Reiss Estate v. R., 99 DTC 5429, [1999] 3 CTC 660 (FCA)

Desjardins J.A.:

This is an appeal of a decision of the Tax Court of Canada [1] which allowed the appellant’s appeal from a reassessment of tax issued by the Minister of National Revenue for the 1990 taxation year.

The late Jan Reiss passed away on January 12, 1990. He owned a 50% interest in a vacant land situated in Halifax, N.S. The Tax Court judge determined, for the purpose of establishing the taxable capital gain realized from the deemed disposition, that the value of the land was $246,000 on December 31, 1971 (“Valuation Day” or “V-Day”) and $1,436,000 at the time of his death on January 12, 1990.

The entire property comprised 25.89 acres zoned largely for residential purposes, but with a small component of around 2 acres for commercial development. [2] The property consisted originally of some 31 acres, 5.084 acres of which were expropriated in 1975. The expropriated acres were valued by the Nova Scotia Expropriations Compensation Board at $18,000 per acre in 1975. [3]

The appellant claims that, in establishing the value of the land in 1971, the Tax Court judge erred in failing to consider that expropriation award.

We agree.

The Tax Court judge said he was giving little weight to the expropriation award because it was a “forced sale”. In fact, he gave no weight at all to the expropriation award.

The proper view, according to the case law, [4] would have been to consider this award in the light of all the circumstances of the case and accept it subject to its weight. The circumstances in the case at bar were unique. There was a dearth of comparable sales in the years contemporaneous to V- Day. The expropriation award, on the other hand, was for a former portion of the very land which is the subject of the evaluation at issue. The Tax Court judge ought to have verified if the expropriation award, for a 1975 expropriation, represented, in fact, forced sale value. In particular, he ought to have verified if the award had the characteristics which the case law retains for minimizing this kind of evaluation, [5] and if there were extraneous elements which falsified the figure normally found in an open market sale [6] which is deemed to represent the fair value of the property. He ought to have given consideration to the fact that the expropriation award was made by a specialized tribunal pursuant to lengthy adversarial proceedings designed precisely to establish the fair market value of a portion of that very land.

By rejecting such an award outright, the Tax Court judge ignored relevant evidence of a specialized tribunal and, consequently, misapplied the law in the process in which he was engaged in evaluating the land in dispute.

The appellant claims, as a second proposition, that the Tax Court judge should have deducted from the amount he retained in establishing the fair market value of the property on January 12, 1990, the costs to extend the sewer line to the subject property.

The Tax Court judge stated twice, in his reasons for judgment, that he did not have to consider such an item separately since such cost had been taken into account by him in his determination of the value of both the residential and commercial components of the land.

We are not entirely satisfied that he did.

There were two types of costs for the installation of the sewage system. One was for the costs of extending the sewage systems to the land (the offsite costs). The second was for the installation of pumping stations on certain portions of land to compensate for the lack of gravity flow due to adverse topography (the on-site costs).

The expert for the appellant, Mr. Weatherby, evaluated the property to be roughly $35,000 per acre for serviced land, but then would have deducted from that value an amount of $140,000 for the off-site costs which came to about $5,500 per acre.

Mr. Chappell, the expert for the respondent, stated in his report that the best indication of value of the residential component of the subject land was his comparables 6 (with a purchase price of $28,930 per acre) and 7 (with an average cost of $42,365 per acre). Both of these comparables, given their adverse topography, required a pumping station to properly disseminate the services within such lands. He then concluded: [7]

The best indicators of value for the subject property are considered to be Indices #6 and 7. Both are located in fairly close proximity to the subject and were zoned for R-l uses. The values of these parcels of land excluding the cost of sewage pumping stations ranged from $28,930/acre to $42,365/acre with an average of $35,647/acre.

[...]

Indices #6 and 7 are considered to provide the best indicators of value for the subject property and indicate a value range for unserviced acreage from $28,930 to $42,365. Based on the foregoing, the unit value of the subject land as a cleared site is estimated to be $35,000/acre.

[Our emphasis]

In his testimony, Mr. Chappell erroneously stated that there were no costs to bring in services to the lands (referring presumably to off-site costs). There were costs, however, in his view, for distributing the services on the lands [8] (referring presumably to on-site costs).

This was in contradiction with what Mr. Weatherby had done. He had deducted from the $35,000 per acre $140,000 for the cost of the sewer run (the off-site costs).

In Reiss Estate, the Tax Court judge stated at p. 1467:

Mr. Chappell believes that the subject lands are comparable to the $28,930 per acre portion of Comparable 6 and to the $42,365 per acre portion of Comparable 7. He took an average of both these figures and arrived at $35,648 which he rounded off to $35,000. However, had the subject lands been readily developable, the other higher values of Comparables 6 and 7 would have been used. With respect to his Comparable 6, another portion, precisely 10.5 acres, was sold one year later for $300,000 which equates to a price of $28,571 per acre.

He then stated at pp. 1473-74:

Under the sales comparison approach, both parties were basically in agreement that the value of the residential component of the subject property on January 12, 1990 should be established at $35,000 per acre. I say “basically in agreement” as I am not overlooking the point that the Appellant has deducted from the values attributed to both the residential and commercial component a sum of $140,000 to cover the cost of the completion of the municipal sewer line to the subject property. I am satisfied that the value of the residential component of the subject property, including all necessary costs, is $35,000 per acre, as of January 12, 1990. The total value of the residential portion of the property is therefore $836,500, that is 23.9 acres x $35,000.

There is no question that Mr. Chappell made some deduction for the unserviced land and that he arrived at the rounded figure of $35,000 per acre. What is unclear is what he meant by unserviced land because he appears to be referring to the on-site costs only.

With regard to the commercial component of the land, Mr. Chappell stated: [9]

A. Based on what I just discussed, I felt that the value of that land would be fifteen dollars ($15.00) if you could just go and develop it “as of right”; but again, it has no sewer services. The analysis that I did was, if you can recall back to the residential lows, my indices six (6) and seven (7), my residential lands, I said that land with immediately ready to be developed with sewer services was worth, it was forty-one thousand dollars ($41,000) an acre.

And without this, thirty-five thousand ($35,000) an acre. There’s a difference of fourteen point six per cent (14.6%). That’s forty-one thousand dollars ($41,000) minus thirty-five thousand dollars ($35,000), divided by forty-one thousand dollars ($41,000), it is fourteen point six per cent (14.6%).

Q. So the difference between a property serviced...

Monsieur le Juge:

Q. You used the same percentage?

A. Exactly, yes, I used the same percentage to apply against subject property.

M Marie-Andrée Legault:

Q. So that explains note one (1).

A. Yes, so 1 used that fourteen per cent (14%), fourteen point six per cent (14.6%), I reduced my fifteen dollars ($15.00) as a break value by fourteen point six per cent (14.6%) and that gives me twelve dollars and eighty cents ($12.80) that you see at the top of the page, in my calculation.

The Tax Court judge concluded at p. 1474:

1 find in the list of Comparables for the commercial component of the subject property, lands listed as Comparable 19 in Mr. Weatherby’s report and Comparable 15 in Mr. Chappell’s report are the best indicators of value. I have concluded that the commercial component of the property should be valued at $12 per square foot. Since I have determined that the total commercial portion of the property is 86,800 square feet, its total value at $12 per square foot is $1,041,600.

[...]

1 have not considered as a separate item the cost to complete the sewer line to the subject property, calculated by Mr. Weatherby to be in the amount of $140,000 on the basis of an estimate made by Project Consultants Limited, since such cost was taken into account in my determination of the value of both the residential and commercial component of the subject lands.

The same confusion arises with regard to the commercial component of the land.

For the purpose of clarity, since this matter will be returned to the Tax Court judge, on the first ground of appeal, namely for a consideration of the expropriation award, we will also return the matter to him on the second ground of appeal, so as to make sure that the off-site costs expenses for the unserviced land were properly considered by him as he analysed the figures given to him by both expert witnesses with respect to the value of the residential and commercial components of the land.

The appellant will be awarded costs on appeal.

The appellant is also asking for costs before the Tax Court judge on the basis that, if he is successful in his appeal, he ought to be awarded his costs before the Tax Court judge.

Since the matter is referred back to the Tax Court judge, we will expect him to review his earlier decision on costs as need be, once his review of the substantive issues is completed.

This appeal will be allowed with costs, the decision of the Tax Court judge will be set aside, and the matter will be referred back to him for a reconsideration in conformity with these reasons.

Appeal allowed.