Date:
20010328
Docket:
1999-3446-IT-I
BETWEEN:
YVAN
TURMEL,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Reasons
for Judgment
Lamarre
Proulx, J.T.C.C.
[1]
This is an appeal under the informal procedure in respect of the
1994 taxation year. The issue concerns the fair market value on
February 22, 1994, of land held by Club Les Garrots Inc.
(hereinafter referred to as the "Club" or the
"corporation"). The appellant is one of the Club's
four shareholders and holds 25 per cent of its
shares.
[2]
The appellant was not present at the hearing.
[3]
In his 1994 tax return, the appellant made an election under
subsection 110.6(19) of the Income Tax Act (the
"Act") with respect to his share in the Club. He
reported the fair market value of that share, on February 22,
1994, as $102,873. Since the adjusted cost base was $14,535 and
since the deemed proceeds of disposition were $102,873, the
capital gain to which the election applied was $88,338. The
taxable capital gain-75 per cent of $88,338-and the capital gains
deduction claimed were each in the amount of $66,253.
[4]
At the time of the assessment, the Minister of National Revenue
(the "Minister") established the value of the land at
$160,000 and the value of the appellant's share at $40,000.
According to the Notice of Confirmation, since the amount
designated as proceeds of disposition exceeded 11/10 of the fair
market value, the election under subsection 110.6(19) of the
Act could not, by virtue of subsection 110.6(28) of
the Act, be revoked or amended. The deemed capital gain
resulting from the deemed disposition was determined to be
$18,873 in accordance with subsection 40(3) and paragraphs
39(1)(a) and 53(2)(v) of the Act. A taxable
capital gain of $14,155 was computed pursuant to paragraph
38(a) and included in the computation of income under
section 3 of the Act.
[5]
The computation of the tax consequences appears in the schedule
to the Reply to the Notice of Appeal, as follows:
[TRANSLATION]
FMV of the
property at the end of the day on February 22,
1994:
$40,000 (A)
Proceeds of
disposition designated by
T/P:
$102,873 (B)
Amount from
line (A) x
1.1:
$44,000 (C)
Line (B)
minus line
(C):
$58,873
$58,873 (D)
Line (A)
minus line
(D):
($18,873) (E)
Line (E) =
the new adjusted cost base, and if negative, the cost base is
zero.
The negative
amount becomes a capital gain for 1994, and you may not claim a
capital gains deduction to reduce this gain.
New adjusted
cost
base:
$0
Additional
capital
gain:
$18,873
Taxable
capital
gain:
$14,155
[6]
The appellant's position as set out in the Notice of Appeal
is as follows:
[TRANSLATION]
1.3
After reviewing the above-mentioned election, Revenue Canada
determined the value of the land to be $160,000 and the value of
the taxpayer's shares in the corporation to be
$40,000.
1.4
In the course of the review conducted by Revenue Canada, the
taxpayer instructed his own firm of accredited appraisers
(Jean-Jacques Verreault & Associés) to
determine the fair market value of the land. After a number of
meetings and discussions with Revenue Canada's appraiser,
Verreault & Associés determined that $364,300 was the
minimum fair market value of the land, excluding the hunting and
fishing rights owned by the corporation (see attached
documents).
Taking this appraisal into account, the fair market value of the
taxpayer's shares in the corporation is thus at least
$90,000.
1.5
In view of the difference between Revenue Canada's appraisal
and the appraisal of Jean-Jacques Verreault &
Associés, the taxpayer instructed Pierre Roy of the Roy
Mercier law firm to determine which appraisal was more
accurate.
. .
.
According to Mr. Roy's report, a copy of which is attached
hereto, the fair market value of the land should be at least
$0.05 per square foot, resulting in a total minimum market value
of $442,000.
. .
.
2.1
Based on the various comments referred to above and the documents
provided, the fair market value of the land should be at least
$360,000. Considering the 10% difference in fair market value
allowed in the case of the election under subsection 110.6(19) of
the Income Tax Act and given the fact that the appraisal in
question represents a minimum price, the said election should be
accepted as filed.
[7]
Each of the parties called an expert witness to testify regarding
the fair market value of the land. The respondent also called an
expert with respect to the value of the appellant's share in
the corporation.
[8]
The appellant's expert was Jean-Jacques Verreault.
In his opinion, the Club's market value was $364,300 :
$360,000 for the building and $4,300 for the rowboats and the
camp.
[9]
The respondent's expert was Yvon Ouellet. In his view,
the value of the property was $115,000.
[10] The
corporation owns a hunting and fishing club on 8,853,350 sq.
ft. of land in the municipality of Château-Richer in
Quebec. This land is situated south of Ste-Anne Boulevard. The
property consists of three parcels, two of which are located
approximately 125 meters from Ste-Anne Boulevard while the other
is on Ste-Anne Boulevard. This parcel has a six-meter
frontage on the boulevard. The total area is composed of
6,869 sq. ft. of land along the riverbank, that is, between
Ste-Anne Boulevard and the high-water mark, and
8,846,481 sq. ft. of shore, that is, land between the
high-water and low-water marks. The riverbank area of
6,869 sq. ft. is actually a 20-foot-wide access road that
links the shorefront land to Ste-Anne Boulevard.
[11] There
are 13 duck breeding ponds, seven of which were developed by
Ducks Unlimited and the others by the Club. No document was
submitted concerning the agreements with Ducks
Unlimited.
[12] The
land was purchased in 1981 and 1982 for a total price of $33,000.
However, according to page 8 of the report of the appraiser
Verreault, when Club Les Garrots Inc. purchased most of the land
in March 1981, the owner, Club de Chasse les Ilets Inc., belonged
to [TRANSLATION] elderly people who no longer hunted. The land
had been abandoned for a number of years. It was overgrown and
there was no duck pond any more. The sale price was a liquidation
price because the vendors were eager to sell. In the years
after the purchase, the Club invested a great deal of time and
money to restore the land to a condition more suitable for duck
breeding and hunting. Ducks Unlimited also developed breeding
ponds to enable ducks to breed more easily. . . . There is a
peninsula (at low tide) that becomes an island at high tide. When
we visited the site, the tide was low and coming
in.
[13] The
municipal assessment for 1995, 1996 and 1997 was $82,400. As
regards municipal zoning, the land is located in a zone in which
only hunting, fishing or ornithological uses are permitted. No
permanent construction is allowed in that zone.
[14] On the
land, there are four rowboats. The 12' x 14'
camp is located on the property of Serge Rhéaume,
another member of the Club.
[15] The two
appraisers believe that the highest and best use of the land is
for a hunting and fishing club. The direct comparison approach
was chosen by both. However, the appellant's appraiser based
his appraisal on surface area. He took the depth of the property
into account using the square root method. As for the
respondent's appraiser, his analysis of the market with
regard to such properties shows that he considered only the
linear measurement of the frontage.
[16] The
appraiser Verreault noted sales of vacant land within the
municipality of Château-Richer from 1990 to the date
of the appraisal. The sales noted were of properties located
south of Ste-Anne Boulevard. Of the 17 sales so noted, the
appraiser chose eight. These sales had apparently also been
chosen by the Minister's first appraiser. In view of the
great depth of the property, Mr. Verreault used the square root
method to arrive at a value of $0.04 per sq. ft. for the
shorefront portion, for a total of $353,859. He assessed the
riverbank portion at $0.91 per sq. ft., or $6,250 altogether,
which gives a combined of $360,109.
[17] The
unit of comparison used by the Minister's appraiser was the
linear metre of frontage. This unit was chosen, according to the
appraiser, because his analysis of the market showed that the
depth of the shore was of less importance than access to the
river with the rights associated with such access.
[18] The
previous appraiser, with whom the appellant's appraisers had
talked and whose report was not produced in evidence but had
served as the basis of the assessment, had arrived at a value for
the land of $160,000. His appraisal apparently took property
depth into account.
[19]
According to the Minister's appraiser, it makes no difference
whether the depth was 300 metres or 700 metres; all that has to
be considered is linear meters of shoreline. The depth of the
properties whose purchase was analysed by the Minister's
appraiser was at least half of that of the properties in question
in this case. According to the appraiser, when purchasing
vacation property, such as lakefront property, it is the amount
of frontage that determines the value. In his view, the same
method had to be used for the purposes of the appraisal involved
here, with no adjustment for the depth of the property. He used a
unit rate of $100 per linear metre. As the frontage was 1,150
metres, he arrived at a total of $115,000, even though the
property's depth was 715 metres.
[20] He also
took into account the fact that the Town of Beaupré, with
the collaboration of public agencies, including the Fondation de
la faune du Québec, had recently purchased four
properties. He included in his report a letter from the lawyer
for the Fondation de la faune du Québec, dated June 20,
2000, regarding the unit rates paid for various purchases south
of the boulevard in the parish of Ste-Anne de
Beaupré. The lawyer referred to a unit rate of $100 per
linear metre for three properties and $154 for a fourth
property.
Conclusion
[21] It does
not seem plausible to me to accept the linear metre method as
being superior to the square root method when it comes to
appraising very deep properties, even when located along the
shore. The Minister's appraiser maintains that it was his
analysis of the local market for shorefront properties that
prompted him to use this method, and that the validity of this
choice was confirmed by the letter from the Fondation de la
faune.
[22] The
statement by the Fondation de la faune could have been useful if
that organization had been the purchaser, but it was not; the
Town of Beaupré was. The statement may have been a tool in
negotiations between the Fondation de la faune and the town in
order to determine the extent of the former's financial
involvement. It is not known which method was used by the Town of
Beaupré, which was the purchaser. In those circumstances,
the information provided by the Fondation de la faune, which is
moreover very brief, is not useful.
[23]
Furthermore, I would have liked to have been referred to some
authors who confirm the appropriateness of not taking depth into
account in appraising waterfront property. I was referred to no
authors regarding the method to be used. The Minister's
appraiser might object that the appellant's appraiser did not
provide me with any authors on the subject of his square root
method either. That is true. With respect, however, it seems to
me, based on my knowledge of the reactions of a normal purchaser,
that the approach taken by the appellant's appraiser is more
in keeping with the norm than that used by the Minister's
appraiser.
[24] One
method appears strange, while the other seems to result in a very
high value if one takes into account the municipal assessment and
even certain land purchases. However, it is my opinion that the
method used by the appellant's appraiser is more logical,
especially when one considers the highest and best use of the
land in question, which is as a hunting and fishing club. That is
accordingly the method I must follow. Counsel for the respondent
suggested that I might make certain allowances, but I would find
that difficult since the errors in the appellant's appraisal,
if his method were accepted, have not been specifically pointed
out to me.
[25]
Therefore, the appeal is allowed, with costs.
Signed at
Ottawa, Canada, this 28th day of March 2001.
J.T.C.C.
[OFFICIAL
ENGLISH TRANSLATION]
1999-3446(IT)I
BETWEEN:
YVAN
TURMEL,
Appellant,
and
HER MAJESTY
THE QUEEN,
Respondent.
Appeal heard
on January 9, 2001, at Montreal, Quebec, by
the
Honourable Judge Louise Lamarre Proulx
Appearances
Counsel
for the
appellant:
Pierre Roy
Counsel
for the
respondent:
Valérie Tardif
JUDGMENT
The appeal from the assessment made under the Income Tax
Act for the 1994 taxation year is allowed, with costs, in
accordance with the attached Reasons for Judgment.
Signed at
Ottawa, Canada, this 28th day of March 2001.
J.T.C.C.
[OFFICIAL
ENGLISH TRANSLATION]
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