Sira Enterprises Ltd. v. The Queen, docket 98-2463-GST-G

Date: 20001122

Docket: 98-2463-GST-G

BETWEEN:

SIRA ENTERPRISES LTD., a body corporate, duly incorporated under the laws of the Province of New Brunswick,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Margeson, J.T.C.C.

[1] The Minister of National Revenue (“Minister”) assessed the Appellant by Notice of Assessment No. 01FE0000013, dated September 5, 1997, in the amount of $49,913.36 tax in respect of Goods and Services Tax (“GST”) returns for the period from July 1, 1995 to December 31, 1995. From this assessment the Appellant appealed to this Court.

[2] At the commencement of the trial in this matter the parties filed an Agreed Statement of Facts as follows:

AGREED STATEMENT OF FACTS

The Appellant, Sira Enterprises Ltd. and the Respondent, Her Majesty the Queen, by her solicitor, agree to the following facts provided that:

such admissions are made for the purpose of these proceedings only; and

the parties are permitted to adduce additional evidence which is not contrary to these agreed facts.

Sira Enterprises Ltd. (hereinafter referred to as “Sira”), is a registered corporation, pursuant to the Statutes of New Brunswick, having its principal place of business at 465 rue L’Avant Garde, in the Town of Dieppe, County of Westmorland, and Province of New Brunswick.

Sira is the owner of the following residential apartment complexes:

a 16 unit building located at 35 Fairlane Drive, Moncton, New Brunswick, the construction of which was completed on or about August 1, 1995, and which was first occupied on or about August 1, 1995;

a 24 unit building located at 150 Mapleton Road, Moncton, New Brunswick, the construction of which was completed on or about September 1, 1995, and which was first occupied on or about September 1, 1995;

a 24 unit building located at 170 Mapleton Road, Moncton, New Brunswick, the construction of which was completed on or about October 1, 1995, and which was first occupied on or about October 1, 1995;

a 24 unit building located at 180 Mapleton Road, Moncton, New Brunswick, the construction of which was completed on or about November 1, 1995, and which was first occupied on or about November 1, 1995;

a 24 unit building located at 200 Mapleton Road, Moncton, New Brunswick, the construction of which was completed on or about December 1, 1995, and which was first occupied on or about December 1, 1995;

a 24 unit building located at 190 Mapleton Road, Moncton, New Brunswick, the construction of which was completed on or about December 15, 1995, and which was first occupied on or about December 15, 1995.

Pursuant to the provisions of the Excise Tax Act, Sira reported the deemed self supply of the said residential complexes as required by law to the Receiver General, on or before January 31, 1996.

Sira used the value of $36,757.00 per unit for the purposes of calculating the GST.

During the year 1996, an auditor for Revenue Canada attended the business offices of Sira to discuss the valuation of the residential complexes as established by Sira, for purposes of calculating the Goods and Services Tax (GST), and that time, the records of costs incurred for the construction of the residential complexes were made available to the auditor.

On September 5, 1997, a Notice of Assessment, Number 01FE0000013 was issued to Sira, under the Excise Tax Act, under GST Account Number 135169696, for the period commencing July 1, 1995 to December 31, 1995.

During the course of the year 1997, Sira did meet with a real estate appraiser acting on behalf of Revenue Canada, on the site of the residential complexes, to discuss the nature of income and expenses then generated by the residential complexes.

On September 5, 1997, Revenue Canada issued a Notice of (Re)Assessment, wherein it assessed, as outstanding GST, the amount of $49,913.36 based on a Statement of Audit Adjustments, provided to Sira by Revenue Canada on August 18, 1997.

The amount of $49,913.36 represented a calculation of GST based on a valuation of the units making up the residential complexes of $42,000.00 per unit.

Sira filed a Notice of Objection to the (Re)Assessment with Revenue Canada on September 22, 1997.

On August 18, 1998, the Appeals Division of Revenue Canada disallowed the Notice of Objection of Sira and confirmed the (Re)Assessment dated September 5, 1997, of $49,913.36.

Sira paid to Revenue Canada the sum of $49,913.36, plus accrued interest in the total amount of $50,288.19 on December 23, 1997, under protest.

DATED the 25^th day of September, 2000.

The parties also introduced viva voce evidence and filed experts’ reports in accordance with the Tax Court of Canada Rules of the Court, (“Rules”).

[3] The Appellant presented as a witness in the matter, one Mr. Aris Vautour who was the manager-owner and president of Sira Enterprises Limited, (“Sira”).

[4] Mr. Vautour was educated at a high school in New Brunswick and later received the degree of Bachelor of Commerce (Administration) in the year 1971. He also worked as a tax auditor for Revenue Canada for two and a half years. He was also a loans officer for I.D.B., then became an accountant for a construction company and building supplier during the 1970s. He then entered into the construction business with A.V. Construction Ltd. (“A.V.”) which specialized in residential building and then in commercial building. Sira was incorporated in 1992 and was involved in constructing residential apartments through another company, A.V. The Appellant was president and chief shareholder of Sira. This company now owns 65 residential apartment units.

[5] In the year 1995 Sira started construction on the residential apartment complexes which are referred to in the Agreed Statement of Facts and which are the subject matter of this appeal. These complexes were constructed by A.V. on behalf of Sira. In the year in question that was all the work that A.V. performed.

[6] Mr. Vautour said that he had some experience in self-assessment matters for GST purposes. In 1990 he completed a project which was exempt from the application of GST. He asked for a refund in each quarter and was visited by representatives from Revenue Canada with respect to the self-assessment that he had performed. These self-assessments related to projects in Newcastle and Dieppe in New Brunswick. The self-assessments were not without problems. With respect to the Dieppe Property he was reassessed. He did not agree with the reassessment and it proceeded to the appeal stage and subsequently the parties reached a compromise.

[7] He also self-assessed the projects in issue here using basically the same figures as he had used for evaluation purposes in the previous complexes because the costs were basically the same. He said: “They were both similar to my costs and I was comfortable with them. I am always dealing with costs. I have complete records.” For such purposes he concluded that the unit cost was $36,525 to which he added GST of $2,573 per unit for a total of $39,098, for capitalization purposes.

[8] The witness was referred to Exhibit A-1, which was admitted by consent, particularly at Tab 2, Section A of that exhibit which contained a worksheet setting out the fixed assets additions to Sira totalling $5,317,264.51 for the year 1995. At Section B of the same exhibit he showed the fixed assets additions of Sira for the year ending December 31, 1995, broken down as to different classifications, such as paving, landscaping, appliances and land. At Section C of the same exhibit he showed the land cost for Sira at December 31, 1995 for the Mapleton Road project (“Mapleton”) totalling $525,000. Sixty seven per cent of this amount was allotted to Mapleton and 33% was allotted to single-family residences and duplexes. These latter complexes have nothing to do with the case at bar.

[9] The witness said that he had supporting documents for these and they were contained in several boxes. He did the work on the records and sat down with his accountants to review them. He was familiar with the costs and all the documents which make up the amounts referred to. He said: “These are the accurate costs. Everything was included. These are the end summaries of the documents contained in the boxes. The costs are accurate”.

[10] He used figures from the previous project in the self-assessment for Mapleton. Again he said that the previous figures were close to his costs for the project in issue. He used the value of $36,757 per unit for the purposes of calculating the GST even though this was slightly higher than the amount arrived at by using the actual costs expended on Mapleton.

[11] In cross-examination he said that he had property appraisals done on these projects but he did not provide them to Revenue Canada. He was referred to the Respondent’s Book of Documents, Exhibit R-1, admitted by consent, particularly at Tab 17 which was a memo sent to Revenue Canada with respect to this project. It was dated July 23, 1998. In this document he said that his costs on the property were $36,536 per unit upon completion. He pointed out that the comparison sales method of calculating the value was incorrect because the sale did not occur on completion of the building. The sale occurred after the buildings were in operation for a number of years. He also questioned the department’s use of the capitalization rate of 10.5% and asked why it should not have been a higher rate. He did not know where he obtained the figure of $36,536 per unit. The $36,757 was the first figure he put forward to Revenue Canada when they were considering the assessment and this was based upon Mapleton. There was a difference of $221 which amounted to a difference of about $30,000 on the whole project with GST of about $2,100 in the difference.

[12] He was referred to Exhibit R-2 which was the reported case of Young v. City of Moncton, reported in 66 L.C.R. at page 247. The figure that he put forward to Revenue Canada was put forward about three weeks prior to this case being heard. At page 251 of that case he admitted that he had used the figure of $39,097 per unit as the cost of Mapleton. The trial judge in that case pointed out that the cost approach value per unit was significantly higher than the actual unit cost of the Appellant. He admitted that this was different than the $36,757 per unit figure but said that Revenue Canada did not agree with that figure.

[13] He was referred to Exhibit R-1, Tab 1 at page 6 which were notes to financial statements (unaudited) as at December 31, 1995 for Sira. He was familiar with the mortgage figures and the amount of $634,249. This represented about 85% financing for the project. The remaining 15% he referred to as self-financing. The 85% was close to his actual cost. Canadian Mortgage and Housing Corporation did their own appraisals according to him.

[14] In re-direct he said that in Young, supra, he was not a witness of his present solicitor and that they had asked him what his actual costs were.

[15] Pierre Cormier was a chartered accountant and has been such since 1982. The parties agreed that he qualified as an expert witness entitled to give opinion evidence in the field of accounting. He had been the accountant of Sira since this year. He did no work for Sira in the 1990s. With respect to the present matter he was retained to review the validity of Mapleton by Sira which was the construction of 136 units. He did a report on it which was dated April 3, 2000.

[16] He was referred to Exhibit A-1 at Tab 1 which was a copy of this report. To prepare this report he reviewed the records of Sira and A.V.. He verified the invoice payment system and the disbursement journals for the year 1995 with an emphasis on Mapleton. He verified payments by Sira and A.V. on the basis of random samples. He found that their records were in excellent condition.

[17] His assignment was to ascertain the validity of the specific cost figure in the financial statements. The work that he did was similar to that which he would provide in an audit.

[18] With respect to the random sampling basis he said that he reviewed 27% of the original invoices and documents of both companies. He found no errors. Therefore, he found that the cost figure used in the books of both companies was accurate and concise. He confirmed that A.V. only did work for Sira that year which made the work more simplified.

[19] The allocation of costs from A.V. were all charged to Sira. All costs allotted by Sira to costs of construction were proper. He did not allot any financing costs after the start of the leasing of this project and he said that this was a proper methodology. All costs that had to be allocated were allocated by Sira.

[20] He concluded that the construction costs for Mapleton were properly recorded and amounted to a total of $4,967,336 before GST. With the construction of the 136 units in the project, this represented a cost of $36,525 per unit. He knew that Sira had self-assessed itself at the figure of $36,757 per unit for the purpose of calculating the GST. This was higher than their book costs.

[21] For the purpose of self-assessment, they would not have been much higher if the contractor had not been related. This opinion was based on the review of financial statements of A.V. for a period of six years during which the company was acting as a building contractor for unrelated parties.

[22] During this period, A.V. recorded an average yearly profit from operations of $24,315. In the same period, the average yearly total construction and overhead costs incurred by the company amounted to $1,639,485. The average yearly profit of $24,315 represented a 1.48% profit margin on the costs it incurred. It could have charged an additional $65,236 ($4,407,899 multiplied by 1.48%). If they considered that A.V. could have charged Sira an additional $65,236 and that the self-assessment value was in excess of the total construction costs by $31,635, as shown above, Sira could have increased the self-assessment value by an additional $33,601 ($65,236 less $31,635). This increase represented $2,352 in GST, an insignificant amount for a construction project costing close to $5,000,000.

[23] In conclusion, he believed that the self-assessment value used by Sira was not significantly lower than the amount an independent contractor would have charged for the construction of these same buildings. He concluded that the figure of $36,525 was accurate as the cost per unit. If you take into account the profit margin for unrelated companies, the figure would have been $37,005.

[24] In cross-examination the Appellant said that he was hired in late March of the year 2000 just before discovery was conducted. He applied approximately 15 to 20 hours of his time to this project. There was approximately one box of records. Before he commenced his work, the figure of $36,525 per unit was not provided to him. He determined that the costs given in the financial statements were accurate and precise.

[25] He did account for management fees. They included Mr. Vautour’s salary for that year. He did not see any appraisals on these properties and he did not look at the mortgage amounts.

[26] He was referred to Exhibit R-1, Tab 1, more particularly at page 6 of the notes to financial statements and he agreed that if he used those figures and calculations, the cost per unit would have been $45,659. He admitted this was a big difference. However, the mortgage amount had no bearing on the calculation of costs.

[27] The Respondent called Roger Evans Beckwith who was a senior real estate appraiser with Canada Customs and Revenue Agency. He was qualified as an expert in real property appraisals and was entitled to give expert evidence in that regard. His qualification was by consent.

[28] He was referred to Exhibit R-3 which was his curriculum vitae. He had been qualified as an expert on previous occasions. He had done thousands of appraisals and he did one for the project in question in this case which he referred to as the Fairlane and Mapleton projects.

[29] There were three different methods of appraising a project such as the one in issue. They were (1) cost approach, (2) income approach, and (3) market approach or direct comparison approach.

[30] All the reports were completed by him. He met with Mr. Vautour and inspected one unit. Mr. Vautour told him that all units were the same. He used all units to determine the market value which is set out in his report. The appraisal report for 35 Fairlane Drive included the definition of market value. This was defined by the Uniform Standards of Professional Appraisal Practice 1995 Edition as:

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

buyer and seller are typically motivated;

both parties are well informed or well advised, and acting in what they consider their best interests;

a reasonable time is allowed for exposure in the open market;

payment is made in terms of cash in Canadian dollars or in terms of financial arrangements comparable thereto; and

the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

[31] He gave the dates on which he completed the appraisals for the different units in question. With respect to location they were in the north west sector of the Moncton area. They are easily accessible to the intra-city traffic network and the TransCanada Highway. He referred to the location as good and as being found in the fastest growing area in Moncton. He used the income approach and the direct comparison approach. He did not use the cost approach at all. He said, “usually, for income property, I am more interested in the income stream and not the costs”. He considered the gross rent achievable for the properties multiplied by the number of units and deducted from that an allowance for bad rent and operating expenses for a typical year. He then came up with a net income.

[32] He looked to the market for the capital rate, he looked at comparisons in the market and looked at sales to come up with these figures. He received information from Mr. Vautour with respect to income and expenses. He identified sales of new apartment buildings in the area and obtained gross income figures in order to obtain his multiplier. He charted and analysed three other sales in arriving at his ultimate calculations.

[33] He put most weight on the direct comparison approach. It differed in result from the income approach. For the 35 Fairlane Drive property the higher value was obtained by the income approach.

[34] He was referred to the cost approach for calculating the value and he said that there are a number of defects in this method such as the delay in time and perhaps delays in construction which might not be reflected in the rents available. He reviewed the site plan and reviewed two of the mortgages. His values were higher per unit than the mortgage values.

[35] With respect to the appraisal on the 35 Fairlane Drive property the taxes did not reflect the building being in place. Property taxes for the property were estimated after reviewing the assessments and tax levies for the years 1996 and 1997 in order not to reflect any partial assessments and lower tax levy than what would normally be charged.

[36] The rates were estimated after discussion with the Moncton officials. However, it should be noted that the water and sewer rates are based on consummation. The water and sewer rate was based on the best available data. Some expenses and income were confirmed by Mr. Vautour. He confirmed some other expenses with the City of Moncton.

[37] He referred to the three sales that he used as comparables which were found at Schedule D of his appraisal report. The 431 Gauvin Road property had some basement units which would attract less rent. The 24 Prince Street property also contained basement units which were harder to rent. The 487 Champlain property in Dieppe had no air exchanger system which was a factor.

[38] He admitted that the comparables were some distance from the subject property but he needed to refer to new buildings and those that provided similar income.

[39] His conclusion was that the value of the units making up the residential complexes were $42,000 per unit.

[40] With respect to the units on 150 Mapleton Road he used the direct comparison approach and he used the same comparables. Each unit had a value of $42,000 which was the same as those located at 35 Fairlane Drive.

[41] With respect to the complex at 170 Mapleton Road he used the income approach as set out at page 20 and the direct comparison approach as set out at page 21 and he concluded that the proper value was $42,000 per unit.

[42] With respect to the units located at 190 and 200 Mapleton Road, these buildings were quite close to the buildings in issue. The direct comparison approach was best and the value came out at $42,000. He did not consider the equity value of the owner when he considered the mortgage amounts.

[43] In cross-examination he admitted that he did not use the cost approach at all but he did admit that as the capitalization rate increases, the value decreases. Referring to the income approach he said, “you look at the capitalization rates on identical properties”. He admitted that he used the same properties to obtain the capitalization rates as he did when he was considering the comparable sales approach. He estimated gross income and expenses. If he made a mistake in gross income or expenses this would affect the capitalization rate. He did not make any adjustments for location. He admitted that he was doing the appraisal for his employer.

[44] He was referred to Exhibit A-1 at Tab 3 which was Policy Number P-165 with respect to fair market value for purposes of Part IX of the Excise Tax Act, being the policy position of Revenue Canada and admitted that the policy says that no method should be excluded categorically. However, he did not use the cost approach even though these were new buildings. He admitted that the principle of substitution was inherit in all approaches. Depreciation would not be a factor in the cost approach here because there was no physical depreciation, the buildings being new and the relevant date coincided with the end of the construction period.

[45] He was not aware of the case of Timber Lodge Ltd. v. Canada, [1994] G.S.T.C. 73 (T.C.C.).

[46] He used estimated vacancy rates in all of the comparables. He estimated the rents but he did have some accurate information as he had been involved in appraisals earlier done on some of the properties. He agreed that GST should be excluded from the calculation but he admitted that in the comparables GST may have been included already and he did not make any allowance for these.

[47] He admitted that even in the comparables approach there may have been GST built in and also that this might be so in the income approach. He was again referred to Exhibit A-1 at Tab 4 with respect to the Uniform Standards of Professional Appraisal Practice, Standards Rule 1-4 (i) and (ii) which indicated that in developing a real property appraisal, an appraiser should look at costs. He admitted that this was the case but in the case at bar he had an income-producing property and therefore the other methods were more applicable.

[48] He was asked specifically if he departed from the general principles and whether or not one was required to give reasons for disregarding any method. He said that you were. In answer to a question by the Court later on with respect thereto he said that it was a sufficient reason that he had concluded that the other methods were better.

[49] He admitted that he had not done any calculations by “backing out” GST. No one told him to stay away from the cost method. He admitted that you must have regard to the nature of the assignment.

[50] In re-direct he said that he included the location matter in his final assessment but he did not say how. After re-direct, in response to a question by the Court he said that he had made up his mind that the income approach and the comparable sales approaches were the best and he did not consider the cost approach. Further, he said that the comparables that he used were truly comparable.

[51] In response to a question by counsel for the Appellant he said that he put a lot of emphasis on the Gauvin Road property and that there was a school nearby but there was also a school close to Mapleton. He did not know what types of schools they were.

Argument on behalf of the Appellant

[52] In argument counsel for the Appellant referred to the case of Timber Lodge, supra, at paragraph 7 where Taylor T.C.J. questioned the fact that the cost approach was eliminated in both reports. He said:

The fact is that on both of these buildings, construction was completed on the very date on which appraisal is required. Of course there would be little if any value to a restructuring of an amount to accomplish “replacement or reproduction costs,” and no purpose would be served in going through that exercise. But to eliminate, ignore, or denigrate the usefulness for appraisal purposes of that very total actual cost which had been accumulated during construction and culminated on that very day leaves me in serious disagreement. In all the hundreds of appraisal reports and opinions to which I have been exposed over the years, I can not recall one upon which the relevant date coincided exactly with the end of construction, and the resultant calculations of total costs. For me, barring any direct and incontestable variation in that amount of cost, it should also serve as value, and indeed as fair market value.

Counsel also referred to the case of Charleswood Legion Non-Profit Housing Inc. v. Canada, [1998] T.C.J. No. 503 (Q.L.) where Archambault T.C.J. concluded at paragraph 46 of page 9:

I believe that the Cost Approach should not have been ignored by the two experts. In circumstances such as those in this case, the fair market value should be very close to the cost paid by the Appellants because the two buildings were brand new at the relevant valuation date. This is the approach followed by my colleague judge Taylor in Timber Lodge Limited v. The Queen, [1994] G.S.T.C. 73.

[53] Counsel argued that the cost approach was the right method to be used in the present case and it was completely ignored by the Minister. The appraiser did not use new buildings as comparables. There are always differences between buildings and these should be adjusted. They were not adjusted for in this case.

[54] In the income approach the appraiser for the Minister used the same figures as he did in the comparables approach and there is an inherent weakness in this. When using the cost approach you have a real price. There is no uncertainty. Counsel asked: “Who would value something at more than you built it for?”

[55] Counsel argued that the appraiser on behalf of the Minister gave no reason for excluding the cost approach even though all of the costs were verified on an audit basis. The law is clear that the cost approach should be used and the basis for it is clear. The Minister made a mistake in using the method that he did when the costs were available. The accountant and the taxpayer are being fair in their approach as they have allowed for adjustments.

[56] The Minister has mistaken the law and the facts. The Minister did not exclude GST in the calculations. Subsection 123(1) sets out what fair market value is. Section 154 sets out what is excluded and GST is excluded. It appears that the Minister had included GST and therefore 7% should be deducted from his figure.

[57] In the case of Marall Homes Ltd. v. Canada, [1995] G.S.T.C. 70 (T.C.C.) at paragraph 15, Judge Bell deducted the GST and used the cost approach as being the proper method. He arrived at his valuation by taking three quarters off of the Minister’s calculation and increasing the Appellant’s calculation by one quarter. However, that case can be distinguished from the case at bar as it was not a straightforward rental property and there were other complications.

[58] In the case of Laprairie (M.) v. Canada, [1995] G.S.T.C. 74 (T.C.C.) McArthur T.C.J. mentioned Timber Lodge, supra, but concluded that the Appellant had not met the burden of showing that the market value was less than the actual cost. In that case the Court concluded that the correct valuation of the home was based on the direct comparison approach and the learned trial judge concluded that a court will accept market price or price paid as fair market value unless evidence is produced to show that fair market value is something different from the price paid.

[59] In any event the cost approach should be accepted in the present case as in Timber Lodge, supra.

[60] The proper valuation should be $36,525 per unit or if the Court should decide to consider the profit factor then the amounts should be $37,005 per unit.

Argument on behalf of the Respondent

[61] Counsel for the Respondent referred to section 193 and the self-supply rules and argued that the fair market value was the value determined at the time the unit was first used. He also referred to subsection 123(1). He pointed out that the Court must conclude what the fair market value was. The fair market value in the case at bar is not too different from what the Respondent’s appraiser used.

[62] He argued that subsection 191(3) takes into account what is going on in the market place and not what it cost to build the unit. In Marall Homes, supra, at paragraph 16 Judge Bell indicated that the appraiser should have examined the factors involved in forming his conclusion based upon the income approach because it would have had more relevance to the situation. In the case at bar there was rental income to be considered. Anyone buying the property would have taken the income into account.

[63] The Appellant did not put forward the appraisals which he had done on the properties and there was no information forthcoming about them. The approach used by the Minister is reasonable and comprehensive.

[64] With respect to GST, it was excluded in all of the Minister’s calculations and the amount presented by the Minister as fair market value is the correct valuation. The appeal should be dismissed with costs.

[65] In reply, counsel for the Appellant said that the buildings in question are new buildings. One should consider what it cost to build them.

[66] Again he said that GST was indirectly included in the figures used by the Minister when he used the comparable sales approach and the income approach because GST would have been included in those buildings. The fair market value has to be the lower of the cost or the market value, being the amount of money that the property could be reasonably sold for. Surely the legislators must have had in mind what it cost to build the complexes when they fashioned the rules for calculating GST. Otherwise it makes no sense.

[67] The appeal should be allowed with costs.

Analysis and Decision

[68] In this case some evidence was tendered with respect to the value of mortgages outstanding on the properties in question. In the evidence it was indicated that the properties may have been mortgaged to the extent of 85% of their value with 15% of the value having been supplied by the Appellant company, by one means or another. However, this information is of very little value to the Court without more details having been introduced as to the real basis for the mortgage. The Court finds that such information does not assist it in attempting to determine the fair market value of the properties in question for the purposes of assigning GST to them. Consequently, the Court is unable to attach much weight to this information.

[69] Evidence was also elicited that the Appellant company had at some point in time obtained appraisals on these properties and that these appraisals were not made available to the Minister. Again, the Court is unable to attach very much weight to this information since there was no evidence before it as to what these appraisals amounted to, for what purpose they were obtained or when they were obtained. Presumably if the Respondent were interested in such appraisals he could have obtained the information by way of discovery and could have compelled the production of the appraisals if they were indeed relevant. This was not done and no more information was given to the Court at the time of the trial except the fact that the Appellant had sought and obtained appraisals at some time in the past.

[70] Consequently, the Court places very little weight on this information as presented and concludes that it offers no assistance whatsoever to it in determining the fair market value of these properties for the purpose of GST.

[71] The Court sees its job as that of determining the fair market value of the properties in question at the time when they were first ready for occupation. The GST provisions in essence require the payment of a tax on goods and services supplied or rendered. The goods and services supplied or rendered in the case at bar are those goods and services rendered in the course of the construction of the properties in question. The Court’s duty is to determine the fair market value of the properties for the purpose of the GST. The Court is not interested in the fair market value of these properties for the purpose of sale and indeed there might be many factors which might have to be considered if the Court were required to determine the fair market value for the purpose of sale, which may not be relevant for GST purposes.

[72] In the case at bar it is obvious that there were no special circumstances which would have to be taken into account in determining the fair market value for the purposes of the GST. In accordance with the evidence offered by both parties, and in accordance with the decided cases on this subject, there are three generally accepted methods of determining fair market value. These are: 1) the cost approach, 2) the income approach and 3) the market approach or direct comparison approach.

[73] In some cases it may be possible to conclude that one or other method is the best approach depending upon the circumstances. In the case at bar the Appellant proposes that the cost approach is the best method to use and that was the method employed by the Appellant in concluding as he did that the fair market value of each of the units in question at the time they became ready for occupancy was $36,536 and that is the amount at which the Appellant had self-assessed itself. On the other hand the Respondent contends that the best methods to be used in the present case are the income approach and the market or direct comparison approach. These two methods were used by the Respondent and it excluded the cost approach.

[74] As pointed out by Taylor T.C.J. in Timber Lodge, supra, there are some deficiencies in each of the approaches. In that case, Judge Taylor found that:

Both sets of reports were complete and detailed and demonstrated professional competence, and those for 144 Maypoint and 148 Maypoint were virtually identical in their approach in both cases. Both sets of reports for all practical purposes set aside the Cost Approach, and relied largely on the other two approaches above. I would quote first from the Stillwell report on 144 Maypoint:

“These three approaches to value have been the basic tools for the appraiser over the years. The three approaches are, to a degree, intermarried, each embodying factors found in the market.”

Yet in those instances as in the case at bar, the cost approach was completely eliminated.

[75] In the Timber Lodge case, supra, Judge Taylor had difficulty in understanding why the cost approach was eliminated in both reports and he did not understand the reasons they put forward for doing so. In that case as in the case at bar construction was completed on the very date on which the appraisal is required. Judge Taylor said:

...Of course there would be little if any value to a restructuring of an amount to accomplish “replacement or reproduction costs,” and no purpose would be served in going through that exercise. But to eliminate, ignore, or denigrate the usefulness for appraisal purposes of that very total actual cost which had been accumulated during construction and culminated on that very day leaves me in serious disagreement.

. . .

For me, barring any direct and incontestable variation in that amount of cost, it should also serve as value, and indeed as fair market value.

[76] In the case at bar the appraiser presented by the Respondent was asked the very question as to why he failed to take into account the cost approach in determining fair market value at the time the properties were ready for occupancy. The only attempted explanation was that he had already made up his mind that the income approach and the comparable sales approach were the best and he did not consider the cost approach. He did say that the comparables used were truly comparable but the evidence did show that there were some different factors when one compared the properties in question and the comparables that were used. To the Court’s mind, this was not a satisfactory reason for disregarding the cost approach altogether.

[77] When one has due regard to the departmental policy on the fair market value approach as outlined in Exhibit A-1, Tab 3, it is clear that this policy approach says that no method should be discounted. In the case at bar the cost method was indeed discounted.

[78] Again as shown at Exhibit A-1, Tab 4, the Uniform Standards of Professional Appraisal Practice indicate that in general you should look at the cost approach. The answer that the Respondent’s appraiser gave on that point was that in the case at bar he had an income producing property and therefore the other methods were more applicable. Here again, the Court finds it difficult to accept that as being a valid reason for disregarding the cost approach and the Court must conclude that there must have been some other reason why the cost approach was disregarded although no other reason was given by the appraiser.

[79] The appraiser for the Respondent agreed in cross-examination that depreciation would not be a factor in the cost approach here because there was no physical depreciation and the relevant date coincided with the end of the construction period. Again the appraiser was in agreement with the suggestion of counsel for the Appellant that in all of the comparables he used an estimated vacancy rate and they estimated rental rates although he indicated that he had some accurate information with respect to those rents, having been involved in earlier appraisals, but none of that information was forthcoming to the Court.

[80] Again, the appraiser was prepared to admit that he should have excluded GST in making his calculations of value and indeed said that he had done so. However, it became quite apparent after cross-examination that insofar as the comparables were concerned GST may have already been included in those values and he agreed that he had not “backed them out”. Finally, he was prepared to admit that even in his comparables approach there may have been GST built in and this may also have been the case in the income approach.

[81] In re-direct, the appraiser for the Respondent said that he included the location matter in his final assessment but no evidence was given as to what this meant exactly and as to what information he considered in that regard. Consequently, the Court is left with the conclusion that he merely took this into account in some general, unknown way in reaching the conclusion that he did. He gave some general information about the sites being comparable in the sense that both sites may have had schools nearby them and in a general way that the sites were comparable but without giving more information as to the exact nature of both sites and that the sites were indeed comparable. The Court is left in some doubt as to whether or not the comparables were indeed comparable.

[82] This of course is one weakness in the comparable sales approach method because it is obviously not possible to find sales which are truly comparable and in the case at bar the appraiser for the Respondent did admit that he had to go some distance away from the site of the properties in question to locate other properties which he considered to be comparable.

[83] In Charleswood, supra, Judge Archambault found that one approach was to find that the fair market value was in the range of the actual cost paid by the Appellants since the two buildings were brand new at the valuation date. In that case he found that the fair market value should not exceed the cost of the buildings and should not be lower than the amount of the mortgage loans used to finance the acquisitions.

[84] In that case he said at paragraph 46 at page 9:

I believe that the Cost Approach should not have been ignored by the two experts. In circumstances such as those in this case, the fair market value should be very close to the cost paid by the Appellants because the two buildings were brand new at the relevant valuation date. This is the approach followed by my colleague judge Taylor in Timber Lodge Limited v. The Queen, [1994] G.S.T.C. 73.

He was prepared to concede that there may be special circumstances:

...in which some of the costs incurred for the construction of a building may not be reflected in its fair market value. For example, if there were cost overruns and other inefficiencies during construction, the cost of such property may be above its fair market value. There may be other situations where the cost of property is below fair market value because the land was acquired for $1, as is the case with Charleswood, or because the owner gets involved in the construction of the building and does not charge for his time. Just to take an extreme example, if the cost of a building only included the material and not the labour cost, then clearly the value should be above the cost of the building. Here, there is no evidence of such special circumstances, except for the cost overrun of $30,000. Given that a portion of this cost overrun was assumed by the builder and that the amount represents a small fraction of the total cost, it would not have much impact on the determination of the final value.

[85] In the case at bar the Court finds that there is only one circumstance which would cause it to conclude that the fair market value should be different than the cost incurred for the construction of the buildings and that is found in the evidence of Pierre Cormier, the chartered accountant who did the appraisal on behalf of the Appellant. His evidence was not contested in that regard. He said that he went back six years on the books of A.V. and concluded that if Sira had been dealing with A.V. at arm’s length there would have been an additional $65,236 that could have been charged. That included the extra amount charged by the Appellant in his own self-assessment. Based upon his calculations and taking into account the extra profit margin factor the value of each unit could have been as much as $37,005.

[86] After considering all of the evidence, the arguments of counsel and the expert evidence presented, the Court is satisfied that in the present case the cost approach would have been the best method to be used in calculating the fair market value of the properties in question for the purposes of Part IX of the Act. The Court further finds that based upon the expert evidence given by the appraiser presented on behalf of the Appellant and taking into account the credibility that the Court attaches to the evidence given by Mr. Vautour with respect to the accuracy of the company’s records, as confirmed by the appraiser, the Court is satisfied that the fair market value for purposes of Part IX of the Act, was $37,005 per unit.

[87] Under the circumstances, the appeal is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment based upon these findings.

[88] The Appellant will have its costs, to be taxed.

Signed at Ottawa, Canada, this 22^nd day of November 2000.

"T.E. Margeson"

J.T.C.C.