Benson Investments Ltd. v. The Queen, docket 96-1513-IT-G

Date: 19980106

Docket: 96-1513-IT-G; 97-1577-IT-G

BETWEEN:

BENSON INVESTMENTS LTD., STEPHAN V. BENEDIKTSON,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

McArthur, J.T.C.C.

[1]            These appeals were heard on common evidence with respect to the Appellants' 1991 and 1992 taxation years. The only issue to be decided is the fair market value of real property, on September 1, 1988.

[2]            The Appellants and the Respondent agreed to the following facts:

1.              Stephan V. Benediktson ("Benediktson") is an individual resident in Canada for purposes of the Income Tax Act (Canada) (the "Act"). At all relevant times hereto, he and his spouse owned all of the issued and outstanding shares of Benson Investments Ltd. ("Investments"). As well, Benediktson was a director of Investments.

2.              At all material times, Investments was a body corporate incorporated under the laws of the Province of Alberta which carried on business at 950, 633 - 6 Avenue SW, Calgary, Alberta.

3.              The subject matter of these appeals is property legally described as:

                                                Plan 6191AD

                                                Block 8

                                                Excepting thereout all mines and minerals

                                                In the municipal district of Rocky View

                                                (the "Property")

4.              This property is an improved acreage property situated just outside the limits of the City of Calgary as those limits were established at the relevant time. The front of the property faces Calgary's 69 Street SW. The property consists of 4.81 acres of land together with improvements on the land including a residential dwelling with a double attached garage and a landscaped front yard, an indoor swimming pool, a semi-circular asphalt surface driveway, an old hay shed and a horse corral. The back portion of the property is heavily treed.

5.              From September 1, 1977 to September 1, 1988, Benediktson and his wife Audrey Benediktson owned the property, which they purchased jointly at a price of $175,000.00.

6.              On September 1, 1988 (the "Valuation Date"), Benediktson and his wife transferred both of their interests in the property to Investments for a stated value of $620,000.00 in exchange for a shareholder loan (the "Debt") in Benediktson's favour, and a credit entry was made to his shareholder loan account with Investments for the $620,000.00.

7.              In July 1989, a proposed annexation of the region which included the property was refused by the City of Calgary.

8.              In its fiscal year ended August 31, 1992, Investments transferred all of its assets out of the corporation and the proceeds were debited against Benediktson's shareholder loan account.

9.              As part of that transaction, on December 24, 1991, Investments disposed of the property to Benson Ranch Inc. for proceeds of disposition of $360,000, allocated as follows:

                                                Land                        $200,000.

                                                Buildings                $160,000.

                                                Total                        $360,000.

10.            The property was annexed into the City of Calgary on July 1, 1995.

11.            In computing income of the 1992 taxation year, Investments reported a business loss in the amount of $260,000 from the disposition of the Benson Land.

12.            In computing income for his 1991 taxation year, Benediktson claimed a deduction for an allowable business investment loss in the amount of $121,830 from the disposition of land and buildings, which arose in connection with the $620,000 debt owing to him from Investments, on the basis that it had become a bad debt in that year. In respect of his 1992 taxation year, Benediktson did not claim an allowable business investment loss when filing his return, but instead made a request to claim an additional amount of $73,576 as an allowable business investment loss in his 1992 taxation year, after the return was filed.

13.            The Minister of National Revenue (the "Minister") reassessed Benediktson for his 1991 and 1992 taxation years and reassessed Investments for its taxation year ended August 31, 1992 on the basis that the value of the Property on the Valuation Date was $350,000.00. allocated as follows:

                                                Land                        $190,000.

                                                Buildings                $160,000.

                                                Total                        $350,000.

14.            In reassessing Investments for its 1992 taxation year, the Minister disallowed the loss to the extend of $260,000 on the sale of the property and determined a gain on its sale in the amount of $10,000, calculated as follows:

                                Proceeds of Disposition - land           $200,000.

                                Adjusted Cost Base - land                  $190,000.

                                Gain - land                                                              $ 10,000.

15.            Benediktson previously claimed capital gains exemptions in the amount of $99,944.

[3]            In computing income for the 1992 taxation year, the Appellants reported a business loss in the amount of $260,000 from the disposition of the property. In assessing the Appellants for the 1992 taxation year, the Minister disallowed the loss to the extent of $260,000 on the sale of the property and determined a gain on the sale in the amount of $10,000. The Appellants submit that the property had a fair market value of $620,000 on September 1, 1988 and the Respondent's position is that its value was $350,000.

[4]            Both parties submitted an appraisal report and the appraisers testified to support their divergent values. Mr. Edward H. Wernick testified on behalf of the Appellants and Mr. Peter Lee for the Respondent. They were qualified to give expert evidence. The method utilized by both appraisers was based upon the "highest and best use analysis". They agreed that the Sales Comparison Approach was the preferred approach. From that point their analysis differed.

[5]            The Sales Comparison Approach as defined in the Appellants' appraisal is:

A set of procedures in which a value indication is derived by comparing the property being appraised to similar properties that have been sold recently, applying appropriate units of comparison, and making adjustments to the sale prices of the comparables based on the elements of comparison. The sales comparison approach may be used to value improved properties, vacant land, or land being considered as though vacant; it is the most common and preferred method of land valuation when comparable sales data are available.

[6]            Mr. Wernick concluded that the highest and best use for the land was for a planned residential development or as a rural holding land. Mr. Lee concluded that the highest and best use for the land was the continuation of the existing use as a single family dwelling until such time as the site was right for urban development.

[7]            The vastly different values arrived at are as a result of the very different properties that each appraiser chose as comparables. Mr. Wernick compared the Benson Property to four properties in the vicinity yet within the Calgary city limits and all zoned for multi-residential development. Mr. Lee chose four properties in the same municipality as the subject property, all having a country residential use with an agricultural zoning. For the reasons that follow, I accept the evaluation of the Respondent. The primary defect in the Appellants' appraisal is the selection of properties used as comparables.

[8]            The Appellants' appraiser concluded that because annexation of the land appeared to be imminent, the property could be compared to lands in the City of Calgary that were already zoned for multi-residential development. This is a false premises, I agree with the Respondent's appraiser who took the property as it was and not as what it could be after annexation and rezoning. There is no doubt that a purchaser in 1988, with the intention of developing the property, would have included a condition in any agreement requiring that the lands be annexed and rezoned prior to completion of the transaction.

[9]            In dealing with highest and best use, I agree with the conclusion of the Respondent's appraiser who wrote the following at pages 26 and 27 of his report:

In the event that the annexation is successful, the owner of the subject property would face three alternatives:

(1)            To leave the property as is.

(2)            Utilize the subject site for urban development. Under this scenario, the existing improvements would probably be removed and considered to have no value.

(3)            To keep the existing dwelling and subdivide the back portion of the site out for urban development.

Scenario (1) is likely to be a short term proposition. Normally, it takes a number of years before development starts in a newly annexed area. Many planning and engineering studies need to be done (by Building & Planning, Transportation, utilities, etc.) follows by the drafting of an Area Structural Plan, Design Brief, designation of land use, etc. Therefore, the existing uses usually carry on for many years after the annexation until all the planning are in place.

Scenario (2) will occur only when the value of the subject land equals to or exceeds the value of the property as improved. Under this scenario, the existing improvements are said to have no contributory value and should be demolished to make room for new development. To examine the validity of Scenario (2), a land value (as annexed with development potential) versus the value as improved at the effective date type of comparison was made (as shown on Page 57 & 58 of this report). The analysis revealed that the value of the subject land - assuming a successful annexation, is not equal to or higher than the value of the subject property as improved near the date of the appraisal.

Scenario (3) can only happen after a successful annexation and planning in place. As at the date of the appraisal, the subject site is not permitted for subdivision under the Municipal District of Rocky View Land Use By-Law.

After analyzing all the pertinent factors, it is estimated that the highest and best use of the subject property as at the effective date - September 1, 1988, is the continuation of the existing use until such time when the site is ripe for urban development.

[10]          I conclude that the Minister properly calculated the amount that should have been credited to the Appellants' shareholder loan account from the disposition of the property and the Minister properly determined that the Appellants are not entitled to an allowable business investment loss of $121,830 and $73,576 in 1991 and 1992 taxation years, respectively.

[11]          The appeals are dismissed, with costs.

Signed at Ottawa, Canada, this 6th day of January 1998.

" C.H. McArthur "

J.T.C.C.