Citation: 2008 TCC 411
Date: 20080710
Docket: 2006-2770(IT)G
BETWEEN:
THE ESTATE OF HENRI COUPAL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Lamarre J.
[1]
The Appellant is
appealing from an assessment in which the Canada Revenue Agency (CRA) imputed a
taxable capital gain of $49,607 to it for the 2000 taxation year as a result of
the disposition, by the late Henri Coupal, of an immovable located at 230‑234 Ostiguy Street, in Chambly, to his son Jean‑François Coupal,
for $150,000. The disposition took place on July 20, 2000, and the
Respondent submits that the fair market value of the immovable at that date was
$240,000.
[2]
The CRA, relying on
paragraph 69(1)(b) of the Income Tax Act (ITA), asserts that the
proceeds of disposition are deemed to be equal to the fair market value,
thereby triggering the taxation of the capital gain at issue in the instant
appeal.
[3]
Paragraph 69(1)(b)
reads as follows:
SECTION 69: Inadequate
considerations
(1) Except
as expressly otherwise provided in this Act,
. . .
(b) where
a taxpayer has disposed of anything
(i) to a person
with whom the taxpayer was not dealing at arm’s length for no proceeds or for
proceeds less than the fair market value thereof at the time the taxpayer so
disposed of it,
(ii) to any
person by way of gift inter vivos, or
(iii) to a
trust because of a disposition of a property that does not result in a change
in the beneficial ownership of the property; and
the taxpayer shall be
deemed to have received proceeds of disposition therefor equal to that fair
market value; and
. . .
[4]
The entire debate turns
on whether Henri Coupal sold the property to his son Jean‑François for
its fair market value at the time of the disposition. Mr. Coupal’s son contends
that he did, because he paid an amount that was $10,000 more than the municipal
assessment.
[5]
The Respondent submits
that the fair market value in question was actually $240,000 at the time of the
sale. The Respondent relies in this regard on seven real estate transactions that
took place in July 2000. The transactions involved properties next to or within
the same zone as the property at issue, and the average selling price was
$20-22 per square foot. If this average price of $20-22 per square foot is
applied to the property in issue, it results in a value of $240,000. All seven
sales were to Provigo Ltée (Provigo), which intended to build a Maxi
supermarket in the area and did so in 2002.
[6]
The evidence does not reveal
that the late Henri Coupal received an offer by Provigo to purchase his
property at any time prior to the sale to his son. One year later, the son
received an unsigned option to purchase from one Robert Mongeau—apparently
acting as a proxy for Provigo—in the amount of $275,000 (Exhhibit A‑1,
tab 6), but the purchase option was never exercised because Jean‑François Coupal
did not act on it and Mr. Mongeau never came forward again.
[7]
Jean‑François Coupal
explained that the property in question has four units, that he was born there,
and that he has always lived in one of the four units. The other units are
rented out. The building in question was built by his father in 1954 and has
been well-maintained ever since. In 1993, the town of Chambly
designated the zone in which the property is located as commercial, meaning
that residential buildings could remain residential only by virtue of acquired
rights. The property is located on a small, quiet street, but is
surrounded by two major commercial thoroughfares.
[8]
In March 2000, his
father getting on in age, Jean‑François Coupal made him an offer to
purchase the property. He checked the selling prices of similar buildings in
the area, and noted that the average price was roughly $10,000 below municipal
assessment value. He therefore offered $10,000 above municipal assessment
value (which he asserts was $139,000 at the time), that is to say,
$150,000, in order to ensure that his brother and sister would not be treated
unfairly. He financed 75% of the purchase through Caisse populaire
Desjardins, which did not require any specific valuation of the property. Jean‑François Coupal
explained that he purchased the property because it would be a good source of
retirement income—apartment housing having always been lucrative in the past—and,
moreover, given the family connection, the building held sentimental value for
him.
[9]
His father died in
December 2000, at 83 years of age.
[10]
Jean‑François Coupal
states that Provigo did not quote an offering price to either him or his father
in 2000.
[11]
In April 2001, his
uncle and next-door neighbour Hercule Coupal got an offer from Provigo to
purchase the property, and he accepted it. The uncle sold his property on
April 17, 2001 for $210,000, or $20.68 per square foot. As for Jean‑François Coupal,
as stated above, he received a purchase option from Provigo in 2001, but
he never followed up on it, and Provigo showed no more interest after it
was issued. Mr. Coupal explained that this option was subject to several restrictive conditions.
For example, Provigo required a right of first refusal over the property for
six months, asked that Mr. Coupal evict all tenants at his expense, and arrogated
unto itself the right to enter and inspect the premises, take measurements, and
excavate all on 48 hours’ notice. Nothing ever became of the purchase option,
and in any event, Mr. Coupal was not interested in selling. In fact, Jean‑François Coupal
is still the owner of the property today; he lives in one of the units and
rents out the other three.
[12]
The Appellant called its
expert, Jean‑Luc Bélanger, as a witness. Mr. Bélanger, a
certified appraiser, determined that the market value of the property on
July 20, 2000 was $148,000. In making that determination, he
inspected the property, looked at the surrounding area, and reviewed the zoning
by-laws to ascertain the most profitable use of the property on the valuation
date. In his opinion, residential use was the most profitable use of the
property at the time of the valuation. Indeed, he said that even though
the town of Chambly decided in 1993 that it wanted to transform the zone
where the property was located into a “restricted commercial” zone—in
respect of which the zoning by-law, reproduced in Exhibit A-2 (Appellant’s
expert report, p. 7), permits restaurants, traveller accommodations and
businesses offering recreational, professional, financial, technical,
communications and educational services—there are still several well‑maintained
residential properties in the area, including the property at issue. According to
Mr. Bélanger, the area
was not ripe for exclusively commercial use in 2000, and is still not ripe
for it today. It remains very viable for people who have acquired rights and wish
to stay there. In his view, a wholesale transformation would have to take place
to eliminate the residential aspect of its character. While the arrival
of Provigo continues the planned commercialization of the zone, it
does not signal the end of residential use. In his opinion, the jury is still
out on whether converting the property at issue to commercial use is
economically viable. The residential vocation remains the most appropriate
one for the property, he believes.
[13]
Having made this determination
that residential use remains the most profitable one, Mr. Bélanger estimated
the property’s value using two methods: the cost method and the comparison
method. He determined that the value on July 20, 2000, was $148,000, or
$12.84 per square foot.
[14]
Mr. Bélanger
acknowledges that, for the purposes of his comparison-method appraisal, there
were few similar sales between individuals during the same period near the
property at issue. He says that this was not a bustling real estate market.
He was able to find three sales: one in December 1998, one in
February 2000, and a third in May 2000. All three sales involved
triplexes in residential zones.
[15]
As for the cost method,
it yields a value of $162,000. Mr. Bélanger explains that economic obsolescence
accounts for the difference between this value and the $148,000 comparison-method
value, hence his choice of the latter.
[16]
As for André Verreault,
the Respondent’s expert, he is of the opinion that the most profitable use of
the property is commercial, non-residential use, because the property is in an
area that has been zoned commercial since 1993. He believes that the arrival of
Provigo only reinforces this view.
[17]
The only method used by
Mr. Verreault for his appraisal was the comparison method. The only sales
he considered were sales to Provigo of abutting or nearby land. All of those
sales took place in July 2000, concomitantly with the sale in the case at
bar. Of the seven sales selected for analysis, Mr. Verreault eliminated two
in which the prices were very high in relation to the others, and one in which
the price was much lower. He thus used the median of the other four sales
and arrived at an average price of $20-22 per square foot, resulting in a value
of $240,000 for the property at issue. He did not analyze two other sales to
Provigo that took place in 2001.
[18]
Mr. Verreault
acknowledged that Provigo had purchased all these properties as part of its plan
to assemble 250,000 square feet of land in order to build its Maxi
supermarket.
[19]
Provigo had to acquire
several properties over a short period of time in order to carry out its plan.
Although there is no evidence that Henri Coupal or his son received a
purchase offer from Provigo in 2000, Mr. Verreault was of the opinion that
Provigo was doing a sweep through the area and that Mr. Coupal’s property
could very well have been sold to Provigo for $20-22 per square foot.
[20]
The backyard of Mr. Coupal’s
property became adjacent to the Maxi supermarket. The house next door to Jean-François
Coupal’s, which belonged to his uncle Hercule, was sold to Provigo in 2001. However,
the property at issue was not.
[21]
Mr. Bélanger, the Appellant’s
expert, expressed strong reservations about the Respondent’s expert’s position.
He submits that Provigo is a special purchaser that bought under special
circumstances. In his view, none of Provigo’s transactions are representative
of the fair market value of the property in the context of the free and open
competitive market in 2000. In his opinion, only Provigo could have agreed to
pay such a price. Mr. Coupal did not share in the benefits of this “transient
boom,” so he could not have claimed that his property was worth $240,000. Mr.
Bélanger explained that since Provigo had a special interest in acquiring the
properties it did, it had to persuade the owners of the buildings in the
surrounding area to sell. The only way for Provigo to do this was to offer
prices that the owners would not otherwise have been able to obtain in the ordinary
market. Thus, in order to achieve its objectives, Provigo had to pay premiums
to the owners of the desired real estate that another buyer, under normal
circumstances, would not have been required to pay—including all of the seller’s
relocation costs. For example, Mr. Bélanger cited two transactions in
which Provigo had to buy a second parcel of land belonging to the seller
of the land that interested Provigo (even though it was of no use to Provigo)
so that the seller would agree to sell the parcel that Provigo wanted. In one
of these cases, the second parcel was purchased by Provigo in 2000 for
$210,000, or $62.19 per square foot, and resold in 2000 for $50,000, or $14.80
per square foot. In the second case, the second parcel was purchased by Provigo
in July 2000 for $225,000, and resold in 2002 for $200,000, at a much
more realistic rate of $10.00 per square foot. Mr. Bélanger explained
that, during that same period, vacant commercial land in Chambly was fetching $3.00 to $6.00 per square foot in the
open market. If we look at the plan of the perimeter around Provigo’s Maxi
site, found in Schedule A of the Appellant’s expert’s report
(Exhibit A‑2), we see that Provigo did not acquire all of the
parcels of land neighbouring the property at issue. Several lots, the Appellant’s
included, are not under Provigo ownership. All the sales to Provigo were made
as part of a site-assembly process and therefore cannot be used in appraising
fair market value.
[22]
Mr. Bélanger also
questions the average price of $20-22 per square foot established by the
Respondent’s expert for the sales to Provigo. According to his calculations,
the average price of all the properties is $15 per square foot. Mr. Verreault
took into account only the sales of residential properties to Provigo, and he
disregarded the sales made by the municipalities. This resulted in an average
price of $20-22. However, what interested Provigo was the land, not the buildings
or the rental properties thereon. Thus, there was no reason to make a selection
of this kind. Although the municipality did sell one lot at a deep discount because
it was in its interest to sell to Provigo—a future source of economic
opportunity for the town—it is also true that certain individuals sold at
exaggeratedly high prices because, in those instances, it was in Provigo’s
interest to buy. Accordingly, he asserts, it is not realistic to set a $20-22
average for sales to Provigo based solely on residential sales.
The
parties’ arguments
[23]
The Appellant submits as
follows. What needs to be ascertained is the fair market value of the property—not
its value to Provigo if Provigo had wished to acquire it.
[24]
While it is true that
the property is in an area zoned commercial since 1993, one cannot disregard
the fact that the property is on a small street that remained partly
residential, and that the people who live on that street continue to thrive.
Provigo’s arrival has in no way altered the residential lifestyle of the people
who kept their property.
[25]
The price that Provigo
paid for the neighbouring properties is not representative of the fair market
value in a free market under normal conditions. Provigo was a special buyer in
a specific context.
[26]
As for the $275,000
purchase option submitted to Jean‑François Coupal in 2001, first
of all, no one acted on it, and secondly, all the conditions of the option suggested
that Provigo was willing to pay a premium above market value, hence the
$275,000 price. The purchase option cannot be considered probative of the fair
market value of the property in 2000.
[27]
The Respondent points
out that Mr. Coupal’s property was situated within the quadrilateral sought
by Provigo and that, accordingly, it became more valuable than the more distant
properties. The Respondent submits that Henri Coupal made a choice to
sell to his son, but could just as well have sold to Provigo. Counsel for the
Respondent asks the following question: Would Henri Coupal have agreed to
sell to a third party for $150,000 knowing that he could sell to Provigo for a
much higher price? He submits that one cannot overlook the existence of a
special buyer in determining fair market value. He cites Morneau v. Canada,
[1998] T.C.J. No. 680 (QL), 98 DTC 2199 (T.C.C.)
at paragraph 43:
43 Since in our law the
concept of market value presupposes an open and unrestricted market, it is also
wrong to say that the value which property would have for a potential purchaser
desiring to use it for different purposes can be disregarded on the ground that
he is the only one who wants to use it for those purposes, there is no
competition in the market for this use and the value is thus purely subjective.
To do so would be to disregard one aspect of the situation, with the result
that the appraisal exercise would become highly theoretical, disconnected from
the specific circumstances of the case under consideration and so very
questionable.
[28]
In our specific case,
counsel for the Respondent submits that the sale between related persons has connotations
of sentimental value and that the selling price was well below fair market
value. For this reason, he questions the comparable sales used by the
Appellant’s expert. All of those sales were in residential zones and involved
triplexes, whereas the property at issue is a quadruplex in a commercial zone. In
his opinion, the value computed by his expert is more appropriate because it is
based on concurrent sales in the same sector in a relatively free market—not
forced, as in the case of an expropriation.
Analysis
[29]
The definition of fair
market value that has been accepted by the courts was reiterated by Joyal J. of
the Federal Court (Trial Division) in Dominion Metal & Refining Works
Ltd. v. Canada, [1986] F.C.J. No. 318 (QL), 86 DTC 6311, at page 6314,
and was cited by counsel for the Respondent:
. . . Fair market value has been
defined in Minister of Finance v. Mann Estate, [1972], 5 W.W.R. 2327
(B.C.S.C.); aff’d [1973] C.T.C. 561 (B.C.C.A.); aff’d [1974] C.T.C. 222
(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 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), 73 DTC 5471. In a matter dealing with the Dominion Succession Duty
Act, R.S.C. 1952 c. 89, His Lordship said at page 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 Untermeyer Estate v. Attorney-General for British
Columbia, [1929] S.C.R. 84 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.
[Emphasis added.]
[30]
At page 6314, Joyal J.,
before stating the definition of fair market value, acknowledged the “special
purchaser” approach, which takes account of the premium that a special
purchaser is willing to pay over and above fair market value. He thus
drew a distinction between fair market value and value to a special purchaser.
[31]
Further on, Joyal J.
cited Inland Revenue Commissioners v. Clay and Buchanan, [1914]
3 K.B. 466 (Eng. C.A.), where it was acknowledged that there were
speculators who were willing to pay more than normal value with the intent of
reselling at a profit to a special purchaser. In other words, knowledge of
a special purchaser’s special need could influence the market price if others “join
in competing for the property with a view to 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” (see, at page 6315, the excerpt from
the judgment of Swinfen Eady L.J.).
[32]
In addition, Joyal
J. acknowledged, at page 6318, that facts arising after the valuation date may
be considered for the purposes of the valuation process. Because value,
for income tax purposes, is generally determined in a “notional” market, one
may consider an actual sale subsequent to the valuation date in order to
determine whether the valuation was reasonable.
[33]
In the instant
proceedings, the sales used by the Respondent’s expert are the result of a
special purchaser (Provigo) in the market, a purchaser who inflated the price to
such a degree that it gave special value to the lands thereby purchased.
However, when Provigo itself sought to sell two of those lots less than two
years later, it sold at a markedly deflated price, comparable to the price paid
by Jean‑François Coupal to purchase his father’s property.
The price paid by Provigo, as part of its plan to assemble a 250,000 square
foot site, was clearly speculative, and much higher than what an ordinary
purchaser would have been willing to pay for the same property.
[34]
In Morneau, a
decision that was also cited by counsel for the Respondent, our Court had to
determine whether the shareholder of the corporation that bought his property
was conferred a benefit under subsection 15(1) of the ITA. The Minister of
National Revenue submitted that the corporation had paid the shareholder a
price that was too high in relation to the property’s fair market value. The
corporation was the special purchaser in that instance because it needed the
shareholder’s land for its business purposes, and it offered the shareholder a
price that would enable him to relocate. The shareholder accepted the offer. Dussault
J., of our Court, held that the shareholder did not receive any benefit within
the meaning of subsection 15(1) of the ITA from the sale of the property
to the corporation because he was actually impoverished by the transaction, not
enriched by it.
[35]
In obiter dictum,
Dussault J. addressed the issue of fair market value where a special purchaser
exists. In addition to the above passage from paragraph 43 of his judgment,
quoted by counsel for the Respondent, he stated, at paragraph 44, that it
is impossible to disregard the special interest a potential purchaser may have
in acquiring property for a value higher than what others would be prepared to
pay, in view of the special circumstances in which it finds itself and the use that
it intends to make of the property.
[36]
It is important to place
ourselves in the context. In Morneau, the Court was ruling on the value
of the property to a special purchaser. It acknowledged that the property was
of greater value to that particular purchaser. In this sense, his decision is
in line with what Joyal J. stated in Dominion Metal & Refining
Works Ltd., supra, drawing a distinction between
fair market value and the higher value to a special purchaser.
In addition, Dussault J. held as follows in Morneau, at
paragraph 46:
. . . When the interests of a seller can be
reconciled with those of a buyer, albeit a special one, after a mutual
compromise consistent with each side’s bargaining power, a price which has been
negotiated and finally accepted may be regarded as representing a value which
could be obtained on the market.
[37]
The instant case does
not involve interests of a seller that can be reconciled with those of a
special buyer after a mutual compromise consistent with each side’s bargaining
power because, on the valuation date, Provigo was showing no interest in the
property. There was no price negotiated between and finally accepted by Mr. Coupal
and Provigo equal to the price that two individuals would have negotiated. The proof
is that when Provigo resold two of the parcels that it had purchased to ordinary
buyers, the average market value at which it sold them was no higher than the
price that Jean‑François Coupal paid for his father’s property.
[38]
As for the theory that
speculators would have been willing to pay a higher price so that they could
resell to Provigo at a profit, such an exercise is too hypothetical to
approximate reality in this instance. There was no evidence that such
speculators existed. Had Jean‑François Coupal purchased from his
father for speculative purposes, it seems to me he would have acted on the
purchase option submitted by Provigo’s proxy. Instead, he simply ignored it. Lastly, the
Respondent’s expert’s valuation is based on the assumption that the most
profitable use of the property was commercial. The evidence discloses that there
are still several residential properties in the area, and that the area is
zoned “restricted commercial.” This zoning makes it very possible for
residential and commercial uses to coexist, as authorized by the city. I find therefore
that the Respondent’s expert’s appraisal is not realistic.
[39]
In my opinion, the
Appellant’s expert is much more persuasive when he says that such a property
would never sell for $240,000 in a normal market. The evidence clearly shows
that Provigo’s arrival temporarily inflated prices, albeit only for those who
were within its sights. As for the other owners, I agree with the Appellant’s
expert that the value of their properties was not dramatically increased. Mr. Bélanger
used sales in residential areas for his valuation. The valuation is verified by
the cost-method appraisal, which is slightly higher. The expert explains that
economic obsolescence accounts for the difference, and this explanation is
satisfactory. In my view, this value represents the higher price that
Mr. Coupal could reasonably expect to get in a normal sale in the ordinary
course of business, without regard to the unusual pressures made by Provigo as
part of its site assembly project.
[40]
For these reasons, I
agree with the Appellant’s expert’s valuation of $148,000. The appeal is
allowed, with costs in accordance with the regular tariff under the rules of
this Court, and the assessment is referred back to the Minister for
reconsideration and reassessment on the basis that the $49,607 taxable capital
gain added to the Appellant’s income for the 2000 taxation year must be removed
from his income.
Signed at Ottawa, Canada, this
10th day of July 2008.
“Lucie Lamarre”
Translation
certified true
on this 17th day
of September 2008
Stefan Winfield,
Reviser
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