the Appellant in the Original Return, that is
attributable to neglect or carelessness. The inadvertent over-reporting does
not constitute a misrepresentation as it was an error that favoured the Minister
and there is nothing to prevent a taxpayer from correcting honest mistakes in a
return. Even if this error was a misrepresentation, it was nullified by the
filing of the correction in the Amended Return. The Appellant’s position is
that it was then incumbent upon the Minister to reassess to include the
recapture before the expiry of the period. The Minister’s failure to reassess
prior to the expiry is an error of the Minister, not the Appellant. Even if the
error in the Original Return is found to be a misrepresentation, it was
nullified when the Amended Return was filed to correct the improper reporting
of the Victoria Park property. It could then no longer be said that the
Minister was relying on the misrepresentation made in the Original Return.
[15]
The Appellant acted as
a wise and prudent person to ensure there was tax compliance in the return.
They engaged and relied upon a reputable accounting firm to properly report the
income in the terminal return. Even if the executors had noticed the omission
of Victoria Park, as one of the line items in Schedule 3 of the Original
Return, according to the evidence of Mr. Rayson and Mr. Strezos, as well as that
of Ms. Jacinto and Mr. Mintz, they would not have discovered the error as it
related to the characterization of the property as a partnership, not a tenancy‑in‑common,
and the consequent capital gain calculation. This inability to detect the error
in the Original Return does not amount to neglect or carelessness. The Minister
had all of the information required to make the reassessment within the normal
reassessment period and the Appellant did nothing to prevent the Minister from
reassessing the recapture.
[16]
Even if Mintz made a
misrepresentation in completing and filing the Original Return, there is no
neglect or carelessness because, when it was corrected in the Amended Return,
the Minister was no longer relying on the misrepresentation and could not
therefore invoke subparagraph 152(4)(a)(i). The fact that it was not
caught immediately reflects the complexity of the proper reporting for tax
compliance purposes and, as the Appellant, in paragraph 145 of its Written
Argument suggests, “the subtlety of the error.”
[17]
Even if Mintz were
neglectful or careless in the preparation of the return, according to the caselaw,
it cannot be attributed to the Appellant.
[18]
The Respondent’s
argument, in respect to this issue, is that the executors of the Appellant and
the accounting firm of Mintz made several misrepresentations in the Original
Return which allows the Minister to rely on subparagraph 152(4)(a)(i) of
the Act to include recapture that had not been declared in that return.
Neither the corrections, that Mintz did in the Amended Return, nor the
auditor’s mistaken belief, that a taxpayer-requested adjustment could be processed
without time limits if the adjustment was being allowed, negate those
misrepresentations contained in the Original Return. The Respondent relied on
the Federal Court of Appeal decision in Nesbitt v The Queen, [1996] FCJ
No. 1470, 96 DTC 6588 where the Court rejected a taxpayer’s argument that
there could be no operative misrepresentation that would allow the Minister to
rely on this section of the Act where the Minister was aware of the
mistake in the tax return prior to the expiry of the limitation period
(Respondent’s Written Argument, p. 6).
[19]
Mintz had all of the
information necessary for the proper completion of the return. The firm had
completed returns for the deceased for a number of years prior to his death and
Mintz knew that Victoria Park was owned by the deceased. Steven Rayson, who
worked on the valuation report, was negligent because he knew the property was
a joint venture, yet he valued the deceased’s interest as a partnership. Silvia
Jacinto agreed that, if she had been involved with the return at that point, and
knowing the property was owned as a joint venture, she would have questioned
the way the property was valued if she had seen Mr. Rayson’s valuation report
(Transcript, Volume 1, pp. 132-133).
[20]
Although Harley Mintz
testified that the omission of Victoria Park in Schedule 3 of the Original
Return was the result of a “flaw in the program,” the Respondent submitted that
the omission is due to the negligence of Mintz (Respondent’s Written Argument,
paras 5-9).
[21]
The Respondent also submitted
that, if this Court concludes that Mintz has been negligent, “…it is the same
thing as if the Appellant, the taxpayer, had been negligent…” (Transcript,
Volume 6, p. 665) because neither Mr. Glowinsky nor Mrs. Glowinsky
reviewed the return in any detail.
Issue #2: The FMV of the Wilson Property
[22]
With respect to the
second issue, the Appellant relied on the expert report of David Atlin in
proposing a FMV of $8.6 million for Wilson. Mr. Atlin used the Overall
Capitalization Method to arrive at a FMV and checked the accuracy of those
results using the Direct Comparison Approach. Using this second approach, Mr.
Atlin arrived at a FMV of $8,595,000.
[23]
The Respondent’s
expert, Brian Walsh, arrived at a FMV of $12.832 million, but, according to the
Appellant, the report is significantly flawed and should not be relied upon.
The Discount Cash Flow Method (“DCF method”), used by Mr. Walsh, was not
an appropriate method for this type of residential property as it is best
utilized in commercial contexts where there exists greater contractual
certainty as to the terms of the leases and the expiry/renewal dates
(Transcript, Volume 2, p. 203). Less weight should be accorded to the
Walsh report because it contained unsupported and contradictory assumptions,
inconsistencies and errors. Those unsupported assertions and errors included:
(a) the property
management was “subprime”, that is, it did not maximize the rents because they
were not inclined to do so;
(b) inconsistent testimony
regarding the use of data subsequent to 2003 and his refusal to review actual
rental performance of Wilson;
(c) replacement of the
Schedule “B” to his Report during the hearing, which impacts on his projected
rental income figures in the table at page 107 of his Report;
(d) inconsistencies
respecting the timing of rental increases;
(e) calculation errors affecting
the net income figures for Year 5 onward;
(f) incomplete calculations
in Appendix “C” to the Report, as 146 of the 170 rental units were omitted from
the calculations;
(g) inconsistency in the
calculation of property tax expense;
(h) inconsistent
statements regarding the rental market;
(i) errors in his
explanation of income growth within the DCF and direct capitalization methods;
and
(j) calculation errors in
his explanation of the DCF methodology.
In addition, Mr. Walsh did not readily disclose his
review of a prior Canada Revenue Agency (“CRA”) appraisal and its determination
of the FMV and there was a potential that he may have been influenced by this
prior CRA appraisal.
[24]
The Respondent’s
expert, Brian Walsh, viewed the rental units as being far below market value.
He stated that this could be a function of the property management which, at
the effective date, was a company, Biddington, operated by the deceased’s
son-in-law as President. Mr. Walsh was of the view that, since there was no
contractual obligation on a purchaser to continue using Biddington to manage
the property, a new owner would have benefited from future income by way of
increased rents in respect to Wilson. Therefore, his FMV of $12.832 million
properly incorporated appropriately forecasted rental increases, utilizing the
direct capitalization method which was supported by his second chosen method,
the discounted cash flow method (“DCF method”).
[25]
Mr. Walsh stated that
the Appellant expert’s FMV did not reflect Wilson’s anticipated rental
increases and growth and, consequently, the FMV underestimated Wilson’s FMV. He was also of the view that Mr. Atlin’s choice of methodology to
determine FMV was not the most appropriate because rentals at Wilson were, as
both experts acknowledged, well below the market values and Mr. Atlin’s method
did not account for Wilson’s future anticipated rent increases. Although their
respective capitalization rates were similar, the difference in the FMV
resulted from Mr. Atlin’s application of his rates against a forecasted income
that was well below market rentals. Consequently, Mr. Atlin’s net
operating income did not take into account any rental income growth, other than
the 2.9 percent statutory guideline amounts.
[26]
Mr. Walsh also argued
that Mr. Atlin’s inappropriate choice of comparative properties impacted the
FMV when he applied the middle range capitalization rates. If certain
comparable properties had been excluded, it would have resulted in
capitalization rates in the lower range being applied and, therefore, a lower
FMV. In addition, Mr. Walsh applied a more appropriate turnover rate of 25
percent in respect to tenants vacating the premises and, consequently,
impacting the rate of rental increases.
Analysis
Issue #1: Recapture of CCA Deductions after the Normal Reassessment Period
[27]
The Minister will be
permitted to make a reassessment that falls outside the normal reassessment
period provided that, on the evidence, the taxpayer in his return
misrepresented the facts through neglect, carelessness or wilful default. The
Minister has the onus or burden of proof to establish its right to reassess
after the normal reassessment period has expired by proving that a taxpayer made
a misrepresentation in filing the return and that the misrepresentation is
attributable to neglect, carelessness or wilful default.
[28]
In order to reassess,
the Minister must bring itself within the wording of the applicable provision,
subparagraph 152(4)(a)(i) of the Act, which states:
152(4)
Assessment and reassessment. The Minister may at
any time make an assessment, reassessment or additional assessment of tax for a
taxation year, interest or penalties, if any, payable under this Part by a
taxpayer or notify in writing any person by whom a return of income for a
taxation year has been filed that no tax is payable for the year, except that
an assessment, reassessment or additional assessment may be made after the
taxpayer’s normal reassessment period in respect of the year only if
(a) the taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect,
carelessness or wilful default or has committed any fraud in filing the return
or in supplying any information under this Act, or
[…]
[29]
If the Minister establishes
that there is a right to reassess after the expiration of the normal period,
the onus will then shift to the taxpayer to show that the failure to include
the amount in the return was not due to a misrepresentation attributable to
neglect, carelessness or wilful default.
[30]
The provision is not
penal in nature but remedial. Justice Bowie, in College Park Motors Ltd. v
The Queen, 2009 TCC 409, 2009 DTC 1269, at paragraph 20, addressed its
purpose as follows:
[20] …the purpose of subparagraph 152(4)(a)(i) is not penal but remedial. It balances the
need for taxpayers to have some finality in respect of their taxes for the year
with the requirement of a self-reporting system that the taxing authority not
be foreclosed from reassessing in those instances where a taxpayer's conduct,
whether through lack of care or attention at one end of the scale, or willful
fraud at the other end, has resulted in an assessment more favourable to the
taxpayer than it should have been. This, quite rightly, is not a penalty case.
It is simply a case where the fisc should not be deprived simply by reason of
the passage of time between Mr. Ulmer's innocent mistake and his discovery of
it, and resulting voluntary disclosure.
[31]
There is no suggestion
in this appeal that wilful default was a factor but, rather, the Respondent
submits that neglect or carelessness led to the omission of recapture in the
Original Return. While title to Victoria Park was held as tenants‑in‑common
by the deceased and his daughter, the accounting firm of Mintz treated the
property as if it was held as a partnership on the terminal return. This
incorrect characterization led to an over-reporting of the capital gain in
respect to this property and no reporting of recapture.
[32]
Justice Bowman, in Farm
Business Consultants Inc. v The Queen, 95 DTC 200, confirmed by
the Federal Court of Appeal at 96 DTC 6085, set out two questions to be
answered in dealing with an otherwise statute-barred assessment:
(1) What is the alleged
misrepresentation? and
(2) To what can the
misrepresentation be attributed?
[33]
Because of the nature
of this appeal, a key question, in determining if there was a
misrepresentation, is “who made that alleged misrepresentation?” Paragraph 152(4)(a)
refers to “the taxpayer or the person filing the return.” The taxpayer is the
deceased, Mr. Vine, or more appropriately his estate, and so clearly, in these
facts, the deceased could not make a misrepresentation in the terminal return.
So who is “the person filing the return”? In Aridi v. The Queen, 2013
TCC 74, 2011 DTC 1189, Justice Hogan analyzed the Act generally and gave
this phrase a meaning consistent with the rest of the Act. In many
sections of the Act, a person may or may not be required to file a
return on behalf of a taxpayer (Aridi, paras 24‑26). Subparagraph
150(1)(d)(i) requires the deceased taxpayer’s legal representative, Mr.
and Mrs. Glowinsky in this case, to file the return. Therefore, only those
misrepresentations made by the executors, Mr. and Mrs. Glowinsky, would be
relevant. This interpretation is consistent with other caselaw and with Justice
Hogan’s analysis in Aridi. At paragraphs 25 and 26 of Aridi,
Justice Hogan stated the following:
[25] In that sense, the phrase "person filing the
return" in paragraph 152(4)(a) of the ITA must
be interpreted in the same way as in section 150, unless the contrary is
indicated by the context. In this case, the context, far from indicating to the
contrary, confirms this interpretation.
[26] Thus, I am of the view that the phrase "person filing
the return" in paragraph 152(4)(a) of the ITA
refers to a person listed in subsection 150(1) of the ITA. Consequently, I
cannot accept the respondent's argument that paragraph 152(4)(a) of the ITA applies as well to an accountant or
professional who prepares the return. In addition, even if I accepted the
respondent's position, I note that there is no evidence that the accountant
filed the return. The evidence shows only that the accountant prepared the
return for the appellant.
The person filing the return for the taxpayer is
distinct from the person who prepares the return, in this case the accounting
firm of Mintz. As a result, I am concerned only with potential neglect or
carelessness of the executors, not of Mintz.
[34]
The leading case in
this area is the Federal Court – Trial Division decision in Venne v The
Queen (M.N.R.), 84 DTC 6247, where Justice Strayer, at page 6251, made the
following comments respecting the neglect that must be established to conclude
that a taxpayer has not exercised reasonable care:
I am satisfied that it is sufficient for the Minister, in order to invoke the
power under sub-paragraph 152(4)(a)(i) of the Act to show that, with
respect to any one or more aspects of his income tax return for a given year, a
taxpayer has been negligent. Such negligence is established if it is shown
that the taxpayer has not exercised reasonable care. This is surely what
the word “misrepresentation that is attributable to neglect” must mean,
particularly when combined with other grounds such as “carelessness” or “wilful
default” which refer to a higher degree of negligence or to intentional
misconduct. Unless these words are superfluous in the section, which I am not
able to assume, the term “neglect” involves a lesser standard of deficiency
akin to that used in other fields of law such as the law of tort. … (Emphasis added)
[35]
The test for a finding
of neglect is, therefore, one of lack of reasonable care. This test,
established in Venne, was confirmed in the Federal Court of Appeal
decision of Gebhart Estate v The Queen, 2008 FCA 206, 2008 DTC 6581.
[36]
A misrepresentation is
false in substance and fact, whether innocent or not (Minister of National
Revenue v Taylor, [1961] Ex. CR 318, 61 DTC 1139). In Nesbitt, at
paragraph 8, the Court stated:
… A misrepresentation has occurred if there is an
incorrect statement on the return form, at least one that is material to
the purposes of the return and to any future reassessment. … (Emphasis added)
There is clearly a misrepresentation based on the
evidence before me. Simply, no recapture was declared in the return. The
Respondent pointed out that the Original Return, in respect to Victoria Park,
did not report a deemed disposition, proceeds of disposition, an adjusted cost
base, capital gain or loss, or recapture of CCA. The Appellant characterized
the error as an actual over-reporting of a capital gain and a non-reporting of
the recapture. Although the property had been omitted from the itemized list (Tab
37 of the Joint Book of Documents), a capital gain from the incorrect
characterization of the property was actually included within the total amount.
However, the correct capital gain and the recapture were not. When the Amended
Return was filed within the statutory period, the recapture was included,
although problems continued with the proper reporting of the capital gain, as
the original incorrect amount was not “backed out” of the Amended Return. There
is clearly a lack of reasonable care on the part of Mintz in preparing the
Original Return. Given that the valuators at Mintz for the Victoria Park
property were business valuators and not tax experts, it would appear that a
simple review of the return, by the appropriate specialists within Mintz, would
have revealed the errors in the Original Return. Even if it was a program
error, as contended by some of the witnesses for Mintz, upon a review, the
omission of recapture and the capital gains discrepancy should have been
detected. This was the only property that created a capital gain in section 4
of Schedule 3 and its omission should have been apparent on a review by a tax
preparer. It was not an honest mistake, as the Appellant contends, but a
mistake due to lack of care and inattention which created an incorrect
statement that was material to the return. It was obviously incorrect and not
insignificant to the proper processing of the return. This was not a
complicated or technical reporting issue. Even though I accept that, based on
the evidence, Mintz was either neglectful or careless, this is not the test for
concluding that the Minister can reassess beyond the normal period.
[37]
What I must instead
decide is whether the executors, who were the persons responsible for filing
the Original Return of the deceased, failed to exercise reasonable care which
would then allow the Minister to reassess beyond the normal period. The caselaw
is divided as to whether a taxpayer may successfully argue that, because his
accountant was negligent, he is not liable for the misrepresentation. Justice
Hogan in Aridi reviewed a number of decisions in this regard and rightly
concluded that even where courts have recognized an accountant’s negligence, in
those cases, where the taxpayers were not given the benefit of subparagraph
152(4)(a)(i), it was because their conduct was also found to be
negligent. Was the conduct of the Glowinskys negligent, as in this group of
cases, or was their conduct one of reasonable care in filing the return?
Mr. Glowinsky testified that, since he had no knowledge of accounting and since
he anticipated complexities when dealing with a number of properties belonging
to the deceased, he engaged Mintz, which had been involved with doing
accounting work for the family since the late 1980s, to complete the return
because “…we had faith in and we trusted; they had been there for a long time…”
(Transcript, Volume 1, p. 26) and “…[t]hey were just continuing to do what
they had been doing for years… They were familiar with the estate, I trusted
them…” (Transcript, Volume 1, p. 27). He stated that neither he nor his
wife were involved with the preparation of the return. He further admitted that
he did no type of review whatsoever of the return. “… I might have just looked
through it, but I didn’t review it. It wouldn’t have meant very much to me. I
didn’t appreciate all the nuances involved in a complicated tax return.”
(Transcript, Volume 1, p. 28). When asked if he formed any view as to the
accuracy of the return, he stated that “… They were just numbers. It meant
nothing to me.” (Transcript, Volume 1, p. 28). When asked about his
involvement and review of the Amended Return, he stated:
A. No,
for the same reason I didn’t review the first one. I mean, it wouldn’t have
meant very much to me, and I was assuming that Mintz & Partners who had
been engaged for many years knew what they were doing. I had complete
confidence in them.
(Transcript, Volume 1, p. 29)
[38]
The care that he
exercised in dealing with the return consisted of quickly flipping through it,
if in fact he looked at it at all (Transcript, Volume 1, p. 34). He did
not review it, as it meant very little to him. There was no evidence that he
tried to understand it, asked any questions about its content or reviewed the
properties that would be included in such a return. He was the President of the
property management company that looked after 10 to 13 properties within the Toronto area owned by his deceased father-in-law. While he may have been unaware of the
technical tax details in the return, he did have first-hand knowledge of the
properties owned by the deceased at his death that had to be dealt with in a
terminal return.
[39]
Where taxpayers have
been successful with respect to this issue, they have established, to the
satisfaction of the Court, that they engaged in conduct or actions amounting to
reasonable care in the review of their returns or they have been able to
substantiate the reasons for their bona fide, although incorrect,
beliefs. In Angus v The Queen, 96 DTC 1824, Justice Lamarre Proulx, at
paragraph 7, defined reasonable care as the care that would be expected of a
wise and prudent person in the circumstances. In cases where the courts have
held that this standard of reasonable care had been met, taxpayers have
reviewed the return, had extensive conversations with accountants and asked
relevant questions (Aridi) or had formed a bona fide belief of
the correctness of the return based on a recommended filing position by
accountants and a CRA technical bulletin (Envision Credit Union v The Queen,
2010 TCC 576, 2010 DTC 1399) or had reviewed and relied on a partnership
offering memorandum and professional opinions and statements from the
partnership (O’Dea v The Queen, 2009 TCC 295, 2009 DTC 1172).
[40]
In the present appeal,
neither of the executors took any of these types of steps or actions. Their
review of the return lacked a bare minimum of attention and care. Their conduct
is akin to those taxpayers in the cases of Venne, Nesbitt and College
Park Motors, to name a few. In Venne, for example, the taxpayer
claimed that he was not personally responsible for many of the errors which had
been committed by the bookkeepers and later the chartered accountant. Justice
Strayer, at page 6252, concluded that:
First, there is ample evidence that the taxpayer did not read his returns
before signing them. … While one cannot expect a person with the plaintiff’s
limited education and limited experience with accounting matters to understand
fully the details of a tax return, in my view he cannot absolve himself from
all responsibility by hiring what he now says to be a patently inadequate
bookkeeper and leaving matters entirely in the latter’s hands. … Secondly, the
errors in the income tax returns should have been sufficiently obvious that a
reasonable man of even limited education and experience, especially one who was
apparently a very successful businessman and investor, should have noticed.
In College Park Motors, Justice Bowie concluded
that, if the taxpayer had reviewed the draft return as a prudent individual, he
would have seen questions within the return which would have prompted him to
ask the appropriate questions of his accountant. I believe this applies to the
facts before me.
[41]
Although the Appellant
argued that, even if Mr. Glowinsky had reviewed the return he would not have
spotted the omission of the recapture, I do not believe that the standard of
reasonable care requires that the taxpayer pick out the specific errors/mistakes/miscalculations
in the return but, rather, the standard requires that the taxpayer’s conduct
and actions exhibit a deliberate attempt to complete a review and inquiry with
the knowledge they have. It is the standard of a reasonably prudent person, not
that of a tax expert.
[42]
Consequently, because
the executors, as those persons responsible for filing the Original Return, do
not meet the standard of reasonable care, the Minister has satisfied its burden
and will be entitled to reassess for this taxation year in respect to the
recapture of CCA under subparagraph 152(4)(a)(i) of the Act.
[43]
The fact that the
Minister could have perceived the error is irrelevant. The Appellant suggested
that the Amended Return was an invitation to the Minister to reassess, whether
or not the Minister had relied on a misrepresentation or could have acquired
the truth despite any misrepresentation. In Nesbitt, the taxpayer had
correspondence indicating that the Minister was aware of the error in the
reported capital gains. Despite the correspondence, Justice Strayer concluded
that the misrepresentation, once made by the taxpayer, continued to be
operative. At paragraph 8, he stated:
… It remains a misrepresentation even if the Minister could
or does, by a careful analysis of the supporting material, perceive the error
on the return form. It would undermine the self-reporting nature of the tax
system if taxpayers could be careless in the completion of returns while
providing accurate basic data in working papers, on the chance that the
Minister would not find the error but, if he did within four years, the worst
consequence would be a correct reassessment at that time.
[44]
The Appellant’s
suggestion, that the Amended Return was an invitation to the Minister to
reassess, captures the exact problem posed by Justice Strayer in Nesbitt.
A taxpayer could improperly complete a return in the hope of getting away with
paying a lesser amount of tax and, in the worst case scenario, having to pay
the correct amount of tax. Regardless of whether the Minister could perceive
the error, it is logical that a misrepresentation remains operative. Otherwise,
it would discourage taxpayers from being diligent and taking reasonable care in
the preparation of their returns.
[45]
The Appellant cited the
case of Petric v The Queen, 2006 TCC 306, 2006 DTC 3082 to support its
proposition that a misrepresentation becomes inoperative if the Minister could
perceive the error. In that case, Justice Lamarre, at paragraph 38 of her
reasons, explains two seemingly inconsistent lines of cases, with Nesbitt,
on the one hand, and The Queen v Regina Shoppers Mall Limited, 91 DTC
5101 (FCA), on the other hand. The decision in Regina Shoppers Mall
involved a controversial categorization of earnings, while Nesbitt
involved a taxpayer misrepresenting a basic or straightforward fact which
allowed the Minister to reassess even where the error could have been
perceived. Where the outcome is more controversial, as in Regina Shoppers
Mall, and where there is more room for a taxpayer, who has taken reasonable
steps, to make an error or where the issues are truly beyond his expertise,
then caselaw seems to suggest that, in those instances, the Minister should not
be allowed to reassess beyond the normal reassessment period. Those outcomes
protect and balance the integrity of the system which is self-representing and
the certainty and finality offered by a limitation period.
[46]
In the present appeal,
the matter of recapture with respect to the property is not a controversial
item. It is standard reporting procedure in a terminal return that this
property would be treated as a deemed disposition with consequent recapture to
be declared depending upon the nature of the legal title to the property.
Because the title to the property was held as a tenancy-in-common and not a
partnership, there had to be recapture declared. Mintz had been the deceased’s
accounting firm for many years prior to his death. The firm was not new to the
taxpayer’s portfolio of assets and how title was held. It would have been in
their records. Mr. Glowinsky had been the President of the property management
company for the deceased’s real estate holdings. He was a businessman who was aware
of what the assets were in the deceased’s estate and, at minimum, should have
questioned why Victoria Park was not listed. I believe that he would have done
so had he bothered to read the return or if he had given even a slight perusal
to it. In all likelihood, he would not have specifically picked up on the
omission of declared recapture but, being familiar with the properties owned by
the deceased, as a reasonably prudent individual, he should have recognized
that Victoria Park did not appear to him to be included in the return. This was
not, as the Appellant suggests, an honest mistake or honestly-held mistaken
belief. I make this conclusion while acknowledging that, in these particular
facts before me, the line between honest mistake and neglect/carelessness is
blurred and that the distinction is almost ‘too close to call’. There appears
to be a common thread in the jurisprudence in this area. First, where the court
has found that taxpayers committed an honest mistake in filing a return, that honest,
although mistaken, belief was established as a fact, based on the evidence
before the court, whether in the application of a provision or a mistaken
belief as to their own actions (for example, that they had remitted the tax).
In the case before me, Mr. Glowinsky provided no evidence that he held any
such belief except for the trust placed in the accountants. Second, in a number
of the cases, the taxpayers have shown that some reasonable steps were taken to
ensure the correctness of the return. Again, Mr. Glowinsky testified that he
felt he would not have understood the return so he did not bother to review it.
Such indifference is irreconcilable with the caselaw concerning honest mistake.
While the conclusion that I have reached on this issue bears all the hallmarks
of being unfair, I refer to the comments of Justice Robertson in The Queen v
Nassau Walnut Investments Inc. (1996), 97 DTC 5051 (FCA) at page 5057:
It cannot be doubted that the refusal of the Minister
to accede to Nassau's request seems antithetical to elemental concepts of
fairness. Conversely, the doctrine of honest mistake is appealing because its
application is intended to bring about a result that is in harmony with basic
ideas of fairness. But the difficulty with the doctrine lies in delimiting its
boundaries. To paraphrase Judge Learned Hand, I do not think it desirable for
this Court to embrace the opportunity of anticipating a doctrine which may be
in the womb of time but whose birth is somewhat distant: see Spector Motor
Service, Inc., v. Walsh, 139 F. 2d 809 at 823. The doctrine of honest
mistake may serve as a starting point for analysis but cannot supplant a
contextual and purposive approach to the interpretation of tax legislation. In
other words, legal conclusions cannot rest upon the premise of unfairness
without a corresponding examination of the legislative framework relevant to
the issue at hand.
[47]
In summary, the
Minister will be permitted to reassess after the normal reassessment period to
include in the taxpayer’s income the recaptured capital cost allowance from the
deemed disposition of 3000 Victoria Park.
Issue #2: The FMV of the Wilson Property
[48]
The Original Return
reported the FMV of the shares of Leadway for the purposes of the deemed
disposition as $9,111,000 (Joint Book of Documents, Tab 2, Schedule 3).
Leadway was the owner of Wilson, which consisted of two multi-residential rental
units on 2.7 acres of land. The Minister obtained a waiver during its audit of
the deceased’s 2003 taxation year that covered the reassessment of this
property. The Minister determined that the FMV of Leadway’s interest in Wilson
was $12.832 million and, consequently, the FMV of the Leadway shares was $13.4
million (Agreed Statement of Facts, paragraph 30 – parties agree that $1.4
million is to be added to whatever the Court determines the FMV of Wilson to
be). The determination of the FMV of Wilson is essential in order to calculate
the deceased’s gain from the deemed disposition of the corporate shares of
Leadway at the date of death.
[49]
Both the Respondent and
the Appellant relied upon expert valuations of Wilson, each of which take a
very different view of the FMV of this property. Both experts employed
different valuation methods, with the Appellant’s expert, David Atlin, arriving
at a FMV of $8.6 million (less than the Appellant’s reported FMV of $9.11
million in the Original Return) and the Respondent’s expert, Brian Walsh,
arriving at a FMV of $12.832 million. The wide disparity between these two
valuations is attributable primarily to the approach each expert took in
respect to rental revenues for Wilson over the course of a number of years.
Their approaches otherwise were not that dissimilar and both selected and
applied approximately the same capitalization rate. The higher the
capitalization rate applied, the lower the FMV will be and, conversely, the
lower the rate, the higher the FMV. Mr. Atlin applied the average between the
two capitalization rates of 7.25 percent and 7.50 percent, while Mr. Walsh
applied a rate of 7.25 percent.
[50]
Both experts
acknowledged that Wilson contained an inordinate number of tenants that were
paying below market rents for their units. The property was subject to the Provincial
rent control legislation in place at that time. It limited a landlord’s ability
to increase rental amounts annually beyond statutory limits even though tenants
might be paying below market rates. In 2003/2004, that yearly rental maximum
increase was 2.9 percent. Other than this legislated rental increase, a
landlord could increase rent by more than 2.9 percent only if the tenant
vacated the unit or if capital improvements had been made to the property.
However, a capital expenditure increase, which had a cap of 4 percent, was
subject to a process of approval before the Ontario Rental Housing Tribunal
and, consequently, not a guaranteed increase.
[51]
Mr. Atlin determined
the normalized net operating income (“NOI”) for the property by estimating the
gross income of the properties for the following year (page 53 of his Report).
He considered rental revenue at the standard legislated amount of a 2.9 percent
increase for below-market units and also other sources of revenue such as
parking, laundry and cable before deducting a 2.5 percent allowance for vacancy
and bad debt. After arriving at a gross income of $1.475 million, based on
prior years, and after deducting expenses, he estimated a NOI of $728,990.
After applying his chosen capitalization rates of 7.25 percent and 7.50
percent, he then took the average between these two calculations and arrived at
an amount of $9.775 million. From this figure, he deducted capital expenditures
in the amount of $1.180 million, which had been itemized in prior engineering
reports, and he did so according to a decreasing percentage in terms of those
expenses which were immediate and necessary, those that could be done between Years
3 and 5 and those that could wait and be done between Years 5 and 10. This last
calculation provided the FMV of $8,595,000, which Mr. Atlin rounded to $8.6
million. This capital expenditure adjustment was very similar to the adjustment
Mr. Walsh took in both of the methods which he employed.
[52]
According to Mr.
Walsh’s testimony, one of the methods he used, the DCF method, is based on the
principle of “anticipation”, that being, in this appeal, the future rental
revenue which it is anticipated will be derived from the property. Mr. Walsh
agreed with the Appellant’s suggestion that an anticipated projection of future
revenue must be “likely” in a given market as opposed to merely “possible”. Mr.
Walsh also agreed with comments taken from the Canadian Uniform Standards of
Professional Appraisal Practice (“CUSPAP”) that, when this analysis is undertaken
it must be checked for errors and reasonableness due to the compounding effects
that can be produced by inputting even minor errors. Mr. Walsh assumed a
theoretical Years 3 and 4 income, an approach based on dramatic increments to
rental revenue after the effective date. Mr. Atlin disagreed with the use of
the DCF analysis for Wilson because he felt that it was more commonly employed
for valuing commercial properties such as shopping malls or office buildings
where there is long-term contractual lease certainty and predictability as
opposed to multi-unit residential apartment complexes.
[53]
At this point, I make
three observations in respect to Mr. Walsh’s Report and testimony:
(a) first, the Report
contained too many significant errors and unwarranted assumptions that would
allow me to place any reliance on it;
(b) second, both Mr.
Walsh’s credibility and impartiality as a witness and an expert were
compromised during his testimony; and
(c) third, as a
consequence, I gave this report no weight.
[54]
Although Mr. Atlin’s
Report could have benefited from an analysis of the property’s demographic
makeup, which Mr. Walsh did not address either, and contained a few minor
errors, it is far more accurate than Mr. Walsh’s Report and his testimony was
straightforward and credible.
[55]
In Mr. Walsh’s Report
and during much of his testimony in Court, he represented that he had “…no
present or prospective interest or bias with respect to the property…” (the
Walsh Report, paragraph 4, page (i)). Eventually, however, after repeated
cross-examination, he admitted that he had been given copies of the initial CRA
appraisal report, as well as the Appellant’s Expert Report, and that he had
read both prior to the preparation of his own Report (Transcript, Volume 3, pp.
384-394). He did not disclose his access to these appraisals in his Report as
he should have done nor was it forthcoming in his testimony. Mr. Walsh’s
independence as an appraiser was compromised once he saw and read both of those
other appraisals. He was, at times, non‑responsive and appeared to be
hedging many of the questions on cross‑examination. In the case of Brunette
v M.N.R., 82 DTC 1308, at paragraph 39, which the Appellant referred
me to, the Tax Appeal Board concluded that a report prepared by a department
employee who had reviewed prior reports, was seriously impaired. The extent to
which Mr. Walsh’s conclusions had been tainted or influenced by information
contained in other reports is difficult to assess. However, his choice, not to
disclose this information in his Report or in his testimony without some
prodding, is indicative of his knowledge that this potential existed and, more
importantly, it undermines his objectivity and impartiality as a witness and a
qualified expert and makes his testimony as a whole suspect and unreliable.
[56]
Mr. Walsh’s analysis is
based largely on a series of speculative assumptions, particularly as they
relate to rental income projections that he assumed would be achieved between Years
3 and 4. This analysis predicted an income based on a pattern of rental revenue
which is not evident on the effective date. Unlike Mr. Atlin, he ignored
rental income that had actually been attained in years prior to the effective
date and, instead, based his NOI on hypothetical revenue (which he referred to
as stabilized or normalized revenue) that he assumed would be achieved in Years
3 and 4, that is, between 2006 and 2007, subsequent to the effective date in
2003. It is Mr. Walsh’s use of this hypothetical Year 3 and 4 stabilized income
or the NOI amount that accounts for the large difference in the FMV in each
expert report. Much of the rest of their analysis is not that far apart,
including the capitalization rates that each expert applied. Mr. Walsh’s net
income figure of $980,491 in Year 3, as well as his rental projections over a
ten-year period, assumes that all of his projected rent increases will have
occurred in Years 1 to 3. He based his analysis, respecting future rental
revenue, on the following:
(1) 25 percent tenant
turnover applied equally to below-market and at‑market units enabling
rents to be increased in all units to market rates by Years 3 and 4;
(2) application of the
legislated 2.9 percent yearly rental increase; and
(3) completion of capital
expenditures at the end of Year 1 (2004) enabling an additional 3 percent
one-time rental increase.
[57]
However, Mr. Walsh
ignored the acknowledged fact that, on the effective date in 2003, the Wilson properties contained a significant number of units with tenants paying below-market
rents. Common sense dictates that, based on practicalities, tenants paying
below-market rents would not vacate their units to relocate to at‑market
rentals, except under exceptional circumstances and they could not otherwise be
forced out. Both experts, therefore, had very different views on the timing of when
tenants with below-market rentals would vacate those units and, consequently,
when rental amounts could be increased for those units. Even if I had decided
to give any weight to Mr. Walsh’s Report, which I have not, I would still
reject his analysis in this respect. Mr. Atlin’s view is just simply more
realistic in the commercial world considering the practicalities landlords face
in respect to such tenants and the difficulty a prospective buyer would have in
projecting when these tenants would vacate and when the opportunity to increase
rents might occur. As Mr. Atlin testified, the opportunity did exist at the
effective date but the precise timing was indeterminate. For this reason, Mr.
Walsh’s application of a rate of 25 percent per year tenancy turnover at Wilson is flawed because he failed to differentiate between those units with tenants
paying below-market rents and those with tenants paying at-market rents.
According to Mr. Walsh’s assumption, all or substantially all of the tenants
paying below-market rents would have vacated their units between Years 3 and 4
at this turnover rate, enabling all of the significant number of below‑market
rents at Wilson to be brought up to market levels. This ignores the fact that
tenants, paying lower rentals than what the current market could support, do
not vacate at the same rate as those tenants that pay market rates. Those below‑market
tenants cannot be evicted and the rent control legislation limited yearly rent
increases to 2.9 percent of existing rent. Mr. Walsh’s conclusion in this
respect is flawed. Because Mr. Walsh’s assumption overestimates the number of
below-market tenants that would vacate Wilson, he consequently overestimates
the future rental revenue for Wilson.
[58]
As the Appellant
pointed out, the 2004 rent roll shows that the actual performance of the Wilson property after 2003 was significantly lower than the projections that Mr. Walsh
proposed. Those projections, which in reality were not achieved, are simply
unsubstantiated. According to the CUSPAP standards, an accurate appraisal using
the DCF method can be produced only where the events upon which it is
predicated are “likely” to occur or be achieved. Mr. Walsh’s assumptions
respecting 25 percent turnover for below-market rentals and consequent future
rental increases are unsustainable and distorted due to the future projected
income for Wilson. This applied whether he used the direct capitalization
method or the DCF analysis. In the direct capitalization method he capitalized
the Year 3 and 4 NOI figure, that he predicted could be achieved, instead of the
Year 1 figure. As Mr. Atlin explained, a capitalization rate of 7.25 percent
has embedded within it the assumption that there will be an upside to the property
but if the rate is applied to a NOI figure that assumes this upside has already
occurred (as Mr. Walsh does), then it results in a compounding and double-counting
which distorts the resultant FMV.
[59]
It is interesting to
note that Mr. Walsh suggested that the below-market rents could be attributed
to poor management of Wilson and linked this to the family connection between
Leadway and Biddington, the property management company owned by the deceased’s
son-in-law. As the Appellant pointed out, there was no factual basis for this
suggestion and, in fact, at the time that Mr. Walsh attended at the property in
2012 for a viewing, Biddington had been replaced by a new management company. I
do not see the correlation between the alleged bad management and the rate of
turnover of below-market tenants and, ultimately, how better management could
have evicted those tenants or encouraged them to leave in an effort to get
rents up to market levels. In any event, it was an unsupported and rather
ridiculous supposition that management, particularly one that had close family
ties, would have no interest in having rents at market rates where possible.
[60]
Both the direct
capitalization method and DCF method, employed by Mr. Walsh, relied upon
calculations formulated in an Appendix B to his Report as the foundation for
his projected rental income. Subsequent to his direct examination and well into
his cross-examination, it became apparent to him that his calculations
contained in Appendix B could not be reconciled with the content of his Report,
particularly the Table at page 107, and that it would have to be re-drafted and
replaced. Mr. Walsh did so and submitted an entirely new Appendix B the next
day of the hearing. However, this new Appendix B was also incomplete and fraught
with errors. While the Table at page 107 of his Report shows projected rental
income for Years 1 to 10, Appendix B showed calculations respecting projected
rental income for only Years 1 to 3 and omitted entirely the calculations for Years 4
to 10. Consequently, his calculations cannot be verified and there is no way to
assess the extent to which this may have affected his analysis and ultimately
his conclusions concerning FMV.
[61]
By Mr. Walsh’s own
admission, the new Appendix B contains another inconsistency concerning his
application of a rental increase respecting capital expenditures that would be
achieved at the end of Year 1. According to Appendix B, this rental increase for
capital expenditures commences by month 10 of Year 1, and not, as one would
expect, at the end of Year 1. This, of course, results in an accelerated
increased rental forecast affecting a substantial number of the units. Because
of the procedural steps that must be followed before a rental increase would be
allowed in respect to capital expenditures, if at all, it would be entirely
unreasonable to expect this to occur by month 10 of Year 1. For example, before
permission could be obtained for a rental increase, many variables had to
occur:
(a)
the work on the
building had to be completed;
(b)
notice of a rental
increase had to be provided to the tenants with time to respond; and
(c)
if there was a
challenge by the tenant to a rent increase the matter had to go for hearing
before a rental tribunal with various steps to be followed if this occurred.
Therefore, there was uncertainty and no guarantee that
rent could be increased when capital expenditures were completed. Using Mr.
Walsh’s method, he had to assume that all of the foregoing would “likely” be
completed by month 10 of Year 1. In my view, this is an unlikely and
unreasonable assumption on his part which again distorted his rental income
projections upwards resulting in the error being compounded in subsequent
years. As Mr. Atlin correctly observed, commercial realities dictate that a
prudent buyer would not purchase a property assuming that the rate of growth
would be achieved without risk and at the same time a prudent seller would not
expect to sell as if this could be achieved without risk.
[62]
An Appendix C attached
to the Report also contains omissions, concerning calculations of capital
expenditures, similar to omissions contained in the original Appendix B which
was eventually replaced. A significant number of the total 176 units were
omitted from the calculations in both Appendices making it impossible to verify
the calculations within the Report in respect to the property.
[63]
In addition to the
foregoing errors, the new Appendix B contained other discrepancies which Mr.
Walsh blamed on inputting errors in the Excel program used to prepare his
tables. No explanation was provided as to why some yearly rental increases,
subsequent to the income stabilization he suggested, would occur in Years 3 and
4, would be more than the suggested yearly legislated 2.9 percent increase.
Such a calculation error which occurred at Years 4 to 5 results in an immediate
overstatement of net income figures subsequent to Year 5 and eventually an
inflated FMV under his DCF method. Because of the importance of Appendix B in
the formulation of his calculations and reliance on the projected rental income
analysis, it makes the accuracy of his conclusions, at best, suspect and, at
worst, unreliable.
[64]
There were other
inconsistencies within his Report. It was apparent during the cross-examination
that he had calculated the property tax expenditure incorrectly (Table at page
107 of his Report). After reviewing his Report and his testimony, it is still
not clear to me why he used the figures he did or how he justified his results.
The value attributed to Wilson in the 2003 property tax bills by the Municipal
Property Assessment Corporation (“MPAC”) was $11,017,000, which he had
available to him. Applying the applicable 2003 property tax rate would yield
property taxes of $316,373. Between Years 2003 and 2004, to establish the 2004
(Year 1) property tax rate, Mr. Walsh factored into his calculations an
increase of 2.45 percent which, based on the MPAC value of $11,017,000, as
acknowledged by Mr. Walsh, would have resulted in taxes of $324,124 in 2004 (Year
1). However, Mr. Walsh’s table, at page 107 of the Report, references a
property tax expense of $247,000, not $324,124, as would be expected based on
the MPAC figures. To add confusion to this matter, he testified that he actually
relied on property taxes in Year 1 in the amount of $241,092, not the $316,373
amount, or the $247,000 figure (Transcript, Volume 4, pp. 506-508). The amount
of the reduction in FMV would be increased again if, instead of the $247,000
figure, the amount of $241,092 is substituted. According to the Appellant’s argument,
and it seems apparent from my own calculations, that if he had calculated the
property tax expense based on the MPAC value which his own Report did reference,
the FMV of Wilson which he reported would have been reduced by $1,063,779. This
represents another significant yet inconsistent calculation affecting the
ultimate FMV of Wilson.
[65]
Three of the five
properties, which Mr. Walsh selected for comparison, were of superior condition
and, while he acknowledged that a downward net qualitative adjustment would be
required for each of these three properties to be comparable, the Report did
not disclose any adjustment for those properties. Mr. Walsh also admitted
problems with his graph contained at page 77 of his Report in that he plotted
his comparable properties on that graph, based on the sale and NOI data as of
the date they sold, while he plotted Wilson based on the hypothetical
stabilized NOI that he assumed could be achieved between Years 3 and 4 (or 2006
and 2007). If Wilson had been plotted using a unit NOI based on his Year 1
(2004) as per his Report, the subject property would have placed very
differently on the graph for comparison purposes. Again, these problems
undermine his analysis and ultimately the strength of his proposed FMV.
[66]
Mr. Walsh’s explanation
of the two valuation methods he employed also contained errors in respect to
the future value of rental income and growth potential. He testified that he
used the DCF method because it could better account for anticipated rental
growth over a ten year period. He used two hypothetical property examples, contained
in a flip chart, one with growth potential, one without, to illustrate that the
direct capitalization method would not account for anticipated growth potential
in one of the property models. In both examples, he applied the same 10 percent
discount/capitalization rate to the properties. According to the Appellant’s
expert, Mr. Atlin, such reasoning is “fundamentally flawed” because Mr. Walsh
applied the same capitalization rates to both types of property while ignoring
how the direct capitalization method actually accounts for growth potential
(Transcript, Volume 4, p. 538). Mr. Atlin’s explanation, for why Mr. Walsh’s
approach does not work, was that “[i]n a zero growth model, capitalization
rates equal discount rates” but “[a]s soon as you introduce growth …
capitalization rates and discount rates part ways” (Transcript, Volume 4, p.
538). Mr. Walsh was attempting to show that his method, the DCF analysis, should
be the preferred method because it gave a better forecast of income over a ten
year period. I agree with Mr. Atlin’s observation that the flip chart
illustrations were “fundamentally flawed” because Mr. Walsh either ignored or
did not fully appreciate how the direct capitalization method accounts for
property growth potential. Mr. Walsh incorrectly applied the same rates to both
property examples even though one had growth potential and the other did not.
It makes perfect sense that, with the introduction of growth potential, the two
rates will part ways. I accept that Mr. Atlin’s capitalization rates of 7.25
percent and 7.5 percent are appropriate rates because they factor in both the
upside to the property plus the risks associated with achieving that upside. The
DCF method used by Mr. Walsh is not an appropriate method for
multi-residential apartment complexes such as Wilson due to its limited ability
to forecast income growth potential.
[67]
In addition to this
fundamental flaw in Mr. Walsh’s flip chart examples, the analysis contains
mathematical errors throughout, resulting in completely incorrect calculations
too numerous to mention in my reasons. In the end, a “flip” chart meant to
assist the Court was nothing but a “flop”.
[68]
Mr. Walsh’s Report
contains many unsupported assumptions, inconsistencies, omissions and numerous
errors, mathematical and otherwise. I took no level of comfort in his testimony
either, as he was unable to provide acceptable explanations for such
assumptions and inconsistencies and, overall, was a less than objective
witness. I can give no weight to his Report, as I consider his conclusions
fundamentally flawed. I accept the FMV of Wilson, as contained in
Mr. Atlin’s Report, that is, $8.6 million.
[69]
Since success is
divided with respect to these issues, I make no award as to costs.
Signed at Ottawa, Canada, this 28th day of February 2014.
“Diane Campbell”
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