Ringuette v. The Queen, docket 97-2802-IT-G

Date: 20000420

Docket: 97-2802-IT-G; 97-2803-IT-G

BETWEEN:

CAROLINE RINGUETTE, DOUGLAS YOUNG,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Lamarre, J.T.C.C.

[1] These are appeals from assessments made by the Minister of National Revenue ("Minister") pursuant to subsection 160(1) of the Income Tax Act ("Act"). The Minister assessed each of the two appellants for the sum of $200,000 on the basis that they were jointly and severally liable with Gilles Ringuette to pay tax owed by the latter. At the hearing, counsel for the Minister advised the Court that the Minister was prepared to vary the assessments and to hold the appellants liable for the sum of $175,000 instead of $200,000. In her written arguments, counsel for the respondent conceded that the appellants should be held liable for an amount of not more than $160,500. The appellants ask this Court to vacate these assessments.

[2] Subsection 160(1) reads as follows:

SECTION 160: Tax liability re property transferred not at arm's length.

(1) Where a person has, on or after May 1, 1951, transferred property, either directly or indirectly, by means of a trust or by any other means whatever, to

(a) the person's spouse or a person who has since become the person's spouse,

(b) a person who was under 18 years of age, or

(c) a person with whom the person was not dealing at arm's length,

the following rules apply:

(d) the transferee and transferor are jointly and severally liable to pay a part of the transferor's tax under this Part for each taxation year equal to the amount by which the tax for the year is greater than it would have been if it were not for the operation of sections 74.1 to 75.1 of this Act and section 74 of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952, in respect of any income from, or gain from the disposition of, the property so transferred or property substituted therefor, and

(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of

(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and

(ii) the total of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

[3] Gilles Ringuette is the father of Caroline Ringuette who is married to Douglas Young. On January 13, 1995, Gilles Ringuette sold a property to the appellants for a consideration of $300,000. At that time, Gilles Ringuette was liable to pay under the Act an aggregate amount of $1,056,023.12 in respect of the 1989, 1990, 1991 and 1992 taxation years (according to paragraph 3 (e) of the Reply to the Notice of Appeal, and this allegation has not been challenged by the appellants). The respondent is of the view that the fair market value of the property was not less than $460,500 at the time of the transfer. The respondent therefore claims that the appellants are liable with Gilles Ringuette to pay tax owed by him up to an amount of $160,500. The appellants alleged that the fair market value of the property was no more than $245,000 when they purchased it. Having paid $300,000, they submit that no liability on their part is triggered by the provisions of section 160 of the Act.

[4] The sole issue to be determined is what the market value of the property was on January 13, 1995.

[5] The property bought by the appellants was a commercial property located in the town of Rigaud in the province of Quebec. A former flourmill, the property had been transformed into a restaurant before it and the adjoining commercial site were acquired by the appellants. The property also included a residence located on the land adjacent to the commercial property and vacant sites known as Lots 111-4, 111-5 and Part Lot 111 ("Lots 111") and Part Lot 108 ("Lot 108") in the town of Rigaud.

[6] Each party had an expert testify concerning the value attributed to the property. For the purpose of their evaluations, each expert divided the property between the commercial property, the commercial site, the residential property, the residential land and the vacant sites. Their evaluations can be summarized as follows:

Evaluation

	Appellants' expert	Respondent's expert
Commercial property	$ 124,500	$ 293,750
Commercial site - 25,000 sq. ft. (land adjacent to the mill) - 392,103 sq. ft. (land attributable to commercial property)	56,250 15,716	56,250 36,000
Residential property	11,400	26,500
Residential land	13,500	13,500
Lots 111-4, 111-5 and Part lot 111	500	6,000
Part lot 108	23,000	30,000
Total	$ 244,866	$ 462,000*

*The respondent mistakenly indicated a total of $460,500.

[7] Both parties agree on the definition of market value. In the Dictionary of Real Estate Appraisal, second edition, 1989, published by the American Institute of Real Estate Appraisers, that term is defined as follows:

The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.

[8] Both experts agree that such market value must be determined on an objective standard and taking into account the concept of highest and best use of the property under appraisal. The term "highest and best use" is defined as follows in the appellants' expert report at page 27:

The reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value. The four criteria the highest and best use must meet are legal permissibility, physical possibility, financial feasibility and maximum profitability.

The highest and best use of land or a site as though vacant is defined as:

"The use of a property based on the assumption that a parcel of land is vacant or can be made vacant through demolition of any improvements."

The highest and best use of a property as improved is defined as:

"That use that should be made of a property as it exists."

[9] Upon determination of the highest and best use of a property under appraisal, the evaluation of its market value will be based on one or more of the following three approaches which are summarized in the appellants' written arguments at pages 3-4:

Upon determination of the Highest and Best Use of a property under appraisal, the evaluation of its market value will be based on one (1) or more of the following three (3) approaches:

(a) The Cost Approach, which consists of determining the market value of the land being appraised, to which is added the depreciated replacement cost of the structure erected thereon as of the date of appraisal;

(b) The Income Approach, which consists of determining the market value of a property (or leasehold interest) by capitalizing the net income (or net rental) which the property can reasonably be expected to produce.

(c) The Direct Sales Comparison Approach, which consists of comparing recent sales of current asking prices of similar properties with the property under appraisal and, moreover, analyzing their differences with the property under appraisal and making appropriate adjustments to reflect such differences.

The Commercial Property

[10] The commercial property was originally a flourmill that was built in 1830. In 1908 a small dam was built on the site to provide power to the mill. The mill was converted to a restaurant-bar in 1992. Since the flourmill has ceased operating, the dam is no longer required and presently serves no purpose for the property.

[11] According to the appellants' expert, Giuseppe Bruno, since the dam is still under private ownership, it is detrimental to the value of the property. This would be primarily due to the liability incurred by the owners in the event that it should be damaged. According to Mr. Bruno, the cost to repair it and the damage that it could cause to adjoining properties may be greater than the market value of the commercial property. Consequently, it is his opinion that the presence of the dam renders the commercial property undesirable and unmarketable.

[12] Although the respondent's expert, Michel Sauro, acknowledged that the owners are responsible for the dam, he is of the opinion that it does not have any impact on the marketability of the commercial property. According to the respondent, this is evidenced by the sales transactions involving the commercial property and the land adjacent to it. Indeed, on March 21, 1990, the commercial property, the residence and the adjacent land were sold for $260,000 in an arm's-length transaction to Club Condominium Sol International, a corporation whose president was Gilles Ringuette. This sale did not include Lot 108 and Lots 111. Furthermore, on March 19, 1992, Gilles Ringuette acquired properties, including the properties at issue, from Club Condominium Sol International for $939,900. Finally, Gilles Ringuette sold the property at issue to the appellants on January 13, 1995 for $300,000.

[13] As evidenced by the Deed of Sale entered into between Gilles Ringuette and the appellants, the dam is included in the property sold and there is a reference to the right to make all necessary repairs to it. The presence of the dam, with its advantages and disadvantages, was presumably known to the appellants, and still they agreed to purchase the property at issue for $300,000. The same can be said of Gilles Ringuette, who purchased the property in an arm's-length transaction. I therefore conclude that the presence of the dam does not render the commercial property unmarketable.

[14] With respect to the value of the commercial property itself ("the Moulin"), the appellants' expert, Mr. Bruno, has determined its value to be $124,500 based on the Cost Approach. On the other hand, the respondent's expert, Mr. Sauro, determined a market value of $293,750 using a combination of the Direct Sales Comparison Approach, the Income Approach and the Cost Approach.

[15] Caroline Ringuette testified that she bought the property from her father in January 1995 for $300,000 and that she had no indication at that time that it was not the fair market value. She said that her father had operated a restaurant in the Moulin from the month of July 1994 until the end of August 1994. He approached her in the month of November 1994 with the intent to sell the property. She did not ask a third party to inspect the Moulin as she relied on her father's advice. At the time of the purchase she and her husband expected to run a restaurant as a turnkey operation on the main floor of the Moulin, although they did not have much experience in the restaurant business. They also intended to have receptions on the upper floor of the Moulin and operate a pub in the basement.

[16] After they took possession of the Moulin, they realized that the kitchen was grossly inefficient and that it was impossible to serve 80 people in the dining room as originally suggested by Gilles Ringuette. They also realized that it was impossible to operate in the wintertime because the building was not insulated and it generated very high heating costs. In fact they opened the restaurant in the month of March 1995 and had to close in December 1995 because it was too cold. No attempt was made to replace the heating system in the Moulin given that to do so would have been prohibitively expensive. Moreover, insulating the stone walls which are three feet thick, would have taken away from the Moulin's distinctive historical flavour, which was a major factor attracting patrons to the Moulin.

[17] In the spring, the appellants were confronted with flooding from the river. The basement of the Moulin was prone to flooding during the annual spring thaw and they realized that it would be difficult to operate a bar there. They also realized that the ceilings in the basement were too low and not in conformity with municipal regulations respecting the operation of a bar.

[18] The appellants also testified that every spring thaw causes extensive damage to the commercial land subject to flooding, which necessitated a substantial amount of landscaping and gardening work following the receding of the water. Furthermore, as a result of the annual flooding, they had to spend approximately $5,000 per year in order to repair a drain pipe which discharges water into the canal crossing the commercial land subject to flooding.

[19] As a result of the foregoing factors, the operation of the Moulin as a full-service restaurant was a complete failure. In this regard, Ms. Ringuette testified that she and her husband declared a loss of approximately $80,000 for 1995. They then attempted to sell the property but were unable to do so.

[20] In 1996, they reopened the Moulin as a banquet hall for weddings on the weekends during the summer period and the food has since then been provided by outside third-party caterers.

[21] As previously stated, in order to establish the value of the Moulin, the respondent's expert, Mr. Sauro, used a combination of three different approaches while the appellant's expert, Mr. Bruno, used only the Cost Approach. In using the Direct Sales Comparison Approach, Mr. Sauro acknowledged that comparable properties were limited since the Moulin is a very old property. Mr. Sauro explained that he tried to use properties having characteristics similar to the Moulin, such as age and use, in order to demonstrate that there was a market for this kind of property. In using this technique, Mr. Sauro determined that the value of the Moulin was $321,048. To reach this value, he determined that a reasonable price per square foot would be $36 based on an average price per square foot of five comparable sales.

[22] The appellants' expert, Mr. Bruno, did not use this approach due to the lack of comparable sales of properties having attributes similar to the subject property. He testified that the comparable sales used by Mr. Sauro were inappropriate given the substantial differences between such comparable sales and the Moulin.

[23] For example, the first comparable sale chosen by Mr. Sauro occurred in 1987 and was located in the town of Rosemère. Mr. Bruno testified that average salary, level of education and market value of homes in the town of Rosemère are all greater compared than in the town of Rigaud, as appears from the extract from the 1996 Census Report prepared by Statistics Canada. Furthermore, that first comparable sale used by Mr. Sauro is an old home located on a boulevard where a whole string of similar old homes have been converted into business enterprises, particularly restaurants. That location is conducive to attracting a steady flow of patrons whereas the Moulin stands by itself on a dead-end street in the town of Rigaud without the benefit of the ambience created by businesses surrounding it that would have helped to attract people to the area. This first comparable sale also involves a property substantially smaller than the Moulin, therefore it is not logically comparable. Counsel for the respondent replied that many old structures had been renovated in the town of Rosemère since the first comparable sale in 1987 and that Mr. Bruno cannot compare the neighbourhood as it is now to the way it was at that time. In my view, the fact that this sale occurred eight years before the sale of the subject property is one reason why it should not be used. Both experts admitted that there were fluctuations in the economy between the mid-80's and the mid-90's and it is obvious from the 1996 Census Report that the town of Rosemère has developed more advantageously than the town of Rigaud.

[24] Two other comparable sales used by Mr. Sauro were one restaurant located in the municipality of St-André Est that was very small compared to the Moulin and therefore inappropriate for comparison purposes, and another restaurant located in the historical zone of the town of Laprairie. In the latter case, Mr. Sauro used a sale price of $200,000 for the property whereas $50,000 of that purchase price was attributable to the equipment. Consequently, Mr. Bruno determined that the purchase price per square foot established by Mr. Sauro was overestimated. Counsel for the respondent does not agree with Mr. Bruno since the appellants paid a price for the Moulin that included the equipment. Therefore, for the purposes of comparing the two restaurants it was logical that Mr. Sauro not deduct the $50,000 attributable to the equipment. Counsel for the respondent also submits that a mortgage in the amount of $180,000 was given on the property in Laprairie and she suggests that it certainly was not given on the equipment. Counsel for the appellants retorts that the value of the equipment is not an issue in the present case and that both experts restricted themselves solely to the evaluation of the Moulin. In any event, the equipment that was in the Moulin at the time it was purchased by the appellants was not priced in the Deed of Sale. I agree with counsel for the appellants that it can be reasonably assumed that such equipment had only a nominal value. This was confirmed by the different witnesses who have visited the Moulin and who have confirmed that the equipment in the Moulin is functionally and economically obsolete. I therefore consider that Mr. Sauro erred in considering the sale price of $200,000 for the comparable sale in Laprairie.

[25] The fourth comparable sale used by Mr. Sauro is located on a busy street surrounded by many properties classified as historical in the city of Boucherville. According to Mr. Bruno, this fact alone disqualifies that sale from being comparable. There is a big difference between a restaurant on a major street surrounded by other similar properties in the city of Boucherville and the Moulin standing alone on a dead-end street in the town of Rigaud. Obviously the former will attract a critical mass of people by virtue of the area in which it is located while no one would find the Moulin unless they were going there specifically. Furthermore, Mr. Bruno determined that the purchase price of $200,000 for the fourth comparable sale includes not only the restaurant but also a smaller structure, which is currently leased as a residential home, and all the land upon which it is located. According to Mr. Bruno, the area of the building is actually much larger than that calculated by Mr. Sauro. In this regard, Mr. Bruno testified that the price per square foot should be less than that determined by Mr. Sauro. Counsel for the respondent submits that at the time of the sale, the property consisted of only one structure and that the sale price must be related to the property as it was at the time of the sale in 1993. As no evidence was adduced specifically on that point, I find that this comparable sale should not be considered.

[26] With respect to the fifth and last comparable sale, Mr. Bruno testified that it is totally irrelevant for the purposes of determining the market value of the Moulin. First, it is a four-storey structure and very large as compared to the Moulin. Second, this property used to house a religious order and at present it is a retirement residence. In this regard, Mr. Bruno testified that given the former use of the property and its current use, there likely was very little conversion cost involved given that it was always functional as a residence. This is obviously not the case with the Moulin. The costs associated with the conversion of the Moulin into a retirement residence would be astronomical.

[27] In retrospect, I agree with Mr. Bruno that none of the comparable sales chosen by Mr. Sauro were appropriate for the purposes of determining the market value of the Moulin. Consequently, I do not find that the Direct Sales Comparison Approach was helpful in determining that value. Each of the comparable sales had its own particularity that made comparison with the Moulin almost impossible. I will therefore disregard the value calculated under this approach.

[28] Mr. Sauro, the respondent's expert, also used the Income Approach to establish the market value of the Moulin. According to Mr. Bruno's report, the Income Approach is the most relevant approach to the appraisal of an investment property, since such properties are bought, held and sold on the basis of their income generating potential. Under this approach, the value of a property is estimated by capitalizing the net rental which the property can reasonably be expected to produce. This approach was not used by Mr. Bruno because it would not yield the Moulin's highest market value based on its highest and best use. In this regard, even Mr. Sauro admitted that the restaurant kitchen at the Moulin has the capacity to serve no more than 40 patrons. Given the relatively large size of the Moulin, Mr. Bruno is of the opinion that using the Moulin's first floor as a restaurant seating 40 people would be a gross underutilization of the Moulin, which would not therefore yield its highest market value. According to Mr. Bruno, given the substantial number of economic and functional deficiencies of the Moulin as a projected full-service restaurant at the time it was purchased by the appellants, it would have been best to convert it for other purposes rather than to remedy the problems, the reason being that the costs associated with making the Moulin economically and functionally fit as a full-service restaurant would surely exceed the price anyone would pay for the Moulin. For those reasons, Mr. Bruno did not use the Income Approach.

[29] However, even had he decided to apply the Income Approach, Mr. Bruno would have arrived at an estimated value of $97,400 considering the property's optimal use while Mr. Sauro arrived at a value of $311,290 on the basis of its optimal use. The discrepancies between the experts' evaluations lie in the estimated revenue and in the capitalization rate.

[30] In determining the estimated gross revenue, Mr. Bruno considered the usable area only, given that this is the area a reasonably informed and objective tenant or investor would be looking at if such tenant or investor wanted to lease the Moulin for the purposes of operating a restaurant there. Mr. Sauro measured the area of the property by using its exterior walls as a reference point. Mr. Bruno used the interior of its walls. Both experts agreed that as a generally accepted valuation principle the measurements must be calculated by using the exterior walls as the reference point. However, Mr. Bruno testified that these standard measurements are inappropriate in the present case. According to Mr. Bruno, the standard measurements have been developed by owners-landlords of large office buildings for the purposes of determining floor area in such buildings. However, in modern buildings walls are eight inches to one foot thick while the walls of the Moulin are three feet thick. According to Mr. Bruno, if he had measured from the exterior walls, the available floor space would have been overestimated by almost 2,000 square feet, that is, 28 per cent more than the actual floor space. On this first issue, I find that Mr. Bruno's reasoning is well founded. I agree with him that the Moulin cannot be measured according to modern standards. I agree with counsel for the appellants that the Moulin's area should be determined by reference to its interior walls on the basis that any objective business person would be able to use only the area so determined and would arrive at the estimated gross revenue for the Moulin based on that area.

[31] In adjusting the gross revenue, Mr. Sauro applied a reduction of 10 per cent in order to take into account the bad debts and the building's vacancy. Mr. Bruno testified that an adjustment of 10 per cent must be made for vacancy and a further adjustment of 10 per cent should be made for bad debts. Counsel for the respondent submits that, since the vacancy and the bad debts are closely related, applying both deductions would mean that the property would be occupied only six months per year. In "Principes et concepts généraux en évaluation foncière", Introduction au Manuel d'évaluation, Ministère des Affaires municipales du Québec (Exhibit A-10), the following is said with respect to vacancy and bad debts at p. 13/8:

Dans la plupart des évaluations d'immeubes à revenus, l'évaluateur doit établir des probabilités et nécessairement prévoir une perte possible de revenus causée par des vacances ou des mauvaises créances. Cette perte se calcule sous forme de pourcentage du revenu brut selon la catégorie de bâtiment.

Les facteurs à considérer dans l'estimation d'une provision pour les logements vacants et les dettes irrécupérables sont le rendement passé de la propriété, l'âge et la qualité du bâtiment à évaluer, l'économie de la région, les logements vacants d'immeubles comparables, le type et la qualité des locataires, la durée des baux et le niveau des loyers, etc.

[32] Considering the above passage, the experts seem to have stretched a point in making adjustments with regard to vacancy and bad debts when using the Income Approach in the present circumstances, as we are not, strictly speaking, dealing with a rental property. However, taking into account that the experts have proposed a 10 and 20 per cent adjustment and given the enormous costs of curing the substantial number of economic and functional deficiencies of the Moulin as a projected full-service restaurant at the time it was purchased by the appellants, I find that it is plausible that a potential tenant or investor would not, in those circumstances, have operated the Moulin more than six months per year. On this point, I would be more inclined to accept the 20 per cent adjustment proposed by Mr. Bruno, which seems to me a very moderate rate in the circumstances.

[33] With regard to the estimated expenses to be deducted from revenues, Mr. Bruno testified that a flat charge of $5,000 representing the annual clean-up that must be done at the Moulin as a result of the land flooding during each spring thaw should be taken into account. Mr. Sauro assumed that all commercial expenses were the tenant's responsibility. Moreover, counsel for the respondent submits that these expenses are the result of inadequate upkeep of the dams. She is therefore of the view that the amount of $5,000 should not be considered as a maintenance and upkeep expense since it results mostly from the negligence of the owner. Counsel for the appellants counters that there is no evidence that the dam's water retainer needed repairs. Rather, as Mr. Young testified, the spring flood is caused by the natural forces of the spring thaw. Debris is carried by the flow of the river to the dam thereby jamming the dam and causing water to flow above and around it. Mr. Young testified that nothing can be done about this problem. Furthermore, Mr. Young said the flooding of the land is also the result of ice jams on the river downstream causing water to back up on to the commercial land. According to Mr. Young's testimony, it cost him approximately $5,000 a year to clean up the land. Mr. Young's testimony convinced me that Mr. Bruno was right in deducting a flat charge of $5,000 for the annual clean up.

[34] The experts also disagreed on the capitalization rate to be applied to the net income determined for the restaurant in the Moulin. Mr. Sauro used a rate of 11 per cent on the basis that a loan with a term of five years and amortized over a period of 20 years could be obtained at a rate of 10.5 per cent per year (this rate being determined on the basis that only 30 per cent of the investment was made in cash and the balance was made by means of a loan) and a long-term investment in a safe bond could be obtained yielding 9.25 per cent per year. Mr. Bruno testified that it would be more appropriate to apply a capitalization rate of 14.9 per cent. This rate is based on an "all cash" investment as opposed to a rate determined on the basis that only 30 per cent of the investment was made in cash. Mr. Bruno also used a risk factor of three per cent. According to Mr. Bruno, if an investor could make a safe long-term investment in a bond at 9.25 per cent per year, it would be unrealistic to assume that such person would expect the same rate of return on a venture involving the operation of a restaurant in the Moulin, which involves a substantially higher degree of risk.

[35] I agree with Mr. Bruno that the operation of a restaurant in the Moulin involves a high degree of risk. Suffice it to say a huge amount of money would have to be invested in order to be able to operate a year-round restaurant in the Moulin. I agree with Mr. Bruno that the Income Approach is not appropriate in the circumstances. As a matter of fact, we are dealing with a building that was not originally supposed to be a restaurant but was designed in the past century to be a mill. It is therefore very difficult, I find, to establish its income generating potential as a restaurant in comparison with other properties designed, built and held to be operated as a restaurant. Even if that method should be found to be applicable, I would certainly agree with Mr. Bruno that a higher rate of capitalization than that established by Mr. Sauro should be used.

[36] Using the Cost Approach, the appellants' expert, Mr. Bruno, determined that the replacement cost of the Moulin is $622,600. However, having determined that the Moulin had reached the end of its economic life at the time it was purchased by the appellants, as a result of its substantial deficiencies in terms of its being economically and functionally obsolescent, Mr. Bruno concluded that the Moulin had only a residual value. Therefore, the replacement cost of $622,600 was discounted by a factor of 80 per cent in order to arrive at a depreciated value of $124,500.

[37] Using the same approach, Mr Sauro determined that the replacement cost of the Moulin is $467,018 to which he applied a depreciation factor of 33 per cent to reach a final value of $316,000. This value corresponds to the municipal value attributed to the Moulin.

[38] The two experts' opinions differed on two main points in using the Cost Approach. First, they did not agree on the measurements of the Moulin. Mr. Sauro testified that the area of the Moulin must be determined by using the exterior of its walls as the reference point. Mr. Bruno took the internal dimensions of the building to ascertain its area. The question of the measurements of the Moulin has already been discussed above in the analysis of the Income Approach and I stand by the proposition of Mr. Bruno that only the usable area should be considered for the purposes of establishing a price for the Moulin.

[39] The second point of disagreement between the experts is the depreciation rate. Mr. Bruno used a factor of 80 per cent to determine the depreciated market value of the Moulin on the basis that the Moulin had reached the end of its economic life at the time it was purchased by the appellants.

[40] In his report, Mr. Bruno acknowledged that the Moulin had been totally renovated in 1992 and that consequently no major defects or deferred maintenance were evident. However, since the building was originally built in 1830 as a flourmill and converted into a restaurant, he is also of the opinion that the Moulin suffers from functional obsolescence due to poor design and poor-quality restaurant furniture, fixtures and equipment. The deficiencies are described as follows at pp 24-25 of his report:

1. The building lacks insulation and must close during the winter season due to prohibitive heating cost. The restaurant is operational from April to November.

2. The kitchen size is grossly inadequate for the size of premises or its seating capacity. It amounts to 5% of overall space (375 sq ft/6,964 sq ft). Conventional kitchen sizes that encompass food preparation, cooking, food storage including refrigeration and cleaning amounts to ±25% of total space, that is ±1,700 sq ft (25% x 6,964 sq ft).*

3. There are no means to transport prepared meals to the basement level or second floor other than the staircase which is situated at the center of the building and at a distance from the kitchen. Typically, multi-leveled restaurants possess food preparation facilities on each level or the staircase is built just adjacent to the kitchen. Such is not the case with the subject.

4. The tables and benches were fixed to the floor throughout the floors and are of low quality and not aesthetically pleasant. Since 1995, the tables and benches were replaced by mobile chairs and tables.

5. There is lack of parking facility on the premises with a capacity of 80 people out of a total capacity of 340 people.**

* In his testimony Mr. Bruno said that the costs associated with making the kitchen bigger would be prohibitively high taking into account the actual structure of the Moulin.

** In his testimony Mr. Bruno explained that there are only about 80 parking spots, yet the projected full-service restaurant in the Moulin would have seated 240 people. In his report Mr. Bruno mistakenly indicated a capacity of 340 people instead of 240 as disclosed by the evidence (see paragraph 48 of my reasons).

[41] Mr. Bruno is also of the opinion that the subject property suffers from economic obsolescence since the socio-economic composition of Rigaud and the surrounding area cannot sustain a restaurant like the Moulin. Indeed, due to the foregoing factors and the property's functional deficiencies, the use of the property was changed from restaurant to banquet facility. As a banquet facility, it is rented at $1,000 per day for the entire building, or $250 for the ground floor and $500 for the second floor. Most occasions are weddings occurring on weekends. As for the food, it is prepared and brought in by a caterer. In spite of the change in use, the subject property continues to generate inadequate revenues to warrant continued operation. In fact, Mr. Bruno established the valuation of the Moulin as is at $75,000 (page 28 of his report) of which he attributes $72,000 to the subjacent land (which is the sum of the values attributed to the lands constituting the commercial site as per the evaluation chart in paragraph 6 of my reasons), leaving a value of $3,000 for the commercial property itself.

[42] Mr. Bruno is therefore of the opinion that given the functional and economic obsolescence of the improvements, the highest and best use of the commercial property does not lie in its current use (as a restaurant). Nor does it lie in the use of the improvements as a banquet facility for the public. Consequently, Mr. Bruno is of the opinion that the highest and best use of the improvements is to put the property to an altogether different use, such as residential. Now, the value attributed to an alternate use according to the Marshall & Swift Valuation Service depreciation table is 20 per cent of the replacement cost new of the improvements in the property's current use. In other words, a commercial property contributes a residual building value of 20 per cent of the building's replacement cost new at the end of its economic life.

[43] Mr. Sauro used a depreciation rate of 33 per cent on the basis that, despite its age, the Moulin is still quite functional given the major renovations carried out in 1991 by Gilles Ringuette (Mr. Ringuette had requested a renovation permit for an estimated amount of $410,000 in the month of April 1991). The appellants advertised the Moulin as a restaurant offering a unique dining experience amidst ten acres of nature. In this regard, Mr. Sauro submits that the Moulin was certainly not at the end of its economic life. According to him, the remaining economic life of the building at the time the appellants bought it was 20 years. Indeed, the appellants mortgaged the Moulin for $200,000 when they purchased it, and an additional mortgage of $40,000 was granted later on. In Mr. Sauro's view, banks will not mortgage more than 70 per cent of the value of a property (over an average amortization period of 20 years). Mr. Sauro also considered that the building had an effective age of 20 years considering the construction standards to which it conformed. Applying the depreciation tables of Marshall & Swift, an average depreciation rate of 33 per cent is to be applied to such a building.

[44] Mr. Sauro acknowledged in cross-examination that he did not try to find out what would have been the highest and best use of the Moulin. He restricted his evaluation to the current use of the property, that is for the operation of a small restaurant accommodating not more than 40 people on the main level and the use of the upper level as a banquet facility. He also considered that a bar could eventually be operated in the basement.

[45] Mr. Sauro also testified that the depreciated market value of the Moulin was determined by attributing depreciation partly to the Moulin itself and partly to the land upon which the Moulin is erected, thereby resulting in a higher depreciated value for the Moulin. Mr. Sauro testified that there are three types of depreciation. The physical and the functional depreciation, which affect only the structure, and the economic depreciation that can affect the value of the land on the market.

[46] The appellants' expert, Mr. Bruno, does not agree with Mr. Sauro. Mr. Bruno testified that depreciation should be taken into account only for the structure erected on the land and not for the land itself, the reason being that the market value of land will not fluctuate as a result of depreciation (other than in unusual and extraordinary circumstances, such as where land becomes contaminated). Rather, land will fluctuate in price because of market conditions, such as supply and demand, economic conditions, location of the land, etc. On the other hand, a structure erected on land is affected by both depreciation and economic conditions. Over time the value of a structure will decrease due solely to normal wear and tear, which decrease is totally independent of market conditions that also affect the market value of a structure. In contrast, the land can be reused on an indefinite basis because its nature precludes it from deteriorating.

[47] Counsel for the respondent also submits that the fact that the appellants experienced financial difficulties in operating the restaurant is irrelevant. In assessing the fair market value of a property, she said, we are not assessing the administrative potential of the owners.

[48] Counsel for the appellants responds that given the large amount of money that it would take to make the restaurant inside the Moulin economically functional, no objective purchaser acting reasonably with knowledge of all the surrounding circumstances would pay anything other than a residual sum for the Moulin. In support of this position, he refers to the following testimony:

- Michael Dobbie, a professional restaurateur for the past 28 years, testified that the kitchen in the Moulin will never be capable of servicing 90 patrons per sitting on the first floor (which is the number of people for which the first floor of the Moulin is licensed), let alone the additional 150 patrons that could be seated on the second floor, but can serve only a maximum of 50 people. According to Mr. Dobbie, an investment of $300,000 to $400,000 would be required in order to use the Moulin to its highest potential.

- Daniel Massé, an engineer and professional restaurateur for the past 12 years, testified that it is impossible to operate a restaurant in the Moulin in its present state. According to him, the kitchen is far too small and cannot service more than 20 people. Furthermore, he felt that it would be very difficult to expand the kitchen due to the present configuration of the very old building. He also noted that the kitchen equipment was obsolete. In his view, to remedy the Moulin's problems of obsolescence an investment of between $450,000 to $500,000 would be necessary.

- Hugues Primeau, who made an offer to purchase the Moulin together with the residence and 450,000 square feet of land for $250,000, testified that he inspected the Moulin in late 1993 with the former urbanist of the town of Rigaud for the purposes of preparing the Offer to Purchase submitted to Gilles Ringuette. He said that there were major renovations to be made (although Gilles Ringuette had already renovated the Moulin) including the heating system, the stairways, which did not conform to regulations, the basement ceilings, which did not meet municipal standards for the operation of a bar, a new kitchen on the second floor, and all the interior design. Mr. Primeau testified that he was informed by the urbanist that, in order to render the restaurant inside the Moulin functional, an investment of $300,000 to $400,000 would have to be made. Ultimately, the Offer to Purchase did not go through.

[49] Given all this evidence, I cannot ignore the functional and economical depreciation of the commercial property. It is obvious that any purchaser would incur losses in operating the Moulin as is and as currently being used. It is also obvious that any purchaser who wished to keep operating the Moulin as a restaurant would have to invest a fair amount of money to keep it functional and profitable. Given the large amount of money that it would take to reach that goal, I agree with Mr. Bruno when he says that the highest and best use of the property may lie in a different use. Mr. Sauro's opinion is in a sense flawed in that he did not take into account what would be the highest and best use of the property in ascertaining its market value under the Cost Approach. Furthermore, there was an arm's length offer that was made in late 1993 by Mr. Primeau. After having considering all the renovations that would have to be made in order to render the restaurant in the Moulin functional, Mr. Primeau offered $250,000 for the Moulin, the residence and 450,000 square feet of land. This offer did not go through but it is an indication of how much a potential buyer dealing at arm's length was ready to pay. This offer is much closer to the total value of $221,366 attributed by Mr. Bruno to the aggregate of the Moulin, the residence and the land (the commercial site and the residential land) than to that attributed by Mr. Sauro, who put a total value of $426,000 on the same property. Furthermore, I would add that I also heard the testimony of François Leduc, the owner of the full-service Klondike Restaurant located on 3 acres land immediately adjacent to Highway 40 between the town of Rigaud and the town of Hudson. He testified that he had invested $400,000 in his restaurant (originally a barn measuring 5,625 square feet) over two years ago. However, recognizing that his restaurant is a money loser, he has been trying to sell it for the past two years for $200,000 (the municipal evaluation is $300,000) without success.

[50] Mr. Leduc's situation confirms, in my view, the very difficult general socio-economic conditions of the Rigaud region and the difficulty of operating a business there. It also gives weight to Mr. Bruno's thesis that the highest and best use of the Moulin does not lie in its current use as a restaurant.

[51] In all the circumstances, I am inclined to give more weight to Mr. Bruno's evaluation and I accept his figures in that regard. I therefore conclude that the value of the Moulin was $124,500.

The Residence

[52] Mr. Bruno determined the market value of the residential home to be $11,400 using the Direct Sales Comparison Approach, while Mr. Sauro determined the market value to be $26,500 using the same approach. According to counsel for the appellants, the reason for this discrepancy lies in the fact that certain of the comparable sales used by Mr. Sauro were inappropriate for comparison purposes. Particularly, three of these comparable sales were properties in relatively good shape rather than in the decrepit state of the residential home herein at the time it was purchased by the appellants. Mr. Bruno and Mr. Young testified that the residential home was boarded up prior to its occupancy in 1995 and was in a poor state of repair. In fact, even Mr. Sauro acknowledged that the residential home required further major repairs, namely the replacement of all windows, the replacement of the heating system, extensive repair work to all the plumbing, insulation of the attic, some repair work on the roof, redoing the floors, etc. According to Mr. Bruno, it is a basic rule that sales that are as similar as possible to the property under appraisal should be used for comparison purposes.

[53] Both experts ascertained the residual building value of each sale by deducting from the sale price the contributory land value. Mr. Bruno used three comparable sales and used a unit rate of $5 per square foot as the residual building value. Mr. Sauro used six comparable sales and arrived at an average sale price of $20 per square foot. He adopted a residual building value of $13.50 per square foot. In his testimony, Mr. Sauro said that the reason for discrepancies lies in the fact that Mr. Bruno attributed all the depreciation to the building and none to the land. Mr. Sauro was of the opinion that land is also affected by depreciation.

[54] I agree with Mr. Bruno that the sales of the renovated houses cannot be used as a basis for comparison in the present case. The two experts had two common comparable sales. However, for these two comparable sales, they did not allocate the same value to the land and to the building. It is difficult for me to analyse those sales as the unit rate per square foot for the building was calculated by each expert according to his own assessment of the percentage of the sale price attributed to the building itself. According to the municipal evaluation, 42 per cent of the value was allocated to the land in these two comparable sales. Mr. Sauro allocated approximately 50 per cent of the sale price to the land while Mr. Bruno allocated approximately 80 per cent. At first glance, I would be tempted to say that Mr. Sauro's appreciation is more accurate. However, it strikes me that these comparable sales were for an amount well under the municipal value. Furthermore, both experts testified that the residence was in very poor condition, in need of major repairs. Mr. Bruno testified that it was boarded up in 1995 and the appellant Mr. Young confirmed that, at the time of purchase it had been abandoned for some years. I would therefore conclude that the residence was not worth much more than the value attributed to it by Mr. Bruno. This value is also more realistic if we take into account the offer made by Mr. Primeau for the Moulin, the residence and the commercial and residential land, as referred to above in my reasons.

Commercial Site: Land Attributed to Commercial Property

[55] The site fronting on Du Moulin Street encompasses an area of 423,903 square feet. Part of it (6,000 square feet) is attributed to the residential property and has been valued by both experts at $13,500. The balance is the land attributed to the commercial property. According to Mr. Bruno, 92 per cent of that part of the land (that is, 392,903 square feet or 9 acres) is located in a flood zone. The other 25,000 square feet, described by Mr. Bruno as the land outside the flood zone, has been evaluated by both experts at $56,250. The issue is to determine the value to be given to the so-called "floodable commercial land". Mr. Bruno has determined its market value to be $15,716 while Mr. Sauro has established it at $36,000. Both experts used the Direct Sales Comparison Approach.

[56] Using nine so-called comparable sales of vacant lands, Mr. Sauro has determined an average price of $8,000 per acre. Mr. Bruno noted that five of those comparable sales occurred between 1987 and 1992, that is, well before the purchase of the commercial land by the appellants in 1995. Both experts agree that the economic situation has fluctuated between the mid 80's and the mid 90's. For this reason, I agree with Mr. Bruno that we should only consider the four comparable sales that occurred in the years close to the date of the purchase of the commercial land. Using only such comparable sales, the average price per acre is $7,450.

[57] Furthermore, Mr. Sauro determined such sum should be discounted by 50 per cent in order to take into account the risk of flood. Mr. Bruno used a discount factor of 75 per cent on the basis that the land in question is substantially all prone to flooding and development thereon is basically impossible. According to Mr. Sauro, the risk of flooding existed only in the spring and not year-round. The rest of the year, this piece of land constitutes an enhancement of the Moulin. He therefore decided on a discretionary basis that a discount factor of 50 per cent should be applied.

[58] Mr. Bruno does not agree. According to him, the land undergoes flooding on an annual basis with each spring thaw. Mr. Young and Ms. Ringuette confirmed this in their testimony. Furthermore, counsel for the respondent filed in evidence a map showing the flood-prone zones in the town of Rigaud. It clearly appears from this map that most of the commercial land in question is located in a zone where there is a high or moderate risk of flooding. Moreover, Annie Lévesque, an urbanist for the town of Rigaud, testified that no construction permit will be issued by the town of Rigaud for the development of any property located in a zone where the risk of flooding is high. Such a permit will not be issued in a zone where the risk of flooding is moderate unless it is approved by an engineer and unless an accurate contour map has been prepared by a land surveyor. These conditions add to the cost of construction and are obviously a concern for potential buyers. According to Mr. Bruno, there are so many residential sites available for development in Rigaud that it is doubtful that a developer would take the risk of developing in a flood plain. This is why he adopted a discount factor of 75 per cent.

[59] I agree with Mr. Bruno's position. Mr. Sauro himself acknowledged that it was difficult to ascertain a discount factor in the circumstances. The respondent filed in evidence a map that strongly supported Mr. Bruno's assertions. I therefore accept a discount factor of 75 per cent to be used in determining the market value of the commercial land subject to flooding. In this regard, the market value established by both experts does not differ much. I therefore accept a value of approximately $16,000 for that part of the land.

Lots 111-4, 111-5 and Part Lot 111

[60] In their reports, Mr. Bruno and Mr. Sauro respectively attributed a value of $4,000 and $10,500 to those sites. At the hearing, Mr. Bruno testified that they had only nominal value, and in her written submissions, counsel for the respondent was prepared to accept a lower value of $6,000 for this land.

[61] Both experts changed their view after the testimony of Annie Lévesque, the urbanist for the town of Rigaud, who testified that this is land that slopes steeply towards the river and is located in an area with a high potential for landslides designated as such in the Landslide Plan included in a schedule to a bylaw of the town of Rigaud. This area was so designated when a business constructed on the other side of the river slid into the river as a result of a landslide. Ms. Lévesque testified that no structures have been built on any part of the slope designated as being prone to landslides on the Landslide Plan. She also confirmed that the town of Rigaud would not issue a permit for the purposes of building a structure on the steep-slope land without first having received and approved an engineer's report confirming that the proposed structure will withstand a landslide. Ms. Lévesque also affirmed that no such permit would be issued unless the projected road leading to the steep-slope land is fully improved to the satisfaction of the town of Rigaud. She confirmed that the cost of improving such a projected road would have to be borne by the owner thereof. According to counsel for the appellants, the owners of the steep-slope land would necessarily have to acquire title to the projected road and pay the costs of improving that road, which would add to the cost of building any structure on the steep-slope land. Finally, Mrs. Lévesque explained that services would have to be extended to any such structure on the steep-slope land at the expense of the owner, thereby further increasing the cost of building thereon.

[62] Counsel for the appellants submits that no objective purchaser, being aware of all the above factors and acting reasonably in the circumstances, would purchase the steep-slope land for the purposes of constructing a residential home thereon. In this regard, counsel notes the testimony of Mr. Bruno to the effect that there are many other lots (which are already serviced, while the steep-slope land is not) in the immediate vicinity of the steep-slope land that are not affected by the risk of landslide and the additional building cost. This is why Mr. Bruno was ultimately of the opinion that the highest and best use of this land would be to simply incorporate it with the lots at the top of the slope fronting directly on the existing road. Thus, given the factors mentioned above, the land would have had only a nominal value.

[63] To assess the market value of Lots 111, Mr. Sauro determined that their highest and best use was residential. Using the Direct Sales Comparison Approach he arrived at a value of $0.50 per square foot. As Lots 111 do not have infrastructure services, he applied a reduction of 50 per cent. Considering the additional costs associated with the risk of landslide, counsel for the respondent is willing to reduce the value of the lots by $1,500 each, representing the cost of preparing the engineer's report. Counsel for the respondent does not agree that no objective purchaser would buy Lots 111 for the purposes of constructing a residential home. She submits that it is riverside land; that each lot is large in area and that there are no neighbours behind them (this assertion is however contradicted by the evidence, which disclosed that there are neighbours behind the steep slope fronting on the existing road); that each lot has a view of the mountain; and that it is quite realistic to erect a home on a slope (citing as an example the fact that many houses are built on slopes in the Laurentians). Therefore, the respondent is of the view that the market value is $6,000.

[64] Considering the evidence given by Ms. Lévesque, who is an objective witness in the present case, I do not find the respondent's arguments convincing. It is not very serious to argue that it is realistic to build on a slope, basing this on the example of the houses built in the Laurentians. First, it is clear from the evidence that Lots 111 are located in an area with a high potential for landslides. It is also clear from the evidence that the town of Rigaud will not allow the construction of any house in such an area without the approval of an engineer confirming that the proposed construction will withstand a landslide. It is also clear that no houses are built on any part of the slope that runs along the river through the town of Rigaud. Second, it is not very realistic to compare the town of Rigaud with the prized region of the Laurentians. The evidence disclosed that the town of Rigaud is not statistically very prosperous economically, which is certainly not the case with the Laurentians. In any event, counsel for the appellants has convinced me that Lots 111 do not have much value. I doubt that any objective purchaser would be interested in the subject land for the purposes of constructing a residential home, most particularly, as mentioned by Mr. Bruno, if there are other waterfront sites available in the vicinity that are not subject to landslides, which assertion has not been rebutted by Mr. Sauro.

Lot 108

[65] This lot is zoned residential. The appellants' expert, Mr. Bruno, determined a market value of $23,000 using the Direct Sales Comparison Approach. Using the same approach, the respondent's expert, Mr. Sauro, determined the market value of that land to be $40,000 in his report. In her written submissions, counsel for the respondent indicated that she was willing to reduce the market value attributed to this property to $30,000. Indeed, in their reports, neither Mr. Sauro nor Mr. Bruno included a discount for the fact that a ten-foot-wide servitude in favour of the town of Rigaud runs through a good portion of Lot 108. The consequence of that servitude is that the town of Rigaud will not issue a building permit that would allow any structure to be built on the servitude. According to counsel for the respondent, this reduction of $10,000 reflects the loss of enjoyment of a potential buyer due to the presence of the servitude. Counsel for the appellants suggests that it would be reasonable to conclude that an objective and reasonable purchaser or investor would want to discount the market value of Lot 108 determined by Mr. Bruno in order to take such servitude into account. However, he does not suggest any other value for Lot 108.

[66] The appellants raised a preliminary issue with regard to the area of Lot 108. Mr. Bruno testified that its area is 182,255 square feet while Mr. Sauro puts it at 196,020 square feet based on the assessment roll of the town of Rigaud, which represents a difference of 13,765 square feet. Mr. Bruno testified that he arrived at the area of Lot 108 based on a proposed subdivision thereof. Mr. Bruno testified, moreover, that the area he determined for that land matches exactly the measurements thereof contained in the Deed of Sale by which the appellants purchased that land from Gilles Ringuette on January 13, 1995. In the circumstances, counsel for the appellants submits that since the appellants could not have acquired any better right than that specifically described in the Deed of Sale, 182,255 square feet is the correct area for Lot 108. Counsel for the respondent did not reply on that issue. Consequently, I will accept the appellants' position in that regard.

[67] With regard to value, the experts, while using the same approach, arrived at substantially different market values for the subject land. According to counsel for the appellants, the comparable sales used by the respondent's expert, Mr. Sauro, are not comparable to Lot 108 for the purposes of determining the value thereof. In particular, counsel for the appellants submits that the locations of the comparable sales used by Mr. Sauro are too distant from Lot 108 to make a comparison therewith meaningful. Since there are comparable lots in the near vicinity of Lot 108 that sold at about the same time as Lot 108, the best comparisons with Lot 108 would necessarily have to exclude comparable lots that are not as close as possible to Lot 108. Mr. Bruno therefore determined a market value before adjustments of $0.75 per square foot based on comparable sales in the immediate vicinity of Lot 108. Mr. Bruno then made some adjustments that included a depreciated value to take into account the eyesore Hydro-Québec electrical generating station directly across from Lot 108 as well as an appreciated value to reflect the fact that six of the nine proposed subdivided lots comprising Lot 108 are on the waterfront.

[68] Once the total current market value was determined, deductions were made therefrom to take into account the subdivision costs and developer's profit based on a building timetable of ten years. Mr. Bruno supports this submission on the basis that a very low number of building permits for the town of Rigaud have been issued in recent years, as shown at page 12 of his report. As a result and given that there are still many serviced lots ready for immediate construction, it is, in Mr. Bruno's opinion, reasonable to say that at least another six years will go by before any building occurs on or near Lot 108 (the appellants having bought Lot 108 four years before the hearing). In fact, the appellants testified that they have posted a "For Sale" sign on the land for the past two years and yet have received absolutely no offers.

[69] Mr. Bruno also included a five per cent risk and illiquidity factor in his adjustments to take into account what an objective and reasonably informed purchaser or investor would want as a return on the capital to be invested in connection with the development of Lot 108, as compared to the return on a safe long-term investment in a secure, marketable Government of Canada bond. After having made those adjustments, Mr. Bruno determined that Lot 108 had a market value of $0.13 per square foot or $5,500 per acre, for a total value of $23,000. According to Mr. Bruno, this value appears realistic when compared to the sale price of the acreages involved in sales #11 to #14 (pages 33-34 of his report). However, in cross-examination, Mr. Bruno had to explain why he did not use the same value as that of comparable sale #12 ($0.17 per square foot or $7,222 per acre), which was a sale of a raw land of approximately the same dimensions as Lot 108. Mr. Bruno replied that a discount was applied to take into account the fact that the Hydro-Québec electrical generating station was an eyesore.

[70] Mr. Sauro testified that he applied the Sales Comparison Approach using unsubdivided lots similar in area to Lot 108. As mentioned in his report, he relied strongly on three comparable sales whose area was similar to that of Lot 108. Mr. Sauro arrived at a price of $8,300 per acre and applied it to 4.5 acres to establish a value of $37,500. He then considered that the land could be developed by the same developer into four lots along the river. He therefore concluded that each lot had a potential market value of $10,000, for a total value of $40,000. As mentioned above, the respondent considers now that the total value should be reduced to $30,000 due to the presence of the servitude.

[71] According to counsel for the respondent, the plan filed in Appendix D to Mr. Sauro's report clearly demonstrates that the comparable sales used by Mr. Sauro are located in the area surrounding Lot 108. Furthermore, she submits that the approach taken by Mr. Bruno, which is based on a proposed subdivision plan to be carried out over ten years, is flawed. First, that plan was never approved by the town of Rigaud. Second, the discount over a period of ten years reduces significantly the value of the land so that the best price would be obtained in selling Lot 108 as raw land. Finally, counsel for the respondent submits that the discount applied by Mr. Bruno to take into account the presence of the Hydro-Québec electrical generating station is not justified. Indeed, that station is not located directly across the street from Lot 108, as stated by counsel for the appellants. There is in fact land between Lot 108 and the Hydro-Québec electrical generating station.

[72] Counsel for the appellants submits that the subdivision of Lot 108 into four large lots as suggested by Mr. Sauro would not make economical and functional sense and does not reflect the highest and best use thereof for the following reasons. First, given the number of other large, serviced lots available in the vicinity of Lot 108 that do not have the same Hydro-Québec electrical generating station eyesore drawback, no objective purchaser would build a relatively large and expensive residential home on one of the four large lots proposed by Mr. Sauro. Second, by subdividing Lot 108 into four large lots, it is highly conceivable that the town of Rigaud would not issue a permit for, at least one of the lots given that the servitude in favour of the city affects one quarter of Lot 108. On the other hand, the proposed subdivision suggested by Mr. Bruno would result in smaller homes being built on either side of the servitude. Third, Mr. Bruno's proposed subdivision would be consistent with the size of the lots and developments currently existing in the town of Rigaud.

[73] There is only a difference of $7,000 in the value attributed by each party to Lot 108. Both experts relied on hypothetical proposed subdivisions. As the experts do not agree on the proposed subdivision, it will be easier for me to rely on the comparable sales of raw land of same dimensions as Lot 108. Both experts used in their Direct Sales Comparison Approach two properties of approximately the same dimensions (sales #11-12 at pages 33-34 of Mr. Bruno's report and sales #8-9 at page 19 of Mr. Sauro's report). The unit price for sale #11 in Mr. Bruno's report and sale #9 in Mr. Sauro's report, a property zoned park and residential that was sold in March 1995, was $0.23 per square foot. The unit price for the other sale (#12 in Mr. Bruno's report and #8 in Mr. Sauro's report), a property zoned commercial, park and industrial that was sold in August 1994, was $0.17 per square foot. Those two properties do not have the same zoning. However, the experts did not make any adjustments in that regard. Consequently, I conclude that an average unit price of $0.20 per square foot should be used for raw land of the same dimensions.

[74] I agree with Mr. Bruno that the electrical station, even if not directly across the street, is detrimental to the value of Lot 108. Mr. Bruno applied a discount of 15 per cent in that regard. I would therefore apply the same discount to the unit price of $0.20 per square foot, which would reduce the unit price to $0.17 per square foot. I have already decided that the area of Lot 108 was 182,255 square feet. I therefore conclude that the value of Lot 108 was around $30,000 at the time it was purchased by the appellants in January 1995. Now, both experts agree that such value should be reduced to take into account the servitude given in favour of the town of Rigaud. In her written submissions, counsel for the respondent was prepared to concede 25 per cent of the total value. I will therefore apply a discount of 25 per cent to the total value of $30,000 which brings the value down to $23,000, as submitted by the appellants.

Conclusion

[75] I accept the values determined by the appellants' experts for all the subject properties as summarized above in my reasons for judgment. I therefore conclude that the total value of all the properties purchased by the appellants was not more than $245,000. The appellants paid $300,000 for those properties. The fair market value of the property at the time it was transferred to the appellants did not exceed the consideration given for that property. Consequently, the appellants cannot be held jointly and severally liable with Gilles Ringuette to pay a part of the tax owed by the latter in respect of the taxation year in which the transfer occurred or any preceding taxation year pursuant to section 160 of the Act.

[76] The appeals are therefore allowed with costs.

Signed at Ottawa, Canada, this 20th day of April 2000.

"Lucie Lamarre"

J.T.C.C.