Dominion Metal & Refining Works Ltd. v. The Queen, 86 DTC 6311, [1986] 2 CTC 47 (FCTD)

Joyal, J.:

1. Opening

The issue in this trial is the determination of the leasehold value of a certain parcel of real property as at December 31, 1971. The value which the Court is invited to fix for it will resolve the conflict as to the amount of capital gain earned by the plaintiff when its leasehold interest in the property was sold in 1976.

The plaintiff contends that the value of its lease rights on Valuation Day was in the $145,000 - $160,000 range. The defendant urges the Court to fix the value at $84,000. The spread between these two valuations, as made clear by both expert evidence of witnesses and expert argument of counsel, is brought to focus by the divergent but not necessarily conflicting approaches of each side to the determination of the dispute and to the valuation technique each of them has adopted.

2. The Property

The parcel of real estate concerned is on Mill Street, in the City of Montreal. It is situated in an industrial district and is adjacent to the Montreal Harbour extending westerly along the banks of the Lachine Canal. It is in an old district with industrial establishments having seen their origins many generations ago. The area is traversed by narrow curving roadways and various railway spur lines. The area is owned by the federal Crown and tenure is secured by long-term lease agreements.

The subject property has an area of some 48,000 square feet (4,478 m ) with a frontage and rear of some 212 feet and an average depth of some 226 feet. The subject property as well as adjacent properties have been leased by the Crown to various tenants for a number of years.

The plaintiff first obtained leasehold rights in the property in 1969. This acquisition was by way of transfer from Bancroft Industries Limited which had become lessee of the Crown in 1946 and whose lease was up for renewal in 1972. The plaintiff paid Bancroft $42,500 on December 22, 1969, to take over the lease. At all material times, the plaintiff was operating a scrap metal business on the premises.

Crown policy with respect to these leases is to enter into 21-year commitments, with 21-year renewal options at a rental to be periodically agreed to by the parties or otherwise to be fixed and determined by the Exchequer Court of Canada (as it then was).

The plaintiffs lands lie immediately east of Ogilvie Lane with Ogilvie Mills “Royal Mill” flour production staging facilities being located immediately west of the Lane.

3. The Neighbour

The neighbour, Ogilvie Mills, has been operating out of its establishment since 1870. Until recently, its staging facilities had been located in three separate buildings each having four floors. Two of these buildings marked “A” and “B” on the sketch below were vintage 1870. The other building marked “C” was of more recent vintage having been built in 1940. [See Exhibit 1 on page 49.]

Material to the issue before me is that, traditionally, Ogilvie Mills’ product of flour and millfeeds was shipped in bag form. For transportation purposes, it relied on railways. As transportation modes changed from railway to motor transport, it began to ship its product in bulk form. Its facilities became increasingly obsolete as the staging areas hitherto planned for shipping in bag form did not readily lend themselves to loading semitrailers and containers in the limited space available. Moreover, the physical arrangements were such as to impose inefficient multiple handling of its products.

The handling problems faced by Ogilvie Mills and their impact on the issue before me may best be expressed by an inter-office memorandum dated May 8, 1973 addressed to Ogilvie Head Office which reads as follows:

Last Friday afternoon I met with Mr. Jacques St. Laurent of the St. Lawrence Seaway Authority; and I discussed with him on a confidential basis the possible availability to us of part of the Bancroft Industries land located on Mill Street.

The land I had in mind encompasses cadastral lots 517 to 520 inclusive, and possibly lot 521 also. The aggregate area of these lots is 231 .O' depth by 305.0' frontage on Mill Street, or 68,472.5 square feet. This land is located immediately East of Ogilvie Lane, and would be admirably suited for the modernization of our warehouse facilities. (A new single story warehouse could be erected thereon, after which our obsolete "A" and “B” warehouses demolished.)

As background information, lots 517 to 520 inclusive are occupied by old derelict warehouses presently used by Dominion Metal & Refining Works Limited under free leasehold rights reverted by Bancroft Industries. Bancroft Industries, who hold the master land lease, renewed their lease with the St. Lawrence Seaway Authority last Autumn for a twenty-one year term. This lease is automatically renewable every twenty-one years, automatically and in perpetuity. The basis of the lease is 84% p.a. of land value which is stated to be $1.75 per square foot; hence, the rent is 14.4¢ per square foot per year.

Dominion Metal & Refining Works operate a scrap metal business on these premises. This type of business could be operated readily elsewhere.

After stating my case to Mr. J. St. Laurent, he relayed to me that during the last few months both Bancroft and Dominion Metals had endeavoured to sell their buildings, and transfer the land leases to a potential buyer. He went on to say there had been a few potential buyers but the negotiations fell through because their offer had been conditional to obtaining further adjacent lands on the North Side of Mill Street as well as reclaimed sections of the Lachine Canal. Lachine Canal reclaimed lands are not being made available by the Seaway Authority for sale or lease at this time due to the recommendations of the Lahaye Commission.

On the North Side of Mill Street, Bancroft Industries have surrendered back to the Seaway Authority their leases on cadastral lots 542, 541, 540 and 539. This land has been cleared of buildings and is located East and immediately adjacent to our Feed Mill yard and garage. This land is currently available for lease from the Seaway. I expressed the opinion to Mr. St. Laurent that our interest was at this time directed more to the land on the South Side of Mill Street.

As you are well aware our plant premises on Mill Street are locked in on all sides for any future expansion. We have also long bemoaned the fact that our multifloor A & B warehouses do not lend themselves to economical materials handling; similarly our mill yard is very restricted in area and makes it most difficult to handle the semi-trailers and containers we are called upon to load. None of these situations will improve since road shipments will continue to increase in relation to rail shipments.

It is my recommendation that through third parties we approach Bancroft Industries with the purpose of purchasing their buildings located on lots 517 to 521 inclusive in exchange of their leasehold rights. It is also my opinion that if we do not act with some haste on this matter, we shall lose the opportunity for ever of acquiring this most valuable land. I do not think we would be involving a very considerable sum of money.

Signed A.S. LaMothe

4. Case for the Parties

It will be recalled that the plaintiff's leasehold rights were acquired from Bancroft Industries Limited in December of 1969 for $42,500. These same rights were resold to Ogilvie Mills on July 19, 1976 at a price of $185,000. The value of the property at December 31, 1971 must normally be somewhere in between.

Adopting a straight rental and improvement value, the Crown's expert report prepared on August 29, 1984 by Mr. Roger Lefebvre lists some eight comparables in the general area of the subject property. These are all Crown lands, all leased out on substantially the same terms and conditions. They show an annual lease cost varying from 6.4 cents to 10.3 cents per square foot. Specifically, the range between April 1971 and September 1973 is between 6.4 cents and 14 cents.

The expert evidence then states that “taking into account that the subject property is very well located and does not suffer any irregularity in its configuration, it is felt that 14 cents a square foot, being the highest rate shown by the market data sample, would be well representative of the economic rental rate for the subject property as of December 31, 1971.”

Making the usual calculations respecting the unexpired term of the lease and the spread between the contract rent and the economic rent, the expert evidence fixes that value at $3,617.

Long before the expert witness’ report had been prepared, the buildings and tenant’s improvements in the subject property had been torn down or replaced. Consequently, the witness had to make certain assumptions as to their replacement costs. He fixes these costs at $277,560. He then depreciates this amount to account for the original buildings’ life expectancy to arrive at a net amount of $80,492. He then adds that this figure is in keeping with the adjusted municipal assessment for the buildings of $64,000 which at a commonly recognized discount of 20 per cent results in an $80,000 valuation. Adding building replacement values to the capitalized rent advantage, the expert arrives at a December 31, 1971 valuation of $84,000.

The case for the plaintiff is set out in a report dated January 21, 1986. Its author, Mr. Richard Wise, is a consultant in business valuation and litigation support. His approach to fixing a value to the subject property does not follow his protagonist’s conventional technique of comparable rental values and discounted replacement costs. Mr. Wise makes his calculations by starting at the end as it were and moving backwards. He states that the purchaser of the leasehold rights in 1976, namely Ogilvie Mills, was a “special purchaser". The subject property's strategic location immediately to the east of Ogilvie Mills’ property gave it a special value. It gave it a special value which was fixed by the parties when negotiations between them opened in the middle of 1974 at between $150,000 and $225,000. Moving back from the final price of $185,000 at July 1976, and allowing for consumer price and building material price indexation and for prime rate and mort- gage interest rate factors for the 30-month period between January 1972 and June 1974, the witness arrives at a Valuation Day value in the range of $145,000 and $160,000, the mid-point being $152,500.

5. The Jurisprudence

It may be stated at the outset that the “special purchase” approach to value adds a new element to the more orthodox “fair market value” approach. The concept is based on experience. It is a premium which a special purchaser is willing to pay over and above fair market value. If the law in expropriation cases is willing to look at special value to an owner over and above fair market value, so is the law in income tax matters willing to look at special value to a purchaser over and above fair market value.

According to the plaintiff, the doctrine does not violate current and acceptable definitions of "fair market value”. Fair market value has been defined in Minister of Finance v. Mann Estate, [1972] 5 W.W.R. 23 (B.C.S.C.); aff'd [1973] C.T.C. 561; [1973] 4 W.W.R. 223 (B.C.C.A.); aff'd [1974] C.T.C. 222; [1974] 2 W.W.R. 574 (S.C.C.) as:

. . . the highest price available estimated in terms of money which a willing seller may obtain for the property in an open and unrestricted market from a willing, knowledgeable purchaser acting at arm’s length.

The term was the subject of further elaboration by Mr. Justice Cattanach in Henderson Estate and Bank of New York v. M.N.R., [1973] C.T.C. 636; 73 D.T.C. 5471. In a matter dealing with the Dominion Succession Duty Act, R.S.C. 1952 c. 89, His Lordship said at 644 (D.T.C. 5476).

The statute does not define the expression “fair market value", but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. These definitions are equally applicable to “fair market value" and “market value" and it is doubtful if the use of the word “fair" adds anything to the words “market value".

Later in his judgment, Mr. Justice Cattanach relented a bit as to the redundancy of the word "fair” in the definition of fair market value. He repeated the comment of Mr. Justice Mignault in Untermyer Estate v. Attorney-General for British Columbia, [1929] S.C.R. 84; [1929] 1 D.L.R. 315 that:

. . . It may, perhaps, be open to question whether the expression “fair" adds anything to the meaning of the words “market value," except possibly to this extent that the market price [His Lordship was dealing with publicly traded shares] must have some consistency and not be the effect of a transient boom or a sudden panic on the market.

Case law is replete with fair market valuation issues. Many deal with personal property, many with publicly traded shares where argument may be advanced that the market price of these shares might not necessarily represent fair market value. As was said in the Untermyer case (supra), market price might be prima facie evidence of fair market value but it is not necessarily conclusive.

There is a shortcoming to these cases, however, as far as the issue before me is concerned. The parties to share valuation disputes have a price before them. That price, the stock market prices, as an example, may be ascertained for any working day of the exchange where the stock is traded. Once the price is known, absent special considerations, the translation of market price to fair market value is more reasonably and more easily achieved. Such special considerations would reflect on the very nature of trading activities in corporate securities. As an example, in the Henderson case (supra), the Minister of National Revenue was quite willing to assess the value of a large block of mining shares at a discount of some 26 per cent from market price knowing the effect on the market of a massive unloading of these shares or on the varying market price levels of the shares if these were to be sold piecemeal. Other considerations might involve elements of control or locked-in minority status of shareholders, outstanding stock options which would have a diluting effect on share values, buy and sell agreements between shareholders, restriction on stock transfers and the like.

Nevertheless, counsel for the plaintiff was able to submit interesting case law where the doctrine of “special purchaser” which I equate with “special value” has been applied to the determination of real estate value. In Inland Revenue Commissioners v. Clay and Inland Revenue Commissioners v. Buchanan, [1914] 3 K.B. 466; [1914-15] All E.R. 882 (C.A.), Cozens-Hardy, M.R. adopted the language of Scrutton, J. when he said at 472 (All E.R. 887):

... An "open market” sale of property “in its then condition” presupposes a knowledge of its situation with all surrounding circumstances. To say that a small farm in the midddle of a wealthy landowner’s estate is to be valued without reference to the fact that he will probably be willing to pay a large price, but solely with reference to its ordinary agricultural value, seems to me absurd. If the landowner does not at the moment buy, land brokers or speculators will give more than its purely agricultural value with a view to reselling it at a profit to the landowner.

Swinfen Eady, L.J. referred to the presence of a special purchaser on the market when he said at 476 (All E.R. 889):

It was then urged by the Solicitor-General that if the probability of this special buyer purchasing, above the price, which but for his needs would have been the market price, could be taken into consideration at all, then only one further point or bid could be allowed, and it must be assumed that this special buyer would have become the purchaser upon making this one extra bid. Such an assumption would ordinarily be quite erroneous. The knowledge of the special need would affect the market price, and others would join in competing for the property with a view of obtaining it at a price less than that at which the opinion would be formed that it would be worth the while of the special buyer to purchase.

The case of Vyricherla Narayana Gajapatiraju v. The Revenue Divisional Officer, Vizagapatam, [1939] A.C. 302; [1939] 2 All E.R. 317, also deals with unusual features or potentialities of land. Said the House of Lords, such features or potentialities must be ascertained even when the only possible purchaser of these potentialities is the authority purchasing under powers enabling compulsory acquisition.

The principle that the use of property by the buyer may be a determinant of value has also been applied by the Supreme Court of Canada in the expropriation case of Fraser v. The Queen, [1963] S.C.R. 455. The property involved was rocky ground of some 110 acres. It had a “bare ground” value of some $50 per acre. It was, however, strategically situated on the Canso gut between the mainland and the Island of Cape Breton where public authorities had decided to build a causeway linking the two. The purpose of the expropriation was to make a quarry site for the nine million tons of rock required for the causeway. Mr. Justice Cartwright observed at 458:

We must deal with the realities of the situation. What was compulsorily taken from the appellant was intended to be used not as land but as a source of building material for which there was an ascertainable market price.

Mr. Justice Ritchie, at 474, adopted the reasoning of the House of Lords in the Indian case (supra) and stated:

The exclusion from the Court’s consideration of “increase in value consequent on the execution of the undertaking” to build a causeway and of any value based on the Crown acting under compulsion as a necessitous purchaser does not mean that the value of the special adaptability to the owner at the date of expropriation is to be disregarded.

The special value approach has been substantially applied in Cyprus Anvil Mining Corp. v. Dickson et al. (1982), 20 B.L.R. 21; 40 B.C.L.R. 180; Glass v. Inland Revenue Commissioners (1915), 52 Sc. L.R. 414; and in Laycock v. The Queen, [1978] C.T.C. 471; 78 D.T.C. 6349.

In this last quoted case, the issue like the one before me involved valuation of real property at December 31, 1971. This property was comprised of 159 acres and adjoined lands where a company operated a cattle feedlot business. The company required more land and in 1971, offered to buy 40 acres of the taxpayer's lands for $400 an acre. This offer was refused. Early in 1973, however, the taxpayer offered to sell his whole acreage to the company for $300 per acre. This offer was readily accepted.

Faced with the problem of determinating Valuation Day value to the farm lands, which as farm lands, which as farm lands had an appraised value of $135 per acre, the Court said:

. . . In my view the logical and best direction for Circle Three to expand was on to the subject land. In my view also it was very likely, though not certain, that this growing company would, within a fairly short period of time, feel, more strongly than in 1971, the need for more land to accommodate its growing business. In such case it would probably desire to purchase either all of the subject land or at least substantially more of it than 40 acres. Mr. Hetherington stated they were always looking at the subject land, and when, early in 1971 [read 1973], it was offered to the company at $300.00 per acre, the offer was accepted, without any argument over the price.

In these circumstances, as at December 31, 1971, the subject land would command a higher price in the market than bare farm land. In fact it was only 14 months after that date when Circle Three bought the entire 159 acres. At December 31, 1971 there was nothing to indicate that the company would want all the land. There was much to suggest that before long the company’s growing needs would make more land a practical necessity and that its first interest would be in the subject land.

The Court then concluded:

After weighing all the known facts, my conclusion is that the 40 acres for which $400.00 per acre was offered in 1971 should be valued at that figure, and that the remaining 119 acres should be valued at about 50 per cent above its value as ordinary farm land. On the evidence before me, I accept Mr. Caron’s conclusion that the value of the 119 acres for ordinary farm purposes was $135.00 per acre. On this basis the 119 acres should be valued at $202.50 per acre. . . .

I should also refer to the case of 931 Holdings Ltd. v. M.N.R., [1985] 2 C.T.C. 2094; 85 D.T.C. 388, when the City of Toronto was willing to pay a premium of some 40 per cent over and above normal fair market value because the owner of the lands involved enjoyed a non-conforming use which the city authorities wished to eliminate. In the judgment, it is stated at 2103 (D.T.C. 395):

It is clear from the evidence that on December 31, 1971 the City of Toronto was in the market to purchase the property to rid it of an obnoxious non-conforming use. . . .

I cite this case because it has some relevance to the issues of fact before me relating to the presence of a special purchaser at the relevant period of time or for that matter relating to the existence of a neighbour whose anticipated needs for expansion might be deemed to have exerted an upward push to the value of the subject lands.

6. The Issues of Fact & Theory

The Court is asked by the plaintiff to find that at December 31, 1971, its neighbour, Ogilvie Mills, fitted the special requirements to make of it a “special purchaser”. If Ogilvie Mills should be so found, the Court is then asked to endorse the backspin calculations prepared by the plaintiff’s valuation expert and fix the value of the property at Valuation Day at the midway point between $145,000 and $160,000.

The Defendant Crown, on the other hand, urges the Court to find that the existence of Ogilvie Mills as a “special purchaser” at the relevant date has not been proved and consequently, the straight fair market valuation of $84,000 prepared by its own expert should be determinative of the value of the subject property at December 31, 1971.

Making a finding in this respect requires the Court to consider all the circumstances of Ogilvie Mills’ occupation of its lands in relation to the neighbouring lands of the plaintiff. According to the evidence of Mr. A. S. LaMothe, and which is part of the record, Ogilvie Mills had occupied its lands as tenant since 1840. It became owner of the lands in 1967. Some of the improvements on these lands had been constructed in 1870. These included two multi-story metal-clad, wood-framed warehouses. The third building was erected in 1940.

Mr. LaMothe was plant manager of Ogilvie Mills from 1964 to 1969. He testified that these buildings were very expensive to maintain by virtue of their age. They were inefficient from a materials handling point of view. As the years went by, these difficulties became more manifest. It provoked Mr. LaMothe to draft an inter-office memorandum on May 8, 1973 which I have already reproduced. It was here that an interest in acquiring the neighbouring property is first made known. There was a follow-up to this initiative and the action taken by Ogilvie Mills is reflected in detail in a further memorandum under Mr. LaMothe's signature dated October 12, 1973.

The witness states in his memorandum that the owner of the plaintiff company was prepared to negotiate the sale of his property. The parameters to establish a negotiating basis were also discussed so as to include goodwill on the lease, the price the plaintiff paid to acquire the buildings from Bancroft and the cost of demolition and clearing of the land.

No further meetings with the plaintiff company took place until March 11, 1974. At that time, perhaps in part as negotiating leverage, the witness mentioned the alternative choice of the Bancroft property located immediately north of the plaintiff’s property and lying on the other side of Mill Street.

On June 6, 1974, the parties fixed their bargaining position at between $150,000 offering price and $225,000 asking price. On June 14, 1974, the parties had reached verbal agreement fixing the price at $185,000 which verbal agreement was confirmed in writing on June 28, 1974 by an option at that price exercisable on or before September 30, 1974. Formal documents of assignment were executed by Ogilvie Mills on July 19, 1976 and Ogilvie Mills took possession of the plaintiff’s lands on October 1, 1976.

This deal with Ogilvie Mills meant that the plaintiff had to move somewhere. On or about August 17, 1976, the plaintiff bought the Bancroft lease rights just down the street from its current location. The assignment price including buildings was $80,000.

In further evidence given by Mr. LaMothe, it is well established that at no time prior to the Fall of 1973 did Ogilvie Mills disclose to anyone its decision to look for additional lands or, for that matter, to let it be known that the neighbouring property of the plaintiff offered the most practical solution to its problems. Furthermore, the dynamics of the market were not such as to place a gun at Ogilvie Mills’ head in the event the plaintiff should at any time demand an unconscionable price for its leasehold interests. There was an alternative to Ogilvie Mills’ expansion plans. There was property on the other side of Mill Street and although not as suitable as the plaintiff’s lands, nevertheless, would be of a nature to put a damper on the plaintiff's ambitions.

The question may now be put and that question is fundamentally the issue before me which must be resolved. As a matter of law, is it or is it not necessary for the application of the special purchaser approach to valuation that the market itself be aware at all relevant times of the existence of such a purchaser? There is no doubt from Mr. LaMothe's evidence that at December 31, 1971, the plaintiff was not aware of it. For that matter, neither was Bancroft Industries aware of it when it sold its leasehold interests to the plaintiff in 1969. The fair market value of the plaintiff’s lands at that time must be somewhere in the neighbourhood of what was paid for it, namely $42,500 including buildings.

Expressed in other terms, at what particular period in a long continuum does a special purchaser slowly emerge like Poseidon from the sea with its trident pointing at the neighbour’s lands? Assuming that Ogilvie Mills were prepared to pay a premium for the plaintiff’s lands in 1974, did it exist as a special purchaser in a notional market two or three years earlier?

It is a troubling question. An affirmative answer to it would presuppose that at December 31, 1971, there existed an element of special value in the plaintiff’s lands by reason of the fact that Ogilvie Mills was next door. It would assume that a notional buyer at that time would have been astute and imaginative enough to gamble that Ogilvie Mills which had remained content on its turf for a hundred years would adopt a more expansionist mode some two or three years later and the plaintiff’s land would be the logical target for this.

A negative answer, strongly urged by the defendant, would be on the basis that the special purchaser theory loses its legitimacy when there is absent from an open market at a particular time any notion of the existence of such a purchaser. In an article titled "Valuation and the Income Tax Act", (September-October 1981), 29 Canadian Tax Journal 626, Richard M. Wise, the plaintiff's expert, accepts the definition of fair market values as “the highest price available estimated in terms of money which a willing seller may obtain for the property in an open and unrestricted market from a willing, knowledgeable purchaser acting at arm's length.” The defendant's position in this respect is that Ogilvie Mills was no more a special purchaser in 1971 than it had been in 1969. Furthermore, as Mr. Wise states in his article at page 629:

Special Purchaser

Since notional marketplace valuations asume, inter alia, (1) a market open to all potential purchasers and (2) a prudent, informed purchaser and vendor, the assumption is that the willing vendor will seek to obtain the highest possible price the property will fetch from whomever the purchaser may be.

Since the definition of fair market value contemplates the highest price obtainable, the inclusion of one or more “special purchasers” or ‘‘special interest purchasers” in the market, particularly when a V-Day valuation is being prepared, would support a higher deemed cost and, hence, ACB. A special purchaser may be considered as one who, for a number of reasons such as the ability to achieve, through combination, various synergistic benefits (economies of scale, competitive advantage, assured sources of supply, product identification, increased profits, or reduced risks, etc.), would be prepared to pay a higher price for the shares of the business being acquired than would other purchasers — that is, those who more typically look merely to the investment (nonsynergistic) aspects of the acquisition candidate. A special purchaser is not an ‘‘exceptional” purchaser but is one who can realize such synergies and is prepared to pay more than other purchasers. For example, he will not only have access to the acquired company’s future earning stream, but he will also increase his own earnings as a direct result of the combination. The ‘‘premium” paid by such a purchaser will specifically take into account such increase in his own earnings.

If, therefore, a fair market value determination is required as of V-Day, every attempt must be made by the valuator to identify any special interest purchaser(s) that may have then existed in the marketplace. The identification of two or more special purchasers is of prime importance because of the possible upward effect on price of their competitive bidding against one another.

According to the defendant's counsel, the attempt by the plaintiff to identify a special purchaser as at December 31, 1971, a process which is essential to the application of the theory, has failed.

Mr. Wise's approach of course requires hindsight. It suggests that the special needs of Ogilvie Mills made manifest in 1974, were present on December 31, 1971. In another article by Mr. Wise, “The Value of Hindsight", (October 1984), CAMagazine 120, the author discusses the principle of hindsight and its admissibility in arriving at a fair market valuation. He states, quite rightly in my view, that facts subsequent to a valuation date may be considered relevant to the valuation process. He says in this respect at page 121:

Because value, particularly for income tax purposes is generally determined in a ‘‘notional” (hypothetical or imaginary) market, it may be acceptable to use facts or information (with respect to an actual sale, say) subsequent to the valuation date to help determine whether the valuation was reasonable, provided that there were open (actual) market circumstances that would not negate the subsequent facts (e.g., a sale under distress conditions).

The author then describes this ‘‘notional" market as contemplating ‘‘a hypothetical buyer and seller who are equally willing (uncompelled) to transact, equally informed, each having similar financial strength, equal negotiating ability, etc.”

The defendant's counsel questions whether the hindsight in the case before me is of a kind which is applicable if the “special purchaser" theory is to be adopted. Further, by Mr. Wise's own observation, it must be assumed that in 1971 Ogilvie Mills was not "uncompelled to transact" as it obviously was “compelled” in 1974 when it had fixed its mind on the plaintiff’s property. Theoretically, therefore, in the absence of "compellability" at December 31, 1971, there would have been a stabilized price. The neighbour at that time, according to the defendant, had not expressed, internally or externally, any interest in the subject property nor any interest in acquiring lands at all.

Yet, such might not provide the complete answer to the defendant's case. A similar situation faced The Tax Review Board in Lakehouse Enterprises Ltd. et al. v. M.N.R., [1983] C.T.C. 2431; 83 D.T.C. 388. It dealt with the value of certain lands on December 31, 1971. These lands had been sold in the summer of 1976 for $825,000. The Minister of National Revenue had fixed the Valuation Day value at $250,000. The taxpayers contended that the value, because the purchaser, The Royal Bank of Canada, was a special purchaser, should be more properly fixed at $419,000.

The facts of this case should be summarized. The properties sold consisted of lots 12 and 13 owned by Lakehouse Enterprises Ltd.; lots 1 and 10 and part of lot 14 owned by Lakehouse Holdings Ltd.: altogether a total of some five lots. A history of acquisition or sale of these lots appears to be as follows:

(1) Lot 13 had been acquired in 1968.

(2) Lot 12 had been acquired in November 1972 for $52,000; two years later a 1200 square foot building improvement was constructed on it.

(3) Lot 1 and Lot 14 had been purchased in 1955 and 1957.

(4) Lot 10 had been purchased in November 1973 for $27,500.

(5) In 1969, a long-term renewable lease had been executed between Lakehouse Holdings and the Royal Bank of Canada covering lots 1 and 14, at a rental of $23,000 annually.

According to the evidence in that case, the normal value of all the lands was $250,000 at December 31,1971 and a normal value of $418,000 at August 31, 1976, the date of purchase by The Royal Bank. The purchaser itself agreed that its own valuation of the lands in 1976 was in the $400,000 range but it was prepared to pay over $800,000. There was also evidence that the rate agreed to by The Royal Bank for the leased lands in 1969 was considerably higher than the going rate, i.e. $5.65 per square foot as against $3.80 per square foot, a rate of some 50 per cent over normal value.

The Board found in favour of the plaintiffs. The Board decided that a special value for the lands existed in 1971. It stated at page 393 that “the preponderance of the evidence is to the effect that in 1976 The Royal Bank of Canada was a special purchaser. The testimony of the appellant’s appraiser is that the normal value of the property was in the amount of $462,000 but $820,562 was paid instead. The said normal value was confirmed by the respondent's witness, Mr. Mitchell, employee of the purchaser for 29 years, who said that the “Royal Bank of Canada, before purchasing the property paid an independent appraiser to value it. The valuation was $460,000."

The Board went on to find that the same special value existed in 1971 and allowed the taxpayers' appeal.

This decision of the Tax Appeal Board has been appealed to the Federal Court, Trial Division. The case does not appear to have progressed beyond the Crown's filing of its statement of claim. It leaves some uncertainty as to the application of the special purchaser theory on the facts of that case, but because of some similarities with the case at bar, I should venture some pithy comments on it.

First, the evidence in the Lakehouse case as to the “normal” value of the lands purchased by The Royal Bank of Canada in 1976 was well established. All parties agreed to this value as being roughly $460,000 and for which the purchaser was willing to pay a 70 per cent premium. Second, although the Board did not specifically refer to it in its conclusion, the presence of The Royal Bank of Canada as “special purchaser” could be evidenced to some degree at least by the premium rate of some 50 per cent paid by The Royal Bank of Canada when it entered into a lease of a portion of the lands in 1969.

One may ask where in the case before me is there any evidence of “special value” to the plaintiff’s land except through the back-tracking calculations made by the plaintiff? No history of the “special purchaser” presence of Ogilvie Mills is alleged. In fact the “notion” of Ogilvie Mills acquiring the plaintiff's lands was expressed only in May 1973 and was only made known to what might be termed a “notional” buyer in October 1973.

One may also ask whether there is any evidence as of Valuation Day that Ogilvie Mills was in an expansionist mood or felt itself so constrained by its increasingly obsolete staging area facilities that it must necessarily and forcibly look to its neighbour's lands for relief.

Furthermore, no evidence was led as to the fair market value of the lands in 1974, absent any special purchaser on the market to inflate the price to its special purchaser level.

Without suggesting that these were determinant factors in the Lakeside Enterprises et al. case, they are certainly factors which are part of the res gestae and which suggest to me that I should be reluctant to endorse it as obvious authority to resolve the issue before me.

In the absence of these factors, I would have to find that the special purchaser theory advanced by the plaintiff applies as well in a vacuum as in circumstances where proper inferences from known facts may be drawn. I would have to find that at all material times, Ogilvie Mills was a special purchaser even though its presence in the “notional” market wasn't even known to itself.

Other authors, with apparently the same credentials as Mr. Wise, have also commented on the theory. Mr. lan R. Campbell, C.A. in “Business Valuation: a non-technical guide for Business people” published in May 1984 by the Canadian Institute of Chartered Accountants, states at page 173 that:

One of the two basic approaches for determining value in the notional market is to assume that “fair market value” or “fair value” is best determined by reference to open market transactions involving similar businesses. Although such an approach may be useful where the transactions are clearly identifiable and, in fact, comparable, it may often lead to inaccurate or misleading conclusions. This is so because an assumption that open market transactions are prima facie evidence of fair market value or fair value may often be incorrect.

The author then lists various components such as unique negotiating or financial strength, restricted transfer rights, forced or imprudent sales, ignorance of all relevant information, all of them factors in an open market approach but not present in a notional market. Mr. Campbell further observes at page 174:

Without consideration of special interest purchaser considerations, fair market value or fair value becomes intrinsic value under the investment approach. However,

the definition of “fair market value” would appear to contemplate a sale in an “open market”. The trend of the court decisions has been to construe the phrase “open market” as a market which includes special interest purchasers. As a practical matter, it frequently proves difficult to identify possible special interest purchasers, let alone quantify prices which they might pay for a particular business being valued. Nevertheless, where special interest purchasers are able to be identified, the fair market value or fair value of the shares of a business becomes the price which that special interest purchaser might be willing to pay to obtain economies of scale from the business combination. In the absence of special interest purchaser considerations, the intrinsic value of a pool of assets is generally considered the best evidence of its fair market value or fair value.

[Emphasis added.]

The author also states at page 38:

Where purchasers with special reasons for purchasing cannot be identified, a determination of fair market value in the notional market becomes, in effect, a determination of intrinsic value without consideration of the different values which the business might have to different specific special interest purchasers. In

such situations, intrinsic value may be regarded as a modified concept of fair market value determined for notional valuation purposes, which comes into play because of the practical limitations of identifying special interest purchasers and quantifying economies of scale they might enjoy following acquisition. .. .

[Emphasis added.]

And again, at page 50, the author says:

As previously stated, special interest purchasers are those who, for one or more reasons, are prepared to pay a higher price for a business interest (be it shares or assets) than other purchasers would be prepared to pay for the same business interest. . .. Accordingly, the term “special interest purchaser" should not be taken to connote an exceptional purchaser, but rather the more usual type of purchaser that prevails in the open market.

The presence of special interest purchasers tends to limit the number of possible purchasers who might otherwise be present. In theory, if there is only one special interest purchaser, that purchaser would pay slightly more than ordinary purchasers would pay to assure that it (he) is the successful bidder.

Later in his article, Mr. Campbell, while recognizing the willingness of the courts to evaluate special purchaser considerations, suggests that courts may be reluctant to entertain such considerations when they are too speculative.

7. Conclusions of Facts and Law

No doubt the plaintiff and its expert witness have advanced a well- constructed, articulate and engaging scenario to establish the fact that the fair market value of the lands in 1974 was only nominally higher than its fair market value at the end of 1971. I will say this for their script: the decision of Ogilvie Mills to acquire the plaintiff's lands in 1973 put Ogilvie Mills within the parameters of the special purchaser theory and, had Valuation Day been fixed at roughly that same period of time, the fair market value of the property would have been determined by the price which Ogilvie Mills, by now a compelled acquirer, actually ended up by paying for it.

Such, however, is not the case before me. The special purchaser theory, as all theories, requires some evidentiary base before it may be applied. As I have observed before, Ogilvie Mills had been a neighbour of the subject lands for generations, without any covert or overt, or presumed intentions to acquire more property. There is no evidence of Ogilvie Mills exerting any acquisitive clout or giving the mere impression of it to alert the notional buyer that at December 31, 1971 the subject lands might have a considerably enhanced value over other locations simply because they were located next door to it. There is no evidence of notional movement by Ogilvie Mills in any direction. Even if one might establish the presence of Ogilvie Mills as a special purchaser as of Mr. LaMothe's internal memorandum of May 8, 1973, or as of his later memorandum of October 12, 1973, I cannot readily see where as at December 31, 1971, Ogilvie Mills can fit into the special purchaser category.

A review of the case law which deals with both land and Valuation Day issues and which is otherwise favourable to the plaintiff's case contains in my view evidentiary elements which distinguish it from the case at bar. In the Laycock case (supra), the owner had been offered a premium price of $400 per acre for some 40 acres. This offer had been made in 1971, and although refused, it established a base upon which a special value for the total acreage could be fixed and the special purchaser theory applied.

In the 931 Holdings Ltd. case (supra) the Court found that it had been clearly established that as of Valuation Day, the City of Toronto was in the market to purchase the subject property to rid it of an obnoxious nonconfirming use.

In the case of Lakehouse Enterprises et al. (supra), the evidence seemed to indicate a dominance exercised or enjoyed by the purchaser, The Royal Bank of Canada, with the latter having already given an indication that it liked to get what it wanted. Because the appeal of that decision is pending, however, I should comment on it no further.

My fear in applying the plaintiff’s approach to the case before me is that it tends to overlook other requirements of case law in dealing with fair market value. As I see it, fair market value presupposes a willing and knowledgeable purchaser dealing with a willing and knowledgeable seller, with neither of them subject to any constraint or untoward pressure. To extend this theory of a notional special purchaser to the limit suggested by the plaintiff would, in my respectful view, impose a purely speculative approach to valuation techniques. The special value of property could be established simply by the application of the post hoc, propter hoc rule to its most egregious extremity. It would mean that no matter when a special purchaser shows up, he should be deemed to have been a “notional” purchaser retroactively.

In my view, the retroactive application of the principle would require some evidentiary base. There must be some facts to support the notion. These facts may not necessarily be facts dealing directly with the issue, but at least facts which would lead to an inference that speculation is warranted. Such, at least, seems to have been the foundation on which courts have applied the theory. In the cases cited by the plaintiff and to which lengthy reference was made, there were facts which gave credence to the presence of a special purchaser not only at the date of acquisition but at the relevant Valuation Day date as well. In the case before me, I fail to find that kind of foundation upon which the presence of a special purchaser in the notional market at December 31, 1971 may be reasonably established. I can only ascribe the excellent price paid for the subject property in 1974 to a fortuitous combination of a self-compelled buyer on the one hand and an astute and obviously knowledgeable seller on the other.

With this finding, I must now turn to the determination of the alternative expert valuation of the subject lands submitted on behalf of the defendant.

I would not believe, first of all, that the economic value on which the lease per se was quantified can be disturbed. In fact, the expert witness, Mr. Lefebvre, conceded that the subject lands were of a quality to warrant the highest prevailing rental rate per foot. I find no error in his calculations of the capitalized rent advantage in that respect.

The market value of the buildings, based on replacement value minus depreciation, is another matter. It will be recalled that a condition of the agreement between the plaintiff and Ogilvie Mills imposed on the plaintiff the responsibility of dismantling its buildings and leaving the ground bare for the buyer's future purposes. As a result, when the defendant's expert valuator prepared his report which is dated August 29, 1984, it imposed on him a very difficult problem of reconstruction. the buildings were no longer there. He could not accurately determine their age, or their state of repair, or their life expectancy. The witness, as he properly explained in his report, had to make a number of assumptions. He had to rely on verbal descriptions of the type of construction used in the buildings which indicated “steel siding and timber framing with standard equipment". He faced the task of reconstructing a number of buildings of that type having a total area of some 35,240 square feet at a cost varying from $7.63 per square foot to $9.55 per square foot.

The witness calculated his replacement cost on data found in the Boeckh V-Day Building Valuation Manual, excerpts from which the witness reproduced in his report. This cost he fixed at $277,560. I have no quarrel with that.

Not so, however, with his calculations respecting the physical deterioration of the buildings based upon a 35-year expectancy and a 25-year effective age. Admittedly, the witness was faced with probables, assumptions and rough guesses. Furthermore, he was not cross-examined on this aspect of his report. Nevertheless, I am concerned with the life expectancy of 35 years he ascribes to the buildings.

If the witness should be unable to determine the physical description and the state of repairs of the buildings on Valuation Day, it makes the determination of their “effective age" difficult. It is a trite principle of evaluation that the effective age of a building when appropriate repairs are carried out regularly is usually lower than the actual age. In the absence of direct information, the witness also had to ascribe the same physical condition and the same actual age to all buildings.

Conventional wisdom to which evaluators appear to subscribe generally fixes the economic life of an industrial building at between 40 and 50 years. I should quote here an extract from the Encyclopedia of Real Estate Appraising, ed. by Edith J. Friedman, Prentice-Hall, Inc., Englewood Cliffs, N.J., 1959, at pages 343-44 where the author, Paul Fullerton, states:

Industrial property is generally given an economic life of from 40 to 50 years. Actually, the life span of an industrial building from a durability standpoint can vary from 25 to 100 years. In determining economic life, however, the appraiser must take into consideration obsolescence as well as physical deterioration. In a new structure, it is rarely prudent to select a figure higher than 50 years. In an older property, it is often possible, because of remodeling and modernization, to select a remaining useful life period which, when added to the building's present age, will total considerably more than a 50-year limit. .. .

In this light, I must find the life expectancy of 35 years ascribed by the witness to the buildings as being on the low side. I will grant that his assumptions as to effective age and life expectancy provide him with a result which approximates assessed municipal valuation but this factor, while beguiling and interesting, is not conclusive. If it is common knowledge, as the witness states, that municipal evaluations at that time were inferior by approximately 20 per cent of the real value, it is also common knowledge that municipal assessment comparisons are rarely good guides to the determination of market values.

I therefore must exercise some kind of interventionist policy based on my finding that the 35-year life period goes against accepted doctrine of 40 to 50 years for industrial buildings. I permit myself to enter this venture because there is no evidence nor rational base before me as to why the witness should have fixed it at that figure. The authority I have quoted, however, is sufficient authority as far as I am concerned to justify my varying the witness' 35-year assumption.

In so doing, it might be said that my own assessment of life expectancy based on some facts, some assumptions and some doctrine is but one tick up from an educated guess. Nevertheless, I believe it is appropriate to fix the life expectancy of the buildings somewhere along the 40-50 year scale. I note in this connection that in Mr. LaMothe's memorandum of May 8, 1973, he described the buildings on the plaintiff’s lands as old derelict warehouses. This observation is perhaps not determinative of the life expectancy as such. I must keep in mind that the buildings appear to have met the plaintiff’s requirements until they were dismantled in 1975-76. I should nevertheless fix the life expectancy at the lower end of the 40-50 year scale. The appropriate level, in my view, would be 42 years resulting in a depreciated value at December 31, 1971 of $111,854.

To this must be added the value of the lease interest at $3,617 for a total valuation of the subject property at the rounded sum of $115,500.

There shall be judgment for the plaintiff and the Minister of National Revenue will be requested to reassess the plaintiff for the year 1976 so as to fix the Valuation Day value of the subject lands at the amount I have stated.

The plaintiff is also entitled to costs.

Judgment for the plaintiff.