Ondrey v. R., 98 DTC 6023, [1998] 1 CTC 317 (FCTD)

Rothstein J.:

The sole issue in this appeal under the Income Tax Act is the value of certain real property on “V” Day, December 31, 1971. The value must be determined to establish the capital gain earned by the plaintiff on the subsequent sale of the said property for capital gains tax purposes.

The property is located in Oakville, Ontario. It consists of 90.155 acres fronting on Highway 25 (Bronte Road) and a service road parallel and close to the Queen Elizabeth Highway (Q.E.W.). Apparently the property had direct access to Bronte Road and to the Q.E.W. via the interchange between Bronte Road and the Q.E.W.

In his income tax return, the plaintiff claimed that the “V” Day value of the property was $1,950,000 or $21,629.42 per acre. However, in evidence, the plaintiffs appraiser estimated the value of the property at “V” Day at $1,623,000 or approximately $18,000 per acre. The defendant’s appraiser estimated the value of the property on “V” Day at $1,226,000 or approximately $13,600 per acre. The difference between the appraisers therefore is $397,000 or approximately $4,400 per acre.

Both parties agree the property was sold for fair market value in an arms length transaction by Agreement of Purchase and Sale dated April 5th, 1973 for $1,617,156.90 or approximately $18,000 per acre. No agent was involved. A $50,000 deposit was paid. The transaction was to close October 31st, 1973 with a further cash payment of $550,000 and a vendor take-back mortgage of slightly in excess of $1 million with interest at 9% per annum and a term of five years.

In assigning a value to the subject property of $18,000 per acre as at December 31st, 1971, the plaintiffs appraiser acknowledged that he had made no adjustment for the increase in the value of the property between that date and April 5, 1973. However, he said that he estimated the increase to be approximately 10% per annum. His explanation for not discounting the April 5, 1973 value of $18,000 per acre back to December 31st, 1971 is that he considered the subject property to have a superior location and access relative to other comparable properties. In other words, the time discount was offset by the location and access advantages. However this explanation is not logical. It is the subject property itself, with its location and access advantages, that had an April 5, 1973 value of $18,000 per acre. The $18,000 already takes into account location and access. There is no evidence of any change in the property between December 31st, 1971 and April 5th, 1973. Therefore even on the evidence of the plaintiffs appraiser, the $18,000 per acre value of the property would have to be discounted by 10% per annum from April 5th, 1973 to December 31st, 1971.

The plaintiffs appraiser’s time adjustment of 10% per annum was not based on any data or analysis. In cross-examination he agreed that, all other things being equal, the time adjustment estimated by the defendant’s appraiser of 16.24% per annum would be appropriate.

The defendant’s appraiser’s time adjustment was based upon two sales of the same property in the vicinity of the subject property, the first on or about August 11th, 1969 for $293,000 and the second about October 15th, 1973 for $458,960. In estimating the “V” Day value of the subject property, the defendant’s appraiser took the $18,000 per acre selling price and discounted it back to December 31st, 1971 using the rate of 16.24% per annum referred to immediately above. Insofar as the rate was concerned, the defendant’s appraiser indicated that the annual rate of 16.24% was attributed to each year between June 1969 and October 1973 on a constant basis even though he was of the opinion that the rate of increase was flatter before “V” Day and was steeper thereafter. In particular he was of the view that the market had started to “heat up” in September or October of 1972. This view was corroborated to some extent by successive sales on each of four other properties between August of 1971 and December of 1973 reflecting annualized increases from 23% to 47%. However, these other four properties were not, by the defendant’s appraiser’s own admission, comparable to the subject property and, in particular, were much smaller and therefore, reliance upon them must be limited. Further, the 16.24% is based on successive sales on only one property, apparently because there were no other comparable properties with successive sales between 1969 and 1973. Nonetheless, I am satisfied from all the evidence that the rate of 16.24% per annum after “V” Day is a relatively conservative estimate of increase and may be accepted for discounting purposes.

The period over which the defendant’s appraiser discounted the $18,000 per acre selling price was from October 31st, 1973, the estimated closing date, back to December 31st, 1971 yielding a “V” Day value of approximately $13,600 per acre. In the course of his evidence, the defendant’s appraiser agreed that it would be more appropriate to use the date of the Agreement of Purchase and Sale of April 5th, 1973 as the date from which the $18,000 per acre selling price should have been discounted, because it was on that date that the purchaser and vendor agreed that the property value was $18,000 per acre. Indeed, the property value may well have changed (increased) between the date of the Agreement of Purchase and Sale and the closing date. It is true, as the defendant’s counsel points out, that only a $50,000 down payment was made on April 5th, 1973 with a further cash payment to be made and a vendor “take back” mortgage to be granted on closing and that the “delay” in the payment of further cash may have had an effect on the purchase price. However this does not justify discounting from the closing date. If it did, an Agreement for Purchase and Sale dated December 31, 1971, “V” Day, scheduled to close six months later would have to be discounted for six months thereby reducing the “V” Day value for capital gains tax purposes below the amount in the Agreement of Purchase and Sale. This does not make sense. According to the defendant’s appraiser’s evidence, a period of six months between the date of an Agreement of Purchase and Sale and closing date is not unusual in industrial property transactions of this type. This would suggest that the price of $18,000 per acre fixed by the agreement on April 5th, 1973 took the delay in payment of further cash until closing into account.

The defendant’s appraiser compared his discounted “V” Day value of the subject property, with other comparable properties relatively close by. His estimate of $13,600 per acre for the subject property exceeds the time adjusted estimated “V” Day value of the comparables which he says adequately accounts for the superior access and, in his opinion, inferior location of the subject property.

The plaintiff’s counsel criticized the comparables used because they were small properties which, as the defendant’s appraiser admitted, might have an upward effect on price per acre because the cash outlay to purchase would be less than for a larger property. The defendant’s appraiser made no adjustment for size. However, it must be remembered that in this case, the basic approach was to take a subsequent arms length sale price of the subject property and discount it back to “V” Day using acceptable methodology and data. Reference to comparables only indicates that the discounted “V” Day value arrived by this process appears reasonable when compared to the “V” Day values estimated for comparable properties. I have no evidence before me to suggest that a size adjustment would be material or would render the “V” Day value of the subject property “out of line” with the comparables.

The plaintiffs counsel submits that the absence of an agent for the April 5, 1973 sale meant that the vendor agreed to a lower price than might have been the case if an agent’s commission had to be paid. Implicit in this argument is that the usual custom is to use agents and that the price in such cases includes an allowance for agent’s commission. However, I have no evidence that would give me any basis for any increase in the fair market value on April 5, 1973 over $18,000 to account for agent’s commission. I simply do not know what impact, if any, the absence of an agent had. In the same vein, the agreement contemplated the vendor taking back a mortgage of over $1 million on land rather than receiving all cash. I have no evidence that would provide a basis for estimating what lower price the vendor might have been willing to accept for an all cash deal if indeed, all cash deals were the norm. In the result I can not take either possible adjustment into consideration.

Having regard to a discount rate of 16.24% per annum and applying it over the period between December 31st, 1971 and April 5th , 1973 to the selling price on April 5th, 1973 of $18,000 per acre for the subject land, the calculated “V” Day value would be $14,861.23 per acre. I would round this figure to $15,000 per acre for a “V” Day value for the entire 90.155 subject acres of $1,352,325.

In view of the divided success there will be no award of costs.

Appeal allowed.