Citation: 2010 TCC 79
Date: 20100209
Docket: 2007-4950(IT)G
BETWEEN:
MICHEL TREMBLAY,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Bédard J.
[1]
This is an appeal from
a reassessment made on April 19, 2004, under the Income Tax Act ("the
Act") by the Minister of National Revenue ("the Minister")
against the Appellant for his 1999 taxation year. By this reassessment, the
Minister added, among other things, a taxable capital gain of $200,901 to the
Appellant's income.
Background
[2]
In 1986, the Appellant
built two contiguous buildings located at 940 and 950 Thérèse‑Casgrain Street, in the city of Saguenay ("the Property"). At the time, the cost of the land was
$46,874 and the cost of the buildings was $785,258. Each building had 16
rental units on three floors and a half basement. On March 31, 1999, by
notarized contract (see Exhibit I‑1, Tab 6), the Appellant
transferred the Property by voluntary surrender to 9060‑8027 Québec Inc.,
whose majority shareholder at the time was Jean‑Eudes Tremblay, the Appellant's
brother. The Minister contends that the fair market value (FMV) of the Property
as at March 31, 1999, was $1,100,000, whereas the Appellant maintains
that it was $912,000.
Issue
[3]
The only issue to be
decided is whether the Minister properly determined that the Property's FMV as
at March 31, 1999, was $1,100,000.
Testimony
[4]
The Appellant testified.
Ghislain Ruest, the Appellant's expert witness on real estate appraisal,
testified in support of the Appellant's position. The Respondent's only
witness was Yvon Bergeron, the Respondent's real estate appraisal expert.
Preliminary remarks
[5]
I would immediately
note that Mr. Ruest's appraisal report (Exhibit A‑1) states
that the Property's FMV in February 2001 was $912,000, based on the direct
comparison method rather than the income or cost methods of valuation. I would
also note that this appraisal report was prepared by Mr. Ruest at the
request of Jean‑Eudes Tremblay (the Appellant's brother) and was
used by Jean‑Eudes Tremblay during his dispute with the Canada
Customs and Revenue Agency ("the Agency") concerning the FMV of the Property
at the time it was transferred in February 2001 by 9060‑8027 Québec Inc. to Jean‑Eudes
Tremblay. The Appellant claims that, in its dispute with Jean‑Eudes
Tremblay, the Agency admitted that the FMV of the Property in February 2001 was
$912,000. Therefore, the Appellant argues, the Court should accept the conclusions
in Mr. Ruest's appraisal report (Exhibit A‑1) because the
market conditions in 2001 were the same as they were in 1999.
[6]
In the case at bar, Mr.
Ruest used 11 real estate transactions for the purposes of his analysis. The
transactions had the following characteristics, among others:
|
|
Location
|
Number of dwelling units
|
Date of
transaction
|
|
Subject
property
|
940‑950 Thérèse‑Casgrain
Street, Chicoutimi
|
Multi-family
|
|
|
Building 1
|
2288 des Roitelets Street,
Chicoutimi
|
4 units
(4½ rooms each)
|
18/11/2002
|
|
Building 2
|
457 Bécard Street,
Chicoutimi
|
8 units
(2½ rooms to 4½ rooms)
|
27/12/2002
|
|
Building 3
|
1420‑26 Alphonse-
Desjardins St., Chicoutimi
|
4 units
(4½ rooms each)
|
28/11/2002
|
|
Building 4
|
1291-1293 Renaud Street,
Chicoutimi
|
11 units
(3½ rooms each)
|
05/04/2002
|
|
Building 5
|
64 Paquet Street,
Chicoutimi
|
8 units
(3½ rooms to 5¼ rooms)
|
22/10/2002
|
|
Building 6
|
733 des Hospitalières Street,
Chicoutimi
|
6 units
(4½ rooms each)
|
27/12/2002
|
|
Building 7
|
980 St-Judes Street,
Alma
|
16 units
(4½ rooms each)
|
01/11/2002
|
|
Building 8
|
2260 St-Jérôme Street,
Jonquière
|
10 units
(3½ rooms and 5½ rooms)
|
05/04/2004
|
|
Building 9
|
763 des Hospitalières Street,
Chicoutimi
|
13 units
|
16/05/2002
|
|
Building 10
|
708 Dequen Street,
Alma
|
24 units
(4½ rooms each)
|
11/12/2002
|
|
Building 11
|
2530-2532 du Perche Street,
Jonquière
|
12 units
(3½ rooms and 4½ rooms)
|
12/04/2002
|
[7]
The Appellant submits
that Mr. Bergeron's determination of the FMV of the Property as being $1,100,000
does not take the condition of the Property into account, and should be reduced
by at least $200,000 in view of how badly rundown the Property was in 1999.
[8]
Mr. Bergeron's appraisal
report (Exhibit I‑2) puts the FMV of the Property as at March 31,
1999 at $1,100,000. This value was determined using the direct comparison method.
I note that Mr. Bergeron excluded the income method in determining the Property's
FMV because there was very little reliable information regarding the income and
expenses associated with the rental activities involving the Property. Lastly,
I note that Mr. Bergeron ruled out the cost method because the Chicoutimi area real estate market was relatively active during
the appraisal period.
[9]
For the purposes of his
analysis, Mr. Bergeron used 11 transactions involving buildings which had the
following characteristics, among others:
|
|
Location
|
Number of dwelling units
|
Date of
transaction
|
|
Building 1
|
Place des Écorceurs,
Saguenay
|
6 buildings of 16 units each (48 units with 4½ rooms and 48 units
with 5½ rooms)
|
02/08/1995
|
|
Building 2
|
750A-750B
Georges‑Vanier Street,
Saguenay
|
32 units
|
19/04/1996
|
|
Building 3
|
130 Des Écorceurs St.,
Saguenay
|
16 units, of which 8 have 4½ rooms and 8 have 5½ rooms
|
01/03/1996
|
|
Building 4
|
70 Des Écorceurs St.,
Saguenay
|
16 units, of which 8 have 4½ rooms and 8 have 5½ rooms
|
01/05/1996
|
|
Building 5
|
120 Des Écorceurs St.,
Saguenay
|
16 units, of which 8 have 4½ rooms and 8 have 5½ rooms
|
01/10/1997
|
|
Building 6
|
731 Alma Street,
Saguenay
|
30 units, of which 6 have 2½ rooms and 24 have 3½ rooms
|
26/09/1997
|
|
Building 7
|
1775-1825
Tadoussac Street,
Saguenay
|
6 buildings of 4 units each
(16 units with 4½ rooms and 16 units with 5½ rooms)
|
27/03/1998
|
|
Building 8
|
1675-1715
Tadoussac Street,
Saguenay
|
4 buildings of 4 units each
(8 units with 4½ rooms and 8 units with 5½ rooms)
|
27/03/1998
|
|
Building 9
|
291 Rimbaud Street,
Saguenay
|
12 units (4½ rooms each)
|
16/07/1999
|
|
Building 10
|
1246-1256 Roitelet St.,
Saguenay
|
36 units, of which 9 have 3½ rooms and 27 have 4½ rooms
|
08/10/1999
|
|
Building 11
|
1240 Lorenzo‑Genest Street, Saguenay
|
16 units, of which 9 have 4½ rooms and 7 have 5½ rooms
|
08/10/1999
|
The Appellant's testimony
[10]
The Appellant
testified as follows:
(i)
During the two years
preceding its sale, the Property was managed by the holder of the hypothec
thereon (the Laurentian Bank of Canada), which it did from Quebec City. The Appellant explained that the Laurentian
Bank ("the Bank") just collected the rent during that period. The Appellant
pointed out that the Property was very rundown on March 31, 1999, since
the Bank had done no repairs or maintenance during the two-year period in
question. The Appellant added that, owing to the Bank's neglect, the Property's
vacancy rate was 45% on March 31, 1999, and the only new tenants during that
two-year period were social assistance recipients. I immediately note that a
rental income and expense forecast for the year 1998 (Exhibit I‑1, Tab 4)
prepared by the Appellant's accountants suggests that the anticipated vacancy
rate for 1998 was roughly 5%.
(ii)
9060‑8027 Québec
Inc. had to invest roughly $200,000 in the Property [translation] "to fix it up and make it rentable again,
and just about the whole lot of tenants was changed" (see paragraph 79 of
the transcript, at page 30.) I note that the Appellant did not specify the
nature of the work done by the company controlled by his brother, that he did
not specify the period in which the work was done, and, lastly, that he
provided no supporting documents in this regard.
(iii)
The condition of the
Property on February 1, 2001 (the date on which Property was transferred by 9060‑8027
Québec Inc. to Jean‑Eudes Tremblay at a price of $912,000) was the same
as it was on March 31, 1999, and this is why the Appellant decided to
use the appraisal report (Exhibit A‑1) that Mr. Ruest had prepared
(at his brother Jean‑Eudes's request) for the purpose of determining the FMV
of the Property on February 1, 2001, when it was transferred by 9060‑8027
Québec Inc. to his brother Jean‑Eudes.
Analysis and conclusion
[11]
When sufficient market
data exist, the FMV of real estate is estimated using three conventional
methods: the cost method, the direct comparison method and the income method.
The cost method is based primarily on the principle of substitution, which posits
that an informed purchaser will not pay more for a building than the cost of
building a similar one, provided there are no costly delays at the time of the
substitution. The direct comparison method is also based on the principle of
substitution, which holds that an informed purchaser would pay no more for a
property than it would cost to purchase a comparable property. In other
words, the direct comparison approach essentially consists in using as a
reference point the selling prices of properties that have similar
characteristics, are located as close as possible to the property to be appraised,
and are sold as close as possible to the relevant appraisal date. The income
method is based essentially on the principle of present value capitalization,
and is the most appropriate method for valuing income‑producing property.
The basis of this method is the relationship between the net income generated, its
future value, and the value of the property.
[12]
In my opinion, the two
experts used the right valuation method to determine the Property's FMV given
the circumstances. Moreover, I note immediately that, for the reasons set out
below, I do not find Mr. Ruest's analysis and conclusions credible:
(i)
First of all, as we
have seen, Mr. Ruest's report (Exhibit A‑1) determines the FMV
of the Property as at February 1, 2001, not March 31, 1999. Mr. Ruest
explained that this fact is not relevant in the case at bar because the market
conditions in 2001 were the same as they were in 1999. Even as an expert, Mr. Ruest
could not hope to convince me of this fact simply by stating it. Indeed, it
would have been very interesting to know the basis for his assertion in that
regard.
(ii)
The Appellant must
understand that, in applying the direct comparison method, the greater the
difference between the characteristics of the property to be appraised and the
similar property, and the farther removed one gets from the appraised property or
from the appraisal date, the more open to doubt the appraisal becomes. Conversely,
the more similar the characteristics, and the closer together the properties and
the closer the dates, the easier it is to estimate the value of the subject property.
In the case at bar, I am of the opinion that the characteristics of the
properties that Mr. Ruest selected for his analysis were too different
from those of the Property. Indeed, buildings 1, 2, 3, 4, 5, 6, 8, 9 and 11 (see paragraph
6), which have four units, eight units, four units, 11 units, eight units, six
units, 10 units, 13 units and 12 units respectively, are not, in my opinion,
similar to the Property, which, as we have seen, has 32 units. The market for those
buildings is not the same market as for the Property. The number of buyers for
32-unit buildings is more limited than the number of buyers for four-, six- or
eight-unit buildings. In addition, buyers of 32-unit buildings are usually
better informed and are therefore harder negotiators than buyers of buildings
with a small number of units. Lastly, buildings 7, 8, 10 and 11 are
too far from the Property to be valid comparables: they are located in cities
other than Saguenay, where the Property is situated. In my opinion, properties
in a city neighbouring the city in which the Property is located can also be
valid comparables, provided satisfactory proof is provided of the market
conditions in each city. Here, the Appellant's evidence in this regard was
based solely on the testimony of Mr. Ruest, who claims that the market
conditions in Chicoutimi were the same as those in Alma and
Jonquière. Once again, even as an expert, Mr. Ruest could not hope to
convince me of this merely by making an assertion that it was so. Lastly, all
of the 11 real estate transactions that Mr. Ruest selected for his
analysis took place after March 31, 1999, and on dates that were considerably later
than that date. A transaction subsequent to the appraisal date, and even relatively
distant in time from the appraisal date, can be taken into account when using
the direct comparison method, if the extent to which the market evolved between
the appraisal and transaction dates can be satisfactorily shown, in which case
one will usually need to make adjustments to take any market changes into
account. Here, the Appellant's evidence in this regard rested solely on the
testimony of Mr. Ruest, who claims that the market conditions in 2002,
2004 and even 2005 were the same as in 1999. Once again, even as an expert, he could
not hope to convince me of this merely by making an assertion that it was so.
Indeed, it would have been very interesting to know the basis for his assertion
in that regard.
[13]
I have accepted Mr. Bergeron's
conclusion regarding the FMV of the Property because I find that the
characteristics of the properties that he chose for the purposes of his
analysis are quite similar to the Property's characteristics. Indeed, all
the transactions selected by Mr. Bergeron involved buildings with 16 units
or more. Furthermore, all of the buildings were located in the same city as the
Property. I would add that most of them were located in the same neighbourhood
as the Property. Lastly, not only did all the transactions used by Mr. Bergeron
take place prior to March 31, 1999, many of them took place on dates
that were rather close to that date. In sum, although Mr. Bergeron's
analysis is imperfect in several respects, his conclusions regarding the FMV of
the Property appeared to me to be more credible than Mr. Ruest's conclusions
in that regard.
[14]
As I have stated, the Appellant
submits that the Respondent should have taken the condition of the Property into
account in determining its FMV, and therefore reduced by $200,000 the value assigned
to the Property using the direct comparison method. In my opinion, adjustments
must be made to take the particular state of a property into account when using
the direct comparison method, but this still requires satisfactory evidence of
the property's condition and of the adjustments that should be made. Here, the
Appellant's evidence consisted solely of his own testimony and that of Mr. Ruest,
who had supposedly visited a few of the Property's units in 1999. As we have
seen, the Appellant testified that the Property was in a very rundown state on March
31, 1999, because the Bank (which was managing the Property from afar)
performed no maintenance or repairs on the Property for two years. As we have
also seen, the Appellant testified that the vacancy rate of the Property on
March 31, 1999, was 45%, owing to the Property's general condition at the time.
Lastly, I would point out that the Appellant stated that 9060‑8027 Québec
Inc. (controlled by his brother Jean‑Eudes) had to invest about $200,000
in the Property after it was acquired, in order [translation] "to
fix it up and make it rentable again, and just about the whole lot of
tenants was changed." Furthermore, Mr. Ruest went no further than saying
that he had visited a few units in the Property in 1999 when looking for an
apartment for a close relative, and that he had noticed the poor condition of
those units at that time. The Appellant could have satisfied me that the Property
was in a rundown state on March 31, 1999, and, above all, he could
have convinced me of the cost of making it rentable again, if his brother, or
an officer of the Bank, had testified regarding the Property’s general
condition, and if he had tendered serious supporting documents related to the
$200,000 that his brother allegedly spent to restore the building to a rentable
condition. The Appellant could have adduced such evidence, but did not do so.
The inference I draw from this is that such evidence would have been unfavourable
to him. I would add that the fact that the Appellant did not raise
this important point at the objection stage or and in his Notice of Appeal only
increased my doubts as to the veracity of the Appellant's allegations in that
regard.
[15]
As for to the Appellant's
argument that I should accept the conclusions of the appraisal report prepared
by Mr. Ruest in light of the fact that the Agency accepted them in the
case involving Jean‑Eudes Tremblay, I am of the opinion that it has no
weight in the case at bar, notably because no evidence was adduced regarding the
circumstances under which the Agency purportedly accepted those conclusions.
[16]
To sum up, the Appellant,
who bore the burden of proof, has not satisfied me that the FMV of the Property
as at March 31, 1999, was not $1,100,000.
[17]
For all these reasons,
the appeal is dismissed, with costs.
Signed at Ottawa, Canada, this 9th day of February 2010.
"Paul Bédard"
Translation
certified true
on this 28th day
of May 2010.
Erich Klein,
Revisor
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