[OFFICIAL ENGLISH
TRANSLATION]
Date:
20021206
Docket:
2000-4081(GST)G
BETWEEN:
LE
11675 SOCIÉTÉ EN COMMANDITE,
Appellant,
and
Her Majesty The Queen,
Respondent.
REASONS FOR JUDGMENT
Tardif,
J.T.C.C.
[1] This is an appeal from an assessment numbered 8214155,
made on February 10, 1999, and confirmed on August 9, 2002. The
assessment covered the period from May 26, 1995, to
June 30, 1997, and dealt with the Goods and Services Tax ("the
GST").
[2] The appellant company, a registrant for the
purposes of the application of the GST, was required to self-assess on the Fair
Market Value ("the FMV") of the building constructed in Saint‑Georges,
Beauce, Quebec.
[3] The respondent set the FMV of the taxable
part of the building at $2,814,269 as at April 1, 1996, whereas the
appellant company self-assessed on an amount of $2,479,415. The respondent also
added interest and penalties to the assessment.
[4] The subject of the assessment is a part of a
six-storey building. The ground floor, with an area of 14,000 square feet,
was occupied by a department store; only the floors above the ground floor are
involved in the assessment.
[5] The five floors on the basis of which the
assessment was made are: the second floor with various administrative areas,
common rooms, meeting rooms, a kitchen and a dining room, all designed to meet
the needs of the senior citizens who are to occupy the four other floors, each
with 17 units, for a total of 68 units.
[6] Initially, the project was to have two
phases; some Phase I facilities were developed in order to eventually serve
Phase II. On the date of the valuation, Phase II was not completed.
[7] What must essentially be determined is the
FMV of the residential part of Phase I and whether the penalties were
justified.
[8] The appellant company is a limited
partnership that owns a building that was completed around April 1, 1996,
when the first tenants began to move in.
[9] The ground floor, occupied by the
"Rossy" department store, was determined to have a commercial
purpose. The other floors, five in total, had a residential rental purpose as a
seniors' residence providing a number of services.
[10] In anticipation of the hearing of its appeal,
the appellant company retained the services of an expert to set the FMV. After
studying the case, the expert valued the GST-taxable part of the building at
$2,178,000.
[11] Having already stated in its Notice of Appeal
that the building had a value of $2,479,415, the appellant company made an oral
application for leave to file an amended Notice of Appeal reducing the
previously stated value of $2,479,415 to $2,178,000. The respondent objected,
arguing that a judicial admission was involved that should form part of the
case.
[12] In support of its claims, the appellant
company argued that what was involved was not a judicial admission but,
essentially, an admission of no consequence, the sole purpose of which was to
come to an agreement. In its Notice of Appeal, the appellant company stated as
follows:
[translation]
Your applicant
estimated the market value of Phase I thus defined at $2,479,415.
[13] In the Reply to the Notice of Appeal, the
respondent stated as follows, at paragraph 6:
[translation]
It denies the
truth of paragraphs 9, 10, 11, 12 and 13 of the Notice of Appeal as written.
[14] The appellant company argued that an
admission was not involved and, alternatively, that if an admission were
involved, the appellant company should be granted leave to withdraw it on the
basis of fairness given that, in its opinion, only an expert was qualified to
set the FMV; because the appellant company was not an expert in this field and
the expert that was retained subsequently set a much lower FMV, the FMV set at
the time of the Notice of Appeal should not be used as an admission.
[15] Taxpayers subject to the tax are required not
to hire an expert to set the FMV but to simply pay the tax on the FMV. From the
outset, we can assume that the first reaction of taxpayers subject to the tax
is to underestimate the FMV, on the basis that they can discuss and even
negotiate to ultimately reach a compromise, with the normal and indeed
legitimate objective of avoiding paying the substantial fees of a professional
appraiser or of avoiding paying tax not payable.
[16] In this case, the situation was quite
different. According to the appellant company, it overestimated the FMV, not
wanting to spend substantial fees to have a report prepared by an expert; it
indicated the stated value essentially to come to an agreement.
[17] I do not believe that what was involved was a
simple statement made as part of a discussion in order to come to a settlement
or a compromise for the purpose of avoiding the costs of a court case.
[18] What was involved was a statement issued in
an important legal proceeding, that is, the Notice of Appeal. There is no doubt
that this statement was indeed a judicial admission: acknowledgement of a fact
that was likely to produce legal repercussions and effects against the person
who makes it.
[19] Is it possible to withdraw such an admission?
It is appropriate to reproduce certain relevant legislative provisions:
Civil code of Québec, Book Seven, Evidence
2850. An admission is the
acknowledgment of a fact which may produce legal consequences against the
person who makes it.
2852. An admission made by a
party to a dispute or by an authorized mandatary makes proof against him if it
is made in the proceeding in which it is invoked. It may not be revoked, unless
it is proved to have been made through an error of fact.
The probative force of
any other admission is left to the appraisal of the court.
Canada Evidence Act
40. In all proceedings over
which Parliament has legislative authority, the laws of evidence in force in
the province in which those proceedings are taken, including the laws of proof
of service of any warrant, summons, subpoena or other document, subject to this
Act and other Acts of Parliament, apply to those proceedings.
Tax Court of Canada Rules
(General Procedure)
54. A pleading may be amended
by the party filing it, at any time before the close of pleadings, and
thereafter either on filing the consent of all other parties, or with leave of
the Court, and the Court in granting leave may impose such terms as are just.
132. A party may withdraw an
admission made in response to a request to admit, a deemed admission or an
admission in the party's pleading on consent or with leave of the Court.
The FMV indicated in the initial
Notice of Appeal of Phase I constitutes a judicial admission. From the
appellant company's point of view, it is an unfavourable admission in that it
sets the FMV higher than the FMV subsequently set by the accredited appraiser.
Since the amount of tax payable by the appellant company is computed on the
basis of this FMV, it is in the appellant company's interest that the FMV be
set as low as possible. In indicating $2.4 million in the initial Notice
of Appeal, the appellant company made this judicial admission; in filing an
amended Notice of Appeal, it now wishes to withdraw that admission.
In considering the judicial
admission and the criteria to be applied in determining whether to allow its
withdrawal, in accordance with section 40 of the Canada Evidence Act
(reproduced on page 4) I must rely on Quebec civil law. Here is what the Civil
code of Québec provides concerning the withdrawal of a judicial admission:
2852. An admission made by a
party to a dispute or by an authorized mandatary makes proof against him if it
is made in the proceeding in which it is invoked. It may not be revoked, unless
it is proved to have been made through an error of fact.
[20] Non-revocability
is the rule; revocability is the exception. On this point, Professor Jean-Claude Royer writes as follows:
[translation]
A judicial admission may
be made by a litigant or the litigant's counsel within the limits of the
counsel's mandate. If it is the result of an error of fact, it may be revoked
by means of an oral or written motion for its withdrawal or for the amendment
of a written pleading. The person who has made the admission shall claim and
prove the error of fact to the Court's satisfaction. In our opinion, in making
the motion for withdrawal of the admission or for amendment of a pleading, that
person need not establish that the admitted fact is false. That person need
only establish that the admission was made in good faith, through an error of
fact. The courts more readily allow revocation of an admission made by counsel.
[21] In
Terlesian v. Manoukian, [1997] Q.J. No. 3768
(Q.L.), Bishop J. of the Quebec Superior Court discusses the revocability of
judicial admissions at paragraphs 26 and 30 of his decision. Two relevant
passages are quoted:
[translation]
26. Article 2852 of the Civil
code of Quebec does not allow the revocation of a judicial admission unless
it is proved to have been made through an error of fact. The error of fact must
exist at the time of the admission. The onus of proving that error is on the
defendant.
...
31. The Court considers that
the evidence has not established the probability that the defendant made the
admissions at paragraphs 2 and 7 of his defence through an error of fact.
Although the defendant claimed to have expressed his intent erroneously in his
October 1994 defence, the fact that he waited 32 months until the
hearing on the merits before correcting his "error" suggested,
instead, that his actual intention was, and still is, to delay the action.
[22] The
general rule governing amendments in general, as opposed to amendments of
pleadings in which a judicial admission has been made, was set out by the
Federal Court of Appeal in Canderel Limited v. Canada, [1993] DTC 5357, at page 5360:
... the general rule is
that an amendment should be allowed at any stage of an action for the purpose
of determining the real questions in controversy between the parties, provided,
notably, that the allowance would not result in an injustice to the other party
not capable of being compensated by an award of costs and that it would serve the
interests of justice.
[23] In
Shaw
Communications Inc. v. Canada, [2001] T.C.J. No. 489 (Q.L.), Mogan J.
states, at paragraph 5: "The question is whether it is more
consistent with the interests of justice that the withdrawal be permitted or
that it be denied." In Continental Bank Leasing Corporation v. The
Queen, [1993] DTC 298, Bowman J. writes as follows, at page 302:
... I prefer to put the
matter on a broader basis: whether it is more consonant with the interests
of justice that the withdrawal or amendment be permitted or that it be denied.
The tests mentioned in cases in other courts are of course helpful but other
factors should also be emphasized, including the timeliness of the motion to
amend or withdraw, the extent to which the proposed amendments would delay the
expeditious trial of the matter, the extent to which a position taken
originally by one party has led another party to follow a course of action in
the litigation which it would be difficult or impossible to alter and whether
the amendments sought will facilitate the court's consideration of the true
substance of the dispute on its merits. No single factor predominates nor
is its presence or absence necessarily determinative. All must be assigned
their proper weight in the context of the particular case. Ultimately it
boils down to a consideration of simple fairness, common sense and the interest
that the courts have that justice be done.
(Emphasis
added.)
[24] Lastly,
in Andersen
Consulting v. Canada, [1998] 1 F.C. 605, at page 612, the
Federal Court opted for a flexible approach:
We must ensure that the
procedure to withdraw admissions is not made so complex and so stringent that
virtually no admissions will be made by defendants.
[25] In light of the comments by these authorities,
should the appellant company
be granted leave to amend the amount of the FMV? In order for someone to be
relieved from the consequences of an admission, it must be established that the
admission was made through an error. In this regard, the evidence does not show
that there was any error.
[26] I answer this question in the negative for
the following reasons:
·
The appellant company
had the knowledge, the experience and, most importantly, all the relevant
information to conclude that the FMV was $2,479,415, a figure arrived at with
the assistance of its very well-informed accountant.
·
Were
one or more errors made that could explain the valuation of $2,479,415?
[27] The appellant company adduced no evidence
establishing that significant errors were made other than to state that the
appellant company was not an expert in this field. The evidence has in fact
established that Jean-Jacques Verreault had considerable experience in this
field. Neither the accountant Michel Paquet nor Roch Lessard were
professional appraisers; they both had appreciable knowledge for the purposes
of determining the FMV—one of them was an accountant who had access to all the
relevant documents and the other was a construction expert.
[28] As well, this matter involved a new building,
a project with which both these persons had been closely associated. These
facts did not automatically rule out the possibility of making one or more
errors, but what needed to be established was that the valuation of
$2,479,415 had been made through one or more errors, and this was not
done.
[29] I find that this admission was binding on the
appellant company since there was no evidence that it was made through an
error. The application for leave to file an amended Notice of Appeal reducing
the previously stated FMV is therefore dismissed.
[30] Concerning the issue of the FMV of the
GST-taxable part of the building, an analysis of the two valuations prepared by
the experts mandated by the parties should be made.
[31] Although generally accepted trade practices
in valuation provide for various methods or approaches in setting the FMV of a
building, that is, the parity method, the replacement cost method, and the
income method, both experts agreed that the most appropriate method, which
should be preferred in the circumstances, was the income method.
[32] Both experts agreed in stating that the FMV
should be set using the income method rather than on the basis of the
construction cost, the standard cost, the municipal assessment, or even the
comparables resulting from the resale of the building in 1999.
[33] The experts therefore preferred the income
method. They agreed on the capitalization rate and on a number of important
factors.
[34] The expert Jean-Jacques Verreault prepared a
valuation report that appeared to be very well researched, well documented and
detailed, thus creating a presumption that he had done very high-quality work
and had followed generally accepted trade practices.
[35] Mr. Verreault's testimony established
that the reality was just the opposite. This point is quite clearly made in the
following excerpts, as recorded at pages 132, 133 and 134 of the transcript:
[translation]
Q. Mr. Verreault,
if I understand correctly, your bible for valuation in this case, if I may
phrase it that way, consisted of the financial statements of 11675?
A. Villa
du Jasmin and the limited partnership, yes.
Q. All
right. Did you question some expenditure items in those financial statements,
particularly to see if they corresponded to market standards?
A. No.
I questioned ... I questioned the expenditure items in order to understand
them, because it wasn't ... the breakdown of the expenditure items shown on the
balance sheet is not the same as in our valuation reports, but I did not
question why the items did not correspond or might not have corresponded to
market standards.
And,
as well, Your Honour, someone who buys a building isn't buying market
statistics. Whether it's a hotel, an apartment building, an inn or a seniors'
residence, what the potential investor wants to know is, "Show me the
income, show me the expenditures; I'll figure out what kind of yield I can get
on my investment and I'll make you an offer to purchase."
That's
the basic principle of anyone who invests in the economy, in every country;
that's the way it works. An investor doesn't work with statistics.
JUDGE
TARDIF
Q. Normally,
that should show up in the subsequent sales contract.
A. What
should?
Q. What
you just stated.
A. Yes.
MICHEL
MOREL
Q. Do
you agree with me, Mr. Verreault, that an investor will not be content
with looking at a business's financial statements, particularly in the case of
a building that is a seniors' residence? An investor will look at what is going
on in the market, too.
A. Yes,
of course. A well-informed investor will try to find comparable factors, see
how buildings have sold elsewhere, and look at the ratios.
Q. Do
you agree with me ...
A. In
this case, there is no parity.
...
[36] Concerning the parking spaces, Mr. Verreault
answered as follows, as recorded at page 112 of the transcript:
[translation]
Q. Do
you agree with me that Rossy does not occupy all the space indicated in dark
gray?
A. I
don't remember.
Q. You
don't remember.
A. No.
I visited the building once, when it was on my way. I don't remember.
Q. In
your opinion, how many parking spaces are available for the residents?
A. I
cannot answer the question; I don't know that either.
Q. You
don't know that either.
A. No.
Q. You
do ... you agree with me that the parking spaces, the parking area, is a ... is
part of the building construction, do you?
A. Yes,
yes.
[37] Concerning economic obsolescence, Mr.
Verreault answered questions as follows, as recorded at pages 117 and 118 of
the transcript:
[translation]
Q. Very
well. Concerning economic obsolescence, Mr. Verreault, you use a factor of
20 per cent, am I right?
A. Yes,
yes.
Q. And,
in your testimony, you tell us that you are justified in using that factor
because of external reasons, external factors; you even mentioned a change of
government as a reason.
A. Yes.
Q. On
the other hand, in your report, you tell us that the reason you use the 20 per
cent factor is that the supply was greater than the demand.
A. That
too. There are many reasons, but what I explained in particular, Your Honour,
is that economic obsolescence is external to us. It is external to the
building: it's economic; it has to do with the economy. It can be caused by a
great many factors: excessively high unemployment in a region; supply and demand
that differ from one region to another. We have just ... we have just ...
Everyone reads the papers, and in Quebec we have just experienced 10 years
during which, in the residential market, houses were selling roughly at or
below the municipal assessments.
Now, for the past
nine or 10 months, it's been a frenzy: houses have been selling at 25 and
30 per cent above the municipal assessments; there aren't even any
apartments left for tenants. Over a 10-year period, we were subject to external
economic factors. Today, a house that sold for $100,000 seven or eight
years ago, still in the same location, still of the same quality and still well
maintained, sells for $40,000 more, and it's still the same house and the
same materials.
Q. O.K.
A. Economic
obsolescence is external to us.
Q. Mr. Verreault,
do you agree with me that the project, Phase I, is a major project and that in
1996 there were no projects of that quality in Saint-Georges, Beauce?
A. No,
there were none.
[38] Concerning the sale of the building and a
lease covering the premises directly subject to the valuation, Mr. Verreault
answered as follows, as recorded at pages 121, 122 and 123 of the transcript:
[translation]
Q. All
right. Mr. Verreault, still using your income method, in terms of
expenditures and taxes, in computing the tax expenditure, did you take the
leases into account? For example, in allocating the tax expenditures, did you
take into account the lease between the appellant company and Villa du Jasmin?
A. I
don't understand your question; do you mean the percentage 76 per cent/24
per cent that I use?
Q. Mr. Verreault,
under the lease between 11675 and Villa du Jasmin, is the lessor not
responsible for only one-sixth of the taxes and the tenant for five-sixths?
A. I
don't know.
Q. You
are not aware of that.
A. No.
Q. Are
you aware that, under that same lease, Villa du Jasmin is responsible for
heating?
A. No.
Q. You
are not aware of that either?
A. The
heating of the commercial part of the building is paid by ...
Q. I
shall find a copy of the contract. Take clause 9.
A. The
tenant shall pay the cost of the electricity used for the operation and heating
of the premises rented under the terms of this agreement. As well, the tenant
alone shall pay for the cost of cleaning maintenance of the rented premises.
Q. So,
responsibility for the heating and electricity expenditure, Mr. Verreault,
did you take that into account in your ... in computing the heating and
electricity expenditure?
A. Yes.
Well, on the balance sheet, the owner pays only the residential heating. In the
owner's heating and electricity expenditures, the meters are separate. Rossy
has its own meters.
Q. No,
I am not talking to you about Rossy, Mr. Verreault; I am talking to you
about the lease.
A. What
lease?
Q. The
lease signed between the appellant company and Villa du Jasmin.
A. Oh,
I'm not aware of that lease. I have never seen it in my life.
Q. Very
well.
A. That
has nothing to do with ...
Q. As
well, were you aware that, under that same lease, Villa du Jasmin is
responsible for five-sixths of the insurance?
A. No.
Personally, I have never seen that lease.
[39] The burden of proof was on the appellant
company.
[40] Mr. Verreault, the expert for the
appellant company, had the qualifications to prepare and to submit the
conclusions resulting from exhaustive research and work. He submitted a
valuation report that appeared to be very well documented and well researched;
in fact, however, he essentially used the figures indicated on the unaudited balance
sheet prepared by Mr. Paquet, the accountant for the appellant company.
Mr. Verreault preferred doings things the easy way rather than doing them
meticulously.
[41] Even though the valuation was to be prepared
specifically as at April 1, 1996, at the time of his analysis, Mr.
Verreault compiled the available accounting figures covering a period of two or
three years and then averaged those figures. All the figures used had been
recorded after the date at which the valuation was to be prepared.
[42] Although a new building was involved,
Mr. Verreault used an economic obsolescence factor of 20 per cent.
[43] Mr. Verreault did not take into account
the fact that the initial project included two phases with some infrastructures
that are common but connected to Phase I, which is the sole subject of the
appeal.
[44] Changed substantially sometime later, the
whole project had a direct and significant effect on certain accounting figures
used to prepare the valuations. In making a valuation as at a previous date, it
was neither wise nor reasonable to limit the exercise to determining average
figures.
[45] Valuing a building as at a specific date
several years prior to a given period is a difficult exercise, in the course of
which it can be tempting to use figures that were neither known nor available
then but that have become accessible in the interim and are available at the
time of valuation.
[46] Thus it is always easier and simpler to set a
value on the basis of accounting figures indicated in financial statements; the
exercise then consists in claiming that the figures reflected reality on the
day the value was to be crystallized.
[47] Valuing a building as at a specific date in
the past implies using hypothetical figures that must be validated by reference
to various statistics and standards to ensure that the result obtained is
objective.
[48] In this case, the experts agreed that it was
judicious to use the income method: in their opinion, the other methods were
not appropriate given the circumstances and the location of the building.
[49] In light of that opinion, it then became
essential that certain items of both income and expenditure be subjected to an
in-depth, detailed analysis, particularly since only one method appeared
appropriate for valuing the building at the time.
[50] Limiting oneself to averaging the figures
from three years of operations certainly did not respect generally accepted
trade practices since subjective factors, which in this case had to be changed
following the considerable alteration of the initial project, had a significant
effect on the result.
[51] Not only was the work done by the expert for
the appellant company questionable but it was also done the easy way, in that
the figures used came from the unaudited financial statements compiled by the
appellant company's accountant. This harsh assessment of the quality of the
work done by the expert for the appellant company is quite apparent from the
following excerpts from his testimony, which, in order to make this judgment
easier to read, are reproduced once again:
[translation]
Q. Do
you agree with me that Rossy does not occupy all the space indicated in dark
gray?
A. I
don't remember.
Q. You
don't remember.
A. No.
I visited the building once, when it was on my way. I don't remember.
Q. In
your opinion, how many parking spaces are available for the residents?
A. I
cannot answer the question; I don't know that either.
Q. You
don't know that either.
A. No.
Q. You
do ... you agree with me that the parking spaces, the parking area, is a ... is
part of the building construction, do you?
A. Yes,
yes.
...
Q. Very
well. Concerning economic obsolescence, Mr. Verreault, you use a factor of
20 per cent, am I right?
A. Yes,
yes.
Q. And,
in your testimony, you tell us that you are justified in using that factor
because of external reasons, external factors; you even mentioned a change of
government as a reason.
A. Yes.
Q. On
the other hand, in your report, you tell us that the reason you use the 20 per
cent factor is that the supply was greater than the demand.
A. That
too. There are many reasons, but what I explained in particular, Your Honour,
is that economic obsolescence is external to us. It is external to the
building: it's economic; it has to do with the economy. It can be caused by a
great many factors: excessively high unemployment in a region; supply and
demand that differ from one region to another. We have just ... we have
just ... Everyone reads the papers, and in Quebec we have just experienced
10 years during which, in the residential market, houses were selling roughly
at or below the municipal assessments.
Now, for the past
nine or 10 months, it's been a frenzy: houses have been selling at 25 and
30 per cent above the municipal assessments; there aren't even any
apartments left for tenants. Over a 10-year period, we were subject to external
economic factors. Today, a house that sold for $100,000 seven or eight
years ago, still in the same location, still of the same quality and still well
maintained, sells for $40,000 more, and it's still the same house and the
same materials.
Q. O.K.
A. Economic
obsolescence is external to us.
Q. Mr. Verreault,
do you agree with me that the project, Phase I, is a major project and that in
1996 there were no projects of that quality in Saint-Georges, Beauce?
A. No,
there were none.
Q. There
were none. It's a really attractive project, isn’t it?
A. Very
attractive.
Q. When
was the building sold, Mr. Verreault; do you remember?
A. No
idea.
Q. You
mention it; you mention it in your report.
A. I
do?
Q. Yes.
Go to page 32, Mr. Verreault, if you please.
A. Yes.
Q. I
imagine you read the contract of sale when you wrote that?
A. Well,
in doing a search at the registry office, we saw the index to immoveables, the transaction,
but we didn't see the contract, no.
...
Q. Would
you go to page 14 of the contract, Mr. Verreault?
CLERK
Exhibit
I-6?
MICHEL
MOREL: I-6
EXHIBIT
I-6
Agreement
of sale of the building
MICHEL
MOREL
Q. Will
you look at clause 14?
A. Yes.
Q. What
share is indicated for the commercial part of the building?
A. $1,300,000,
plus the commercial land at $30,000.
Q. If
we exclude the land, then for the commercial part of the building
$1,300,000 is indicated; do you agree with me?
A. Well,
that's what I read here.
Q. And
do you also agree with me that the commercial part of the building is located
only in Phase I of the project?
A. Yes.
Q. You
agree with me? Elsewhere, on page 52 of your report, you yourself value the
commercial part of the building at $665,000.
A. Yes.
Using the economic method?
Q. Page
52.
A. Yes.
Q. How
do you reconcile the two amounts, Mr. Verreault?
A. I
have no idea. What I estimated was the market value.
Q. All
right. Mr. Verreault, still using your income method, concerning
expenditures and taxes, in computing the tax expenditure, did you take the
leases into account? For example, in allocating tax expenditures, did you take
into account the lease between the appellant company and Villa du Jasmin?
A. I
don't understand your question; do you mean the percentage 76 per cent/24
per cent that I use?
Q. Mr. Verreault,
under the lease between 11675 and Villa du Jasmin, is the lessor not
responsible for only one-sixth of the taxes and the tenant for five-sixths?
A. I
don't know.
Q. You
are not aware of that.
A. No.
Q. Are
you aware that, under that same lease, Villa du Jasmin is responsible for
heating?
A. No.
Q. You
are not aware of that either?
A. The
heating of the commercial part of the building is paid by ...
Q. I
shall find a copy of the contract. Take clause 9.
A. The
tenant shall pay the cost of the use of electricity for the operation and
heating of the premises rented under the terms of this agreement. As well, the
tenant alone shall pay for the cost of cleaning maintenance of the rented
premises.
Q. So,
responsibility for the heating and electricity expenditure, Mr. Verreault,
did you take that into account in your ... in computing the heating and
electricity expenditure?
A. Yes.
Well, on the balance sheet, the owner pays only the residential heating. In the
owner's heating and electricity expenditures, the meters are separate. Rossy
has its own meters.
Q. No,
I am not talking to you about Rossy, Mr. Verreault; I am talking to you
about the lease.
A. What
lease?
Q. The
lease signed between the appellant company and Villa du Jasmin.
A. Oh,
I'm not aware of that lease. I have never seen it in my life.
Q. Very
well.
A. That
has nothing to do with ...
Q. As
well, were you aware that, under that same lease, Villa du Jasmin is
responsible for five-sixths of the insurance?
A. No.
Personally, I have never seen that lease.
...
Q. Mr. Verreault,
if I understand correctly, your bible for valuation in this case, if I may
phrase it that way, consisted of the financial statements of 11675?
A. Villa
du Jasmin and the limited partnership, yes.
Q. All
right. Did you question some expenditure items in those financial statements,
particularly to see if they corresponded to market standards?
A. No.
I questioned ... I questioned the expenditure items in order to understand
them, because it wasn't ... the breakdown of the expenditure items shown on the
balance sheet is not the same as in our valuation reports, but I did not
question why the items did not correspond or might not have corresponded to
market standards.
...
JUDGE TARDIF
Q. Normally,
that should show up in the subsequent sales contract.
A. What
should?
Q. What
you just stated.
A. Yes.
MICHEL
MOREL
Q. Do
you agree with me, Mr. Verreault, that an investor will not be content
with looking at a business's financial statements, particularly in the case of
a building that is a seniors' residence? An investor will look at what is going
on in the market, too.
A. Yes,
of course. A well-informed investor will try to find comparable factors, see
how buildings have sold elsewhere, and look at the ratios.
Q. Do
you agree with me ...
A. In
this case, there is no parity.
...
Q. Do
you agree with me, Mr. Verreault, that financial statements, particularly
unaudited financial statements, are merely working tools for valuation
purposes?
A. Listen,
those are financial statements prepared by a chartered accountant. I don't know
what you mean or what you want to imply by that, but they were prepared by a chartered
accountant who is responsible for his profession, and it's not my job to
question his work.
Q. Am
I to conclude, then, Mr. Verreault, that your work is limited to averaging
figures from financial statements that the accountant has given you, financial
statements that are unaudited?
A. In
this case, we worked with the financial statements, yes.
[52] It appears from the evidence that
Jean-Jacques Verreault
did not take the parking spaces into account. He overestimated certain income
items. He used an economic obsolescence factor of 20 per cent for a new
building; he completely disregarded the lease between limited partnership No. 11675
and Villa du Jasmin, which provided figures that were very helpful for the
valuation.
[53] On the other hand, Francyne Bélanger, the
expert who has worked for the respondent for a number of years, did flawless
work. The high quality of her work was made clear by her testimony. She made a
thorough analysis of each item of both income and expenditure.
[54] Even though her status as an employee might
adversely affect the quality of her work in terms of the objectivity of her
valuation, she overcame this difficulty brilliantly. The expert having used
various external figures, it was easy to cast doubt on the accuracy of those
figures. However, that did not affect the quality or the credibility of this
expert's conclusions.
[55] The excellent cross-examination to which this
expert was subjected did not succeed in bringing to light any significant flaw
that could discredit the quality of her work, which respected generally
accepted trade practices. Quite the contrary¾ it enabled her to describe in
even greater detail the responsible approach she had taken.
[56] Counsel for the appellant company argued that
the lease between the appellant company and Villa du Jasmin was inappropriate:
the two corporations were not dealing with each other at arm's length, and the
content of the lease was therefore neither relevant nor reliable.
[57] That legal reality might have made a conclusion
such as that possible but did not make it automatic. What would have needed to
be established is that the rights and obligations of the parties to the
contract were determined by the fact that they were not dealing with each other
at arm's length and, on the balance of evidence, that the content of the
contract was significantly different from what it would have been had the
contract been entered into between third parties.
[58] I therefore accept the conclusions resulting
from the work of Ms. Bélanger, and I find that the before-tax value of the
building owned by the appellant company was $2,750,208 as at
April 1, 1996.
[59] Since this FMV was lower than the FMV that
formed the basis for the assessment being appealed from, I allow the appeal in
that the case is to be returned for reassessment on the basis that the value of
the GST-taxable part of the building as at April 1, 1996, was
$2,750,208.
[60] Where the penalties are concerned, the
appellant company established that it acted diligently in self-assessing on the
basis of a value that was not completely arbitrary in the circumstances. A
variation of 10 per cent on an overall valuation of nearly
$3 million certainly does not justify a finding of carelessness, neglect,
or any omission; the valuation was made by an accountant whose good faith
cannot be called into question.
[61] As well, the experts indicated that this was
a special case in which it was relatively difficult to use the traditional
methods in setting the taxable value.
[62] The special nature of the case is thus an
additional factor in evaluating the appellant company's responsibility; the
evidence has shown that the appellant company had acted responsibly and in good
faith. Thus, there is no need to maintain the penalties, and I therefore set
them aside.
[63] For all these reasons, the appeal is allowed
in part, in that the penalties are set aside and the taxable FMV of the
building located at 11765, 11795, 1ère Avenue Est,
Saint-Georges, Beauce, Quebec, is determined to be $2,750,208, the whole with
costs to the respondent.
Signed at Ottawa, Canada, this 6th day of December 2002.
J.T.C.C.
Translation certified true
on this 26th day of January
2004.
Sophie Debbané, Revisor
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