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Citation: 2003TCC341
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Date: 20030521
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Docket: 2000-3081(IT)G
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BETWEEN:
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WONSCH CONSTRUCTION COMPANY LIMITED,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Little, J.
A. FACTS
[1] The appeal was heard in Windsor,
Ontario on April 28 and 29, 2003 and concluded on May 1,
2003.
[2] At the commencement of the hearing
the parties filed a Partial Agreed Statement of Facts. The Agreed
Statement of Facts provided as follows:
The Appellant and the Respondent, by their solicitors agree to
the following facts provided:
a) such admissions are made for the purpose
of this proceeding; and
b) the parties are permitted to adduce additional
evidence to supplement, but not to contradict, the facts herein
stated.
1) The Appellant is a registered corporation
pursuant to the laws of Ontario, having its principal place of
business at 345 Taylor Drive, Tecumseh, Ontario and after
December 31, 1990 has been principally in the business of
property development and sales.
2) On October 23, 1968, the Appellant purchased a
parcel of land, legally described as Part of Farm Lots 88, 89 and
90, in the Third Concession and extending through to the Fourth
Concession, Windsor, Ontario (hereinafter "the Subject
Property"). (Tab 1 of Joint book of Documents)
3) The Subject Property occupied approximately 60
acres of land and was zoned Planned Development 1
("PD.1") by the City of Windsor denoting that the only
permissible use of the property was the construction of a single
dwelling on the entire Subject Property.
4) From the date of acquisition to December 31,
1990, ("V-day") the Subject Property was held by the
Appellant on account of capital, and farmed by the Appellant
and/or leased to third parties for farming activities
("Farming Activities").
5) After V-day, the Subject Property was held by
the Appellant as inventory with the primary intention of
developing the property for resale, but Farming Activities
continued on the Subject Property into the 1996 taxation
year.
6) In April 1992, the Department of Public Works
of the City of Windsor invited the Appellant to develop part of
the Subject Property fronting on a municipal highway, known as
Cabana Road East and proposed to service the frontage portion of
the Subject Property with sanitary sewers the cost of which would
be shared with the City under the Local Improvement
Act. The Appellant agreed. (Tabs 2 and 3 of Joint Book
of Documents)
7) Later in 1992, the Appellant applied to the
City of Windsor to rezone the frontage portion consisting of an
area of 4 acres of the Subject Property from PD.1 to R1.13, a
multiple residential category. The Appellant also sought approval
from the Committee of Adjustments of the City of Windsor for the
severance of 19 lots, permitting the development of single unit
dwellings, duplex dwellings and semi-detached dwellings fronting
on Cabana Road East ("Phase 1"). (Tab 4 of Joint
Book of Documents)
8) The application was appealed to the Ontario
Municipal Board, which in January 1994 approved the rezoning of,
and severance plan for Phase 1, but approved the development of
17 lots instead of the 19 lots proposed by the Appellant for
Phase 1.
9) The opportunity for the Appellant to
development Phase 1 of the Subject Property was established in
February 1996 with the final approval from the City of Windsor
and building permits became issuable.
10) In March 1995, the City accepted the offer of the
Appellant to retain Prince Silani and Associates, Urban and Rural
Planning Consultants, to prepare a detailed plan policy document
for the further development of the Subject Property and environs
known as the Howard-Cabana Planning Area. (Tab 5 of Joint Book
of Documents)
11) In February 1996, the Development Plan for the Howard -
Cabana Planning Area was completed. Later that year the City of
Windsor approved the Development Plan with some modifications.
This provided the opportunity for zoning to be amended and the
necessary approval of a plan of subdivision for the balance of
the Subject Property to commence. (Tab 6 of Joint Book of
Documents)
12) In 1996, the Appellant applied to the City of Windsor to
rezone the balance of the Subject Property being Phase 2 and
Phase 3, from PD.1 to R1.13. (Tab 7 of Joint Book of
Documents)
13) In that year the Appellant also applied for approval of a
draft plan of subdivision for Phase 2 and Phase 3 permitting the
development of single unit dwellings, semi-detached dwellings and
a public park. (Tab 8 of Joint Book of Documents)
14) In August 1996, the City of Windsor approved the rezoning
of Phase 2 and Phase 3 of the Subject Property from PD.1 to R1.13
and concomitantly the Plan of Subdivision received draft plan
approval both subject to certain conditions. (Tabs 9 and 10 of
Joint Book of Documents)
15) In June 1997 and February 1998 the City of Windsor gave
final approval to the Plan of Subdivision for Phase 2 and Phase
3, respectively.
16) In the 1996 taxation year, 11 of the 17 lots of Phase 1
were sold. The balance of the lots in Phase 1 was sold in
subsequent taxation years.
17) In the Appellant's financial statement for its 1996
fiscal year, it reported a total gain on the sale of the 11 lots
in the amount of $468,274. (Tab 11 of Joint Book of
Documents)
18) Based on a change in use as of December 31, 1994 and a
valuation of the Subject Property in the amount of
$4.2 million, the Appellant in computing income for the
1996 taxation year reported the total gain of $468,274 on
the sale of the 11 lots in the following manner:
a) The amount of $282,926 represented the
gain on the sale of the 11 lots on account of income;
b) the amount of $185,348 represented the gain on
the sale of the 11 lots on account of capital;
c) the amount of $139,011 represented the
taxable portion on the sale of 11 lots; and
d) the amount of $46,337 represented the
non-taxable portion on the sale of the 11 lots. (Tab 12 of
Joint Book of Documents)
19) The Minister of National Revenue (the
"Minister") reassessed the Appellant for the 1996
taxation year by Notice of Reassessment dated May 5, 1999 to
include the amount of $46,337 in income on the basis that the
entire profit from the sale of the 11 lots was on income account.
(Tab 13 of Joint Book of Documents)
20) By letters dated April 8, 2002, the parties agreed that as
of December 31, 1990, the Appellant first formed a trading
intention with respect to the Subject Property and any
appreciation in the value of the land after the effective date to
the date of the disposition of the 11 lots of the Subject
Property in the 1996 taxation year was on account of income.
21) The parties further agreed to have the Subject Property
independently appraised as of the effective date and that the
only outstanding issue to be determined by this Court is the fair
market value of the Subject Property as of V-day.
22) In order to determine the amount to be included in the
Appellant's income on the sale of the 11 lots, the value of
the Subject Property on V-day should be reduced to a per lot
value.
23) The Appraisal Report, prepared by Ray Bower of the firm of
Ray Bower Appraisal Services Inc. on behalf of the Appellant,
valued the Subject Property at $3 million to $3.3 million on
V-day. (Tab 14 of Joint Book of Documents)
24) The Appraisal Report, prepared by the Wayne Pyke, of the
Canada Customs and Revenue Agency on behalf of the Respondent
valued the Subject Property at $2 million on V-day. (Tab
15 of Joint Book of Documents)
25) The Appraisal Report of Mr. Bower and Mr. Pyke both
employed the direct comparison approach to the valuation of the
Subject Property on V-Day with Mr. Bower also utilizing the
development approach to valuation.
26) To assist the Court, a graphic representation of the
geographic location of the comparables used by both appraisers in
valuing in the Subject Property has been included in the Joint
Book of Documents. (Tab 16 and Tab 17 of Joint Book of
Documents)
27) The parties agree that the comparative sales amounts as
reflected in the report of Mr. Pyke are accurate. The comparative
sales amounts as reflected in the report of Mr. Bower are
accurate where reference is made or obtained in respect to
registry instrument numbers.
28) True copies of the Appraisal Reports prepared by the
parties were served and filed by the parties in accordance with
Rule 145 of the Tax Court of Canada Rules (General
Procedure).
29) The parties agree that both Mr. Bower and Mr. Pyke are
qualified real estate valuators whose evidence ought to be
considered as expert opinion by the Court in determining the fair
market value of the Subject Property on V-day. (Tabs 18 and 19
of Joint Book of Documents)
B. ISSUE
[3] The issue to be decided is the
fair market value of the Subject Property as of December 31, 1990
(December 31, 1990 is hereinafter referred to
as"V-Day").
[4] The value on V-Day of the Subject
Property will establish the cost base of the 11 lots that were
sold in 1996 in order for the Minister of National Revenue (the
"Minister"), to determine the income gain realized by
the Appellant on the disposition of the 11 lots in the 1996
taxation year and the income gain realized by the Appellant on
the sale of the additional lots created from the Subject Property
in subsequent taxation years.
C. ANALYSIS
[5] As noted in the Agreed Statement
of Facts the Minister determined that the V-Day value of the
Subject Property was $2,000,000.00 and the Appellant determined
that the V-Day value of the Subject Property was between
$3,000,000.00 and $3,300,000.00.
[6] In support of its position that
the V-Day value of the Subject Property was $2,000,000.00 the
Respondent appointed Mr. Wayne Pyke to serve as an expert
witness. Mr. Pyke provided the Court with an appraisal report on
the V-Day value of the Subject Property (the "Pyke
Report").
[7] In reviewing the Pyke Report, I
concluded that Mr. Pyke had under-valued the value of the Subject
Property. I came to the conclusion that Mr. Pyke had
under-valued the Subject Property for the following reasons:
1. Mr. Pyke was living in the Toronto area in December
1990 and he admitted on cross-examination that he was not
personally familiar with the economic conditions in Windsor in
December 1990;
2. Mr. Pyke said that when he prepared the Pyke Report
in May 2002 he did not realize that the unemployment rate in the
Windsor area had changed dramatically between December 1990 and
1994 when he moved to Windsor. Mr. Pyke said that he was employed
by the Canada Customs and Revenue Agency (then known as Revenue
Canada) in 1994 and that he moved from the Toronto area to
Windsor in 1994.
[8] The relevant unemployment rates
for the Windsor area in the 1990-1994 period were:
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1990
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1991
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1992
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1993
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1994
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Unemployment Rates
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8.8%
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12.4%
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12.6%
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11.6%
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9%
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(See Marchand Report, p. 11 (Exhibit R-2).)
[9] In preparing his Retrospective
Report on May 24, 2002 to determine the value of the Subject
Property on December 31, 1990 Mr. Pyke used the Comparative
Approach and he referred to three comparable sales. (See
page 11 of Pyke Report.)
[10] Comparable #1 was a sale of 33.74 acres
in the Municipality of Lasalle in October 1992 for $1,240,000.00
or $36,752.00 per acre.
[11] During the hearing evidence was
introduced by Mr. Bower (the expert witness for the Appellant)
that the selling price of this property would be reduced because
the property had a very difficult access from the highway, i.e.
it was very difficult to make a left hand turn into the property.
Furthermore, it was established by Mr. Bower that Comparable #1
was sold three years after October 1992, i.e. in 1995 for
$410,000.00. For these reasons, I reject Comparable #1 as a
comparable sale that can be relied upon in determining the V-Day
value of the Subject Property.
[12] Comparable #2 was an 8.4-acre property
located on Lakeview Avenue in Windsor. Comparable #2 was sold in
March 1993 for $300,000.00 or $35,714.00 per acre.
[13] Mr. Bower testified that in the 1970s
and 1980s flooding occurred in the springtime in the area where
Comparable #2 was located. To prevent flooding a berm (3-4 miles
long) was constructed in the area and restrictive development
restraints were established for the area. Mr. Bower said in
Rebuttal Evidence that the development restraints in the area
provided for storm water management and the construction of
lagoons and retention ponds. Mr. Bower said that as a result of
the potential for flooding the cost of developing land in the
area of Comparable #2 would be higher and this cost factor
would have a bearing on the price paid for property in the
area.
[14] Mr. Pyke said that he was not aware of
the flooding problems in the area of Comparable #2 when he
prepared the Pyke Report.
[15] I have concluded that because of the
risk of flooding the price paid for Comparable #2 was probably
lower than the price that would be paid for properties where
there was no risk of flooding.
[16] Comparable #3 was a 31.78-acre parcel
that was sold in June 1995 for $500,000.00 or $15,733.00 per
acre.
[17] In commenting on the Comparables used
by Mr. Pyke, Mr. Bower said that in preparing an appraisal it was
acceptable to refer to sales that occurred after the valuation
date as long as the appraiser commented upon the economic
conditions at the time of the later sales and the economic
conditions at the valuation date.
[18] Mr. Bower also testified that the
economic conditions in Windsor were reasonably strong in 1989 and
1990 but due to the economic conditions, as illustrated by the
high unemployment in the Windsor area referred to above, the
economic conditions in Windsor declined in 1991, 1992 and
1993.
[19] As is noted above Mr. Pyke did not move
to Windsor until 1994 and Mr. Pyke said that he had no
personal knowledge of the economic conditions in the Windsor area
in December 1990.
[20] In referring to Comparable #3 in his
Report, Mr. Pyke said at page 13:
The rate per acre ($15,733.00) may reflect to a degree a
somewhat flatter market experienced in the mid-nineties.
Note: In rebuttal evidence Mr. Bower referred to Mr.
Pyke's Report and the Statement quoted above and said at page
6:
Again, Mr. Pyke failed to include the economic attributes as
it affects the value of the subject property. He's merely
commented on the economic attributes as it affected the sale
price of one comparable property.
[21] In my opinion a sale that occurred in
June 1995 (i.e. 4½ years after V-Day) cannot be
relied upon. Furthermore, in using a sale that occurred in 1995
as a comparable, Mr. Pyke should have made detailed reference to
the economic conditions in Windsor in December 1990 and the
economic conditions in Windsor in June 1995.
[22] Mr. Ray Bower testified as a witness
for the Appellant.
[23] Mr. Ray Bower has lived in the Windsor
area all of his professional life and he is personally familiar
with the economic conditions of Windsor. Mr. Bower has acted
as a real estate appraiser for many years. In answer to a
question from counsel for the Respondent, Mr. Bower estimated
that his firm has prepared in excess of 40,000 residential
appraisals and 15,000 - 20,000 commercial real estate
appraisals.
[24] Mr. Bower provided the Court with a
copy of an appraisal report on the V-Day value of the
Subject Property (the "Bower Report").
[25] In determining the fair market value of
the Subject Property on December 31, 1990 Mr. Bower referred
to comparable sales. In the Bower Report Mr. Bower said at page
24:
The overall average and median sale price of the 12 sales
considered is $60,506/acre and $54,965/acre. The 3 largest site
sales considered averaged $46,314/acre. The 3 site sales located
in the City of Windsor average $70,520/acre.
[26] Mr. Bower said at page 24:
CONCLUSIONS
Based upon the foregoing observations, it is my opinion that
as of December 31, 1990, the subject site had a unit value
range between $50,000 and $60,000 per acre. Applying this range
to the subject site results in a value estimate by the
Comparative Sales Method as follows:
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LOWER
LIMIT
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UPPER
LIMIT
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Subject Site-58.5 acres
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(@ $50,000, @ $60,000)
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$2,925,000 to
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$3,510,000
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SAY
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$2,900,000
to
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$3,500,000
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[27] Page 34 of the Bower Report contains
the following statement:
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that the final estimate of value range as of December 31,
1990 is: $3,000,000 to $3,300,000.
[28] In his argument counsel for the
Respondent placed great reliance on the fact that the development
of the Subject Property was not imminent and therefore
Mr. Bower's analysis of value was not acceptable.
Counsel for the Respondent also emphasized this point in dealing
with the Development Approach contained in the Bower Report.
[29] In analysing the facts before me I have
not relied upon the Development Approach used in the Bower
Report. However, as Mr. Pyke said, the use of the
Development Approach is acceptable as a check and therefore, I
conclude that Mr. Bower's use of the Development
Approach as a check is acceptable.
[30] In terms of the argument that the
Subject Property was not ready for imminent development on
December 31, 1991, I believe it is useful to refer to the
comments made by Cindy Prince, a witness subpoenaed by counsel
for the Respondent.
[31] Cindy Prince is a land use planner who
has practiced in the Essex County and Windsor area for
approximately 23 years. During the hearing the following
exchanges occurred:
By Mr.
Nwachukwu (counsel for the Respondent):
Q. Okay. So from a
land use perspective was the property developable at December
31st of 1990?
A. Not in terms of
-- the servicing was not in front of the property. There would
have to have been an agreement with the City to extend those
services by Wonsch Construction.
(Transcript, p. 20)
In answer to a question from the Court regarding the
development of a sanitary sewer system to the Subject Property
Ms. Prince said:
So that's not an unusually long service extension. That
wouldn't have been cost prohibitive if someone wanted to
purchase the land and undertake its development.
(Transcript, p. 23-24)
By counsel for the Appellant:
Q. -- I'm going
to suggest that there really were no regulatory or planning bars
as of December 31st, 1990 to developing this land?
Ms. Prince replied:
A. Prior to
development actually occurring you would have had to, first of
all, complete the development plan, and that's the document
we're looking at right now.
...
But all of those things are developer driven. They're at -
they're at the option of the developer. When the developer is
ready and has the money, the developer can proceed as long as
they're in agreement with the City.
(Transcript, p. 24-25)
Counsel for the Respondent then referred to the time it would
take to commence development of the Subject Property and asked
the following question of Mr. Prince:
Q. ... How much
time, typically?
A. Well, again, a
lot of that is based on the motivation of the City and the
developer. ... I think realistically that would take ten months
to a year to get all of those things completed, if you were - if
you were pushing and motivated to get it done.
(Transcript, p. 27)
[32] I have carefully reviewed the testimony
of Mr. Bower and I have concluded that Mr. Bower over-valued the
Subject Property because he had concluded that the Subject
Property was ready for imminent development on December 31, 1990.
(Note: As is noted above a Development Plan for Phase 1 of
the Subject Property was not approved until 1996. In June 1997
and February 1998 the City of Windsor gave final approval to
the Plan of Subdivision for Phase 2 and Phase 3 respectively).
Furthermore, I note that several of Mr. Bower's
comparables were located some distance from the Subject Property
(#2, #4, #5, #7 and #12). In addition several of the comparables
had high density potential. For these reasons I believe that the
higher range of $3,300,000.00 as suggested by Mr. Bower is not
acceptable. I also believe that there should be some reduction in
the value as determined in the Bower Report because the Subject
Property was not ready for imminent development on December 31,
1990.
[33] In my opinion the fair market value of
the Subject Property was $2,900,000.00 on December 31, 1990.
[34] The appeal is allowed, and the
assessment is referred back to the Minister for reconsideration
and reassessment on the basis outlined above.
[35] At the conclusion of the hearing
counsel for both parties requested that a conference call be held
to discuss costs. Since success has been divided, I am not
inclined to award costs in this situation.
Signed at Ottawa, Canada, this 21st day of May 2003.
J.T.C.C.
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