[OFFICIAL ENGLISH TRANSLATION]
Date: 20020129
Docket: 2000-381(IT)G
BETWEEN:
DENIS GAGNÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal for the 1994
taxation year.
[2] The issues are as follows:
· Could the
appellant be assessed after the normal reassessment period for
the 1994 taxation year as a result of his waiver?
· What was
the fair market value on February 22, 1994, of the lots
located at 100, 142, 150 and 158 Rue Des Lilas in
Victoriaville?
· What was
the amount of the capital gain realized by the appellant on the
deemed disposition of the aforementioned lots on
February 22, 1994?
[3] The respondent informed the
appellant in July 1998 of his intention to proceed with a general
tax audit of his file relating to the operation of the bar doing
business under the trade name Bar Tabou, for the period from
January 1, 1995 to December 31, 1997.
[4] At or around the same time, on an
undetermined date, the auditor responsible was questioning his
personal file with regard to the fair market value of the
immovables, that is, the lots at 100, 142, 150 and 158 Rue
Des Lilas in Victoriaville. The lots were part of the larger
whole that was lot 85 in the parish of St-Victoire,
and the appellant had filed the election form (T664) in order to
have a deemed capital gain in respect of the said lots on
February 22, 1994.
[5] The appellant explained the
circumstances of the audit, saying that he had relied on his
accountant. The audit was in fact conducted from his
accountant's place of business.
[6] Some time after the audit
commenced, the appellant says, he received a call asking him to
go to his accountant's office to sign the document which
proved to be a waiver.
[7] Knowing nothing of the content or
consequences of such a waiver, he candidly asked his accountant
for advice before signing, and did so before the auditor, who was
present at the time.
[8] The auditor then asked him whether
he was convinced that the value he had attributed to his lots was
the actual fair value.
[9] The appellant answered that he
was, spontaneously giving the source and origin of the criteria
used to determine the attributed value, thus confirming that that
value was the fair market value. He then agreed to sign the
waiver without any further explanation.
[10] After signing the waiver, he learned
from those present that it was now extremely important that the
attributed value correspond to the actual value of the lots in
February 1994. To demonstrate that it did, he was told, he would
eventually have to rely on experts to prove it before the Court.
Overwhelmed and shaken at the prospect of all the unknowns that
lay before him, he then severely reprimanded his accountant for
not explaining everything to him before he had signed.
[11] He explained how he had determined the
value of his lots. Having received two unsolicited offers from
major real estate developers known in the Victoriaville region,
namely an offer for $150,000 and another for $180,000, he had
calculated the average and considered that that was the actual
fair value of those lots. The evidence revealed that the
developers were shrewd businessmen who regularly purchased lots
in order to build residences on them.
[12] Having acquired the lots at issue in
order to build a pension fund for himself, he had turned down the
offers, thinking that, if the lots were worth that much to real
estate developers, they were worth the same to him. In addition,
discussions with one of the two developers had led him to believe
that there was still a good possibility that the same lots would
appreciate even more in value, in view of the announcement of
future extensive development projects in the region.
[13] The auditor, Pierre Drapeau, who
handled the file for the respondent, relied on one of the experts
at his office, Alain Lortie, an appraiser, who was thus
brought in and was involved in analyzing the file from the
outset. His contribution was also required in reviewing the
file.
[14] Before going forward with the analysis
of the case from the standpoint of the value of the immovables, I
should first dispose of a preliminary point, namely whether the
Minister could assess the appellant after the normal reassessment
period for the 1994 taxation year had expired. The relevant
evidence on this point was scant. First, there was the content of
the waiver that was signed and that was worded as follows
(Exhibit A-1, Tab 17):
[TRANSLATION]
WAIVER IN RESPECT OF THE
NORMAL REASSESSMENT PERIOD
|
Waiver
The normal reassessment period referred to in
subsection 152(4) of the Income Tax Act, within which
the Minister may reassess or make additional assessments or
assess tax, interest or penalties under Part I of the Act
is hereby waived for the taxation year indicated above, in
respect of:
All the tax implications arising from the
revision of the capital gain and all the tax implications
arising from the revision of the business investment
loss.
Indicate applicable part
|
|
Signature of
taxpayer
Date
Pierre
Gagné
September 10, 1998
|
|
Position or Office
|
[15] The evidence revealed that the wording
regarding the object of the waiver was inserted in the
appellant's absence. However, the appellant signed in the
presence of his accountant and the respondent's agent
following summary explanations. According to the appellant, the
consequences were not explained to him more clearly until after
he had signed.
[16] The appellant stated that he had very
little education and no knowledge of or experience in tax
matters, and he had thus relied on his accountant.
[17] The evidence showed that the
discussions prior to the signing had taken place in the presence
of all the persons concerned, the number of whom, however,
remains uncertain. The appellant said that he remembered that the
Minister of National Revenue (the "Minister") had had
two representatives there, whereas the auditor stated that he was
alone at that time.
[18] The appellant's accountant
apparently did not think it appropriate to withdraw with the
appellant in order to inform him of the extent of his rights and
obligations, the number of which, however, remained uncertain. In
those circumstances, was the waiver signed by the appellant
valid, and, in particular, did it allow the Minister to assess
after the normal reassessment period for the 1994 taxation
year?
[19] The object of a waiver must be
expressly stated and the scope of the specified field of
application must also be interpreted restrictively. In case of
doubt as to the scope and extent of the waiver, that doubt must
be resolved in favour of the taxpayer.
[20] That being the case, was the waiver
signed by the appellant sufficiently detailed and clear to permit
the reassessment? Of course, for a layman, the wording of the
waiver was not very clear as to either its object or its
consequences. In light of that, did the respondent have an
obligation to express all the consequences of the waiver in
layman's terms so that the consent sought from the appellant
would be more informed?
[21] Despite the accountant's presence
and notwithstanding the fact that ignorance of the law is never a
valid excuse, the respondent could have been more clear. However,
the respondent was entitled to assume that providing
clarification, details or explanations concerning the effects of
the waiver and necessary to obtaining fully informed consent, was
the responsibility of the appellant's accountant, who was on
the spot at the time the appellant gave his consent.
[22] Did the accountant fail to discharge
his professional obligations? That is a question which it is not
within my jurisdiction to answer. If there was such a failure or
if professional misconduct was committed, that cannot be
attributed to the respondent. The same is true of the
consequences, no matter how serious and far-reaching they might
be. The appellant submitted that the consequences of the waiver
were far-reaching, indeed even disproportionate, and suggested
that the requirements with respect to the waiver should have been
stricter or more rigid.
[23] The severity and gravity of the
consequences of the application of the provisions of the
Act do not reduce or affect the rigour of the conditions
of application; in other words, the extent of the tax
consequences resulting from an overstatement of fair market value
must not be an issue or a relevant factor in assessing the
quality of a waiver. A waiver has its full effect and is
unassailable if the essential conditions for the validity of a
contract have been met, which was the case in this instance. The
waiver signed by the appellant was thus legal, and all the
consequences thereof apply to the appellant.
[24] I shall therefore move on to the
question of the valuation of the lots.
[25] The evidence mainly concerned the fair
market value of the lots at 100, 142, 150 and 158 Rue
Des Lilas in Victoriaville. The appellant's evidence
consisted of various elements. First of all, he explained the
method he had used to establish the value reported at the time
the election was made. He explained that he had received two
unsolicited offers from real estate developers-one for $150,000,
the other for $180,000-for all the lots he owned. He had used the
two offers to establish an average, which he attributed to the
lots as their fair market value in 1994.
[26] To support and confirm the accuracy of
his valuation, he added to his evidence three notarial deeds by
which certain lots belonging to the whole were given in guarantee
of debts of $4,500 and $6,300 owed following work performed by
Services de chauffage Victoriaville and by Hamel et Hamel Inc.
The third guarantee was given so that he could obtain a line of
credit. The deeds show the following:
|
Lot dimensions
|
Amount of debt guaranteed
|
Nature of obligation
|
Creditor's name
|
|
100' x 100'
|
$4,500
|
account for goods and for services rendered
|
Services de chauffage Victoriaville
|
|
100' x l40'
|
$6,300
|
same
|
Hamel et Hamel Inc.
|
|
200' x 200'
|
$18,000
|
in 1983 as a guarantee in order to obtain revolving
credit
|
Caisse populaire
|
[27] The appellant also filed various
contracts: a contract entered into between the estate of
Clément Pépin and Les Constructions
André Jacques Inc. on March 2, 1988, another
contract between Clément Pépin (1978)
Ltée and Les Constructions André Jacques Inc.
dated August 23, 1989, and, lastly, a contract of sale
between the estate of Clément Pépin and Les
Constructions André Jacques Inc. entered into on
September 11, 1992.
[28] In support of his valuation, the
appellant also referred to various appraisal sheets for immovable
properties located in various places in the city of
Victoriaville.
[29] He also called as a witness
André Jacques, the son of the man who had made the
offer of $180,000, himself a developer with experience in
acquiring lots. Mr. Jacques explained that he generally
purchased a limited number of lots for the purpose of quickly
erecting buildings on them. Being often required to absorb
infrastructure costs, he did not have enough capital to acquire a
very large number of lots at one time as part of a long-term
development plan.
[30] Lastly, André Capistran, a
real estate agent and a municipal councillor in Victoriaville,
explained that he had a good knowledge of the location in
question and the relevant experience to be able to make comments
and observations on the value of the lots. As a real estate agent
and municipal councillor whose duties were related to the
assessment roll, he had obtained a number of listings for the
sale of comparable lots. Based on listings obtained in the area
in question, the witness Capistran estimated that the value
attributed to the lots at issue was entirely justified and
reasonable.
[31] In substance, the appellant's
evidence consisted of a set of data and facts and of testimony by
persons with experience and roots in the area concerned.
[32] The respondent called as a witness an
expert with all the appropriate academic training and
qualifications required to prepare the appraisal which he filed
and explained. He had extensive practical experience with respect
to the entire territory served by the office of the Sherbrooke
division, of which the Victoriaville area is a part.
Alain Lortie testified at length. His appraisal report was
prepared and submitted in accordance with good practice in the
field. The report filed is a substantial document, containing a
long list of comparables, some of which were described as more
relevant than others.
[33] Mr. Lortie had all the
qualifications and expertise needed to determine the value of an
immovable property. In his capacity as an expert appraiser, he
explained and supported his appraisal report. Highly articulate
and very familiar with good practice in his field, he submitted a
substantial file to support his conclusion as to the fair market
value on February 22, 1994.
[34] The evidence also revealed that
Mr. Lortie had been involved in the handling of the
appellant's file from the very beginning of the audit. He had
participated and collaborated at all stages of the case.
[35] Mr. Lortie's testimony as an
expert definitely raises an ethical problem. I believe his
contribution went beyond the acceptable bounds of an expert's
role in that he had taken sides in the case long before his
mandate to act as an expert for the Court.
[36] In his testimony, Mr. Lortie
showed that he had a particular interest in supporting his
appraisal. That is understandable and may be explained by the
fact that he had been called upon to work in the case from the
outset. Mr. Lortie took a position in the first stage, that
is to say, during the audit. He subsequently stuck to his
appraisal, which formed the basis of the reassessment. He
furthermore confirmed his position at the revision stage, and did
so without doing as exhaustive a study or analysis as that
conducted for his appraisal report. In other words,
Mr. Lortie probably did not take all the steps described to
the Court when he determined the value of the land the first
time, during the audit. The research and analysis came later,
when he prepared his case for the Court. This is a rather curious
way of going about it.
[37] Similarly, the fair market value must
not be determined on the basis of a vendor who is forced to sell
or a purchaser who is obliged to buy. It seems to me that the
minimum, indeed fundamental, qualification of an appraiser is
that he have no interest in either the process or the result.
Yet, Mr. Lortie submitted at the very outset an initial
evaluation that was certainly not supported by numerous
comparables. Fate would appear to have been on
Mr. Lortie's side as his extensive research merely
confirmed his first appraisal resulting from what was likely
rather summary work.
[38] With a perfect mastery of good
appraisal practice, Mr. Lortie proceeded in accordance with
a methodology entirely consistent with the requirements.
Nevertheless, I believe that the comparables used were selected
in a less than perfectly transparent manner. I am referring in
particular to the deliberate exclusion of certain transactions on
the strength of utterly inadequate explanations.
[39] Furthermore, I did not understand why
the lots appraised were analyzed in the context of an immense
whole, when all the data and information called instead for an
individual approach. The explanations as to why everything was
appraised in the context of the entire area were neither
reasonable nor acceptable, based on the expert's own
arguments that the quality of the soil was highly variable in
that location, that access was a problem and infrastructure costs
prohibitive.
[40] A number of factors called for an
individual approach. Three in particular required that sort of
approach:
- the appellant had acquired individual lots
separated from one another;
- the municipality had appraised them
separately;
- a look at the background of the lots
showed that they had been considered as separate entities; that
was particularly apparent from the fact that the appellant had
given mortgage guarantees affecting the lots separately.
[41] Mr. Lortie even admitted that the
larger the area, the greater the downward effect on value; in
other words, the price per square foot of a very large area was
considerably less than that of a small area. He thus acknowledged
at the outset that he had artificially adopted an approach
unfavourable to the appellant.
[42] Mr. Lortie regularly referred to
the approach he himself had ruled out, namely the subdivision
method, stating that it was not appropriate. Even if the lots
could not be built upon quickly, they could be the subject of a
transaction since they were very precisely identifiable and
defined.
[43] Mr. Lortie took into consideration
all sorts of assumptions with negative impact on the value of the
immovables at issue; I refer in particular to the following:
(1) the lack of interest in the
site;
(2) the possibility of a very high
water table;
(3) problem soil: clay and sand;
(4) the servitude prohibiting
access;
(5) the prohibitive infrastructure
costs;
(6) the difficulty of developing due
to the fact that there were a number of owners, thus making it
difficult to achieve any consensus on establishing and respecting
infrastructure;
(7) the numerous by-law
restrictions.
[44] There was no basis in the evidence
adduced for attributing these defects, faults or shortcomings to
the appellant's lots. These were aspects of the larger area
as a whole. It would have been helpful for Mr. Lortie to
speak at somewhat greater length on the shortcomings of the
appellant's lots rather than those of the whole area in which
they were located.
[45] A number of defects simply did not
affect the lots owned by the appellant, and certain deficiencies
cannot be attributed to the lots at issue. I refer in particular
to the soil quality, the servitude prohibiting access, the
proximity of access routes and the prohibitive infrastructure
costs.
[46] The appellant's lots had obvious
good qualities which were not considered at all. I refer to the
fact that they were identifiable, that they were near access
routes, that, as a result of their location, they were more
likely to be developed than lots at the extremities of the area
considered.
[47] The expert Lortie dismissed out of hand
some undeniable facts, namely that certain lots had been the
subject of mortgage guarantees. He contended that these were
irrelevant factors.
[48] The work required in preparing a real
estate appraisal is an exercise that must meet certain objective
requirements. Determining actual value involves research that
must lead to a conclusion that must stem from the consideration
of all available elements. Disregarding, for no valid reason,
factors that affect directly the value of an immovable property
definitely contributes to the discrediting of the results or, at
least, to the tainting of the essential transparency of the
process leading to the determination of the value.
[49] There are a number of definitions of
actual value. Although they may vary or differ, the variations
and distinctions are much more a matter of language than content,
which always remains appreciably the same.
[50] There are various objective approaches
and methods in determining the actual value of an immovable, such
as the economic approach, the replacement cost approach, the
assessed value approach and the comparable value approach. Having
regard to the particular characteristics of the property to be
appraised, experts often favour one method over another. In some
cases, they take the average of the results obtained through the
application of the various methods. Choosing one method over
another is an entirely subjective decision.
[51] In the instant case, the available
methods or formulas were limited in that unbuilt spaces or lots
were involved, thus giving the comparables formula particularly
great weight.
[52] The quality and quantity of
information, particularly in the comparables approach, are also
essentially subjective matters, especially when it comes to
explaining the relevance of information used or disregarded.
[53] For an expert thoroughly familiar with
good practice in his field, it is possible, and indeed very easy,
to submit a piece of work that is consistent with the various
applicable guidelines and constraints.
[54] Knowledge of good practice and
compliance therewith in preparing an appraisal are not, however,
the only characteristics that must be present in quality work. It
is equally important that the expert called upon to conduct such
an appraisal be independent of the interests involved.
[55] An expert given a mandate to determine
the value of an immovable must have no connection with the
interests of the person who orders the appraisal, otherwise he
risks considerably diluting the objective value of his work.
[56] Did the expert Lortie have such
detachment and independence? I do not believe so. Quite the
contrary, he was, rather, in a situation in which he was both
judge and party. His involvement in the case from the start of
the audits disqualified him or, at the very least, discredited
the value of his work.
[57] Appraisal work is extremely difficult.
Experts very often obtain results that meet their mandators'
expectations although using the same methods and procedures and
doing so with the greatest regard for good practice. The
difference between results obtained concerning value is
essentially determined by the comparables used. The Court must
therefore focus its energy on identifying those comparables.
[58] In that regard, the appellant adduced
reasonable evidence supported by plausible and, above all, highly
realistic information. Of course, there were no thick files,
elaborations on the many theories involved or learned reasons
explaining why one approach was adopted over another. Does that
have the effect of disqualifying or discrediting an approach
whose principal quality was common sense? I do not think so. One
thing is certain and that is that the actual value of an
immovable can be determined without it being absolutely necessary
to rely on a professional in the field or to submit a thick
appraisal report.
[59] In the instant case, the appellant
established the value of his lots using a rational formula
completely consistent with good appraisal practice, that is, by
taking the average of unsolicited offers made by persons with
very good knowledge of the real estate market. The value assigned
to the lots moreover proved to be consistent with estimates
prepared by persons working in fields related to that market. I
am referring to the various creditors who agreed to have their
claims guaranteed by clearly identified lots.
[60] Having acquired the lots for the
purpose of building a pension fund for himself, the appellant
turned down the offers, thinking that if the lots were worth that
much to developers, they were worth just as much to him,
particularly since certain discussions with one of the two
developers had led him to believe that there was still room for a
greater increase in value.
[61] In this case, the respondent's
expert did not have that independence which would have enabled
him to do objective work that would stand up against any
criticism and have the essential quality of impartiality. For
that reason, I take no account of the value he attributed to the
lots.
[62] As to the value that the appellant
attributed to his lots, I am of the opinion that it was
reasonable and consistent with the realities of the market at the
time he made his election. He determined the value based on
information whose quality was not disputed. In support of the
validity of the value assigned to his lots, the appellant
presented evidence of a very acceptable degree of relevance and
quality. Consequently, I find that the value attributed by the
appellant was correct and plausible.
[63] For these reasons, the appeal is
allowed, with costs.
Signed at Ottawa, Canada, this 29th day of January 2002.
J.T.C.C.
Translation certified true
on this 2nd day of May 2003.
Erich Klein, Revisor
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