Saskin v. The Queen, 84 DTC 6411, [1984] CTC 463 (FCTD)

Rouleau, J:—The issue in this trial is directed to the Valuation-Day appraisal (V-Day December 31, 1971) placed on a nine-storey office complex located at 245 Victoria Avenue in the city of Montreal. The property was owned by a corporate body known as 245 Victoria Corporation; both the plaintiff and Robert E J Layton were principal shareholders.

This action, concerning capital gains, is brought by the plaintiff seeking to vary or vacate the reassessment issued against him by the Minister of National Revenue.

It was agreed by the parties that the evidence in this trial, findings of fact, together with any decision, would be applicable and binding in a similar reassessment by the Minister in a suit brought by Robert E J Layton, Court file T-3731-81.

In early 1964, the site on which the structure was erected was leased by the corporation for 50 years at an annual rental of $12,250. Following the execution of the lease, a nine-storey office building, together with two floors of underground garage, was constructed and completed in early 1965 at a cost which I find to be $991,000, not including any interim financing. An offer of purchase and sale for the property for $2,100,000 was executed in April of 1974 and the sale concluded in February of 1975. The delay was brought about because the purchasers were not Canadians and thus required an application to FIRA and confirmation before the transaction could be closed.

The plaintiff filed his individual income tax returns for the taxation year 1975 and had valued the property, as at V-Day, at $1,870,000. A notice of reassessment was issued in June of 1980 for the taxation year 1975 in which the Minister of National Revenue valued the property at $1,000,000. Subsequently the Minister retained a professional appraiser who submitted his report to the Minister in December of 1981; he valued the building on V-Day at $1,300,000. It should be noted that this increased reappraisal was not communicated to the plaintiff, nor was he advantageously reassessed. Experts who prepared a similar study on behalf of the plaintiff in 1975, valued the property on V-Day at $1,700,000; counsel for the plaintiff is suggesting that a V-Day cost of $1,910,000 would be more accurate.

Robert E J Layton, a professional engineer with considerable experience, was a principal of Pringle & Sons, an engineering firm and project managers. This well-established Montreal concern concluded, sometime prior to 1964, that they required more space for their own use and thus entered into negotiations with the plaintiff for the development of this property. Upon completion of the project, Pringle leased and occupied three floors in the complex.

Most of the evidence with respect to the cost of this project was given to the Court by Mr Layton. He testified that the project design and management was undertaken by Magil Construction Ltd for a flat fee of $20,000 plus their actual out-of-pocket expenses (see Ex P-2). He told the Court that in the trade, design and management charges on a project of this magnitude would be at least eight per cent; and, that one should expect the construction contractor to realize a profit of between 10 and 15 per cent. He stated that though the dollars expended were $991,000, in arriving at a true cost one should take into account interest carrying charges, design, management and construction fees; that this building would probably have cost third parties at least $1,200,000.

To further substantiate his assertion as to actual value immediately after completion, he underlines the fact that the corporation, shortly thereafter, was unable to negotiate a 31-year mortgage with Mutual Life Assurance Company for $900,000 bearing interest at six and three-quarters per cent. He submitted that, according to restrictions imposed on insurance companies, as well as good business practices, when making mortgage investments, they generally do not exceed 75 per cent of market value. I accept this submission.

When describing the amenities of the building, which were not challenged, he testified that since Pringle & Sons were in the design and management business, they attempted to make this building a showcase. They incorporated into this structure the latest state of the art building marvels; it contained the most up-to- date electrical, plumbing, heating, ventilation, and air condition systems; it had been insulated far beyond any requirements. These improvements were costly, but the additional installations greatly reduced for them, as well as for any subsequent purchaser, costs of maintenance and energy.

He told the Court that his firm was retained in October of 1971 to design and build a future Montreal metro station which was to be located three blocks from this building. This came about after the announcement by the city of Montreal of the extension of their subway system to the west end of the city. This, he said, increased its value. In addition, when discussing their location, he mentioned the close proximity to the CPR station in Westmount, facilitating commuting; this also enhanced leasing opportunities. Both of these site advantages made their long-term land lease more attractive.

The report prepared in October 1975, by appraisers on behalf of 245 Victoria Corporation, placed a value, as at December 31, 1971, of $1,700,000. Two approaches were taken by the expert; the capital cost approach, arriving at a value of $1,650,000; and, the income approach, with a value of $1,745,000; rounding out both figures to $1,700,000. I was much impressed with this realistic and professional approach to the appraisal.

The expert called on behalf of the Minister of National Revenue, who also prepared a report, arrived at a V-Day price of $1,300,000. The only method he could apply was that of the cost and comparable approach; he was unable to use the income method since the information he would require would necessarily be confidential.

The plaintiff placed great emphasis on the fact that they were able to lease this site for a period of 50 years at an annual rental of $12,250 and I am satisfied that this was indeed an advantageous transaction; the appraiser for the Minister agreed.

My duty is to arrive at a just and fair market value of this property as at V-Day, December 31, 1971.

It was submitted by counsel for the plaintiff that his own appraisers, when preparing their valuation in 1975, failed to take into account the advantageous location of their site and, more particularly, the fact that within a few years the Montreal Metro would be extended westerly and a station would be located within three blocks of this building; that the $100,000 tenants’ improvements, not paid for by the developer, increased the value of the building and insured the long-term residency of the tenants; that the initial valuation placed on the property by the Minister of National Revenue was below their cost; that the revised valuation of $1,300,000 would be a realistic one on the date of completion; that the Minister of National Revenue found no increase in value in the property from the time it was constructed until December 31, 1971, but then suggests that it increased in 27 months by 110 per cent.

I reject the valuation placed on the property by the Minister of National Revenue; it is not realistic. I find that the appraisals prepared on behalf of the plaintiff were more accurate and have satisfied me that their approach was professional and objective.

I find that the building was completed at the end of February 1965 and had a value at that time of $1,250,000; that inflation was constant from the period 1965 through to 1975; that the building would increase in value probably equally over that period of time. It is obvious from the evidence that the building was in use for 82 months prior to V-Day and it was sold 27 months after V-Day, a lapse of 109 months. Using a practical approach, and as I have earlier stated, inflation remained constant throughout the period [sic]; on the other hand, it should be noted that interest rates were rising and the 30-year six and three-quarters per cent mortgage placed on this property would appeal to subsequent investors and was influential in increasing the value of this property. The building sold for $2,100,000 for an increase over the period of 109 months of $850,000. I have divided the $850,000 by the 109 months and attributed 82/109*s of the increase to December 31, 1971, thereby arriving at $1,889,436. I then compared this figure with the 1975 appraisal of $1,700,000, and I agree that it failed to account for location; it put little emphasis on the long-term land lease and the 30-year mortgage at six and three-quarters per cent. It ignored the tenants’ improvements; all factors, that would, in my judgment, increase the value.

In conclusion, I find that the V-Day appraisal, as submitted by the taxpayer in his 1975 income tax return at $1,870,000, is hereby confirmed. It is realistic and is within a few thousand dollars of the practical calculation that I have attempted to apply to the situation. There shall be costs to the plaintiff.