Citation: 2013 TCC 5
Date: 20130110
Docket: 2012-1071(IT)I
BETWEEN:
SUNRISE REALTY INVESTMENTS LIMITED.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Rip C.J.
[1]
Sunrise Realty
Investments Limited ("Sunrise") appeals its assessments for 2005,
2006, 2007, 2008, 2009 and 2010. The issue in each of the assessments is the
allocation of the purchase price of real property acquired in 2004 as to the
cost of the land and capital cost of assets, specifically a building on the
land.
[2]
On August 23, 2004
the appellant purchased for $1,680,000 an investment property bearing civic
address 2340 Council Ring Road in Mississauga, Ontario. The property
included an eight unit retail plaza from which, at all relevant times, the
appellant earned rental income.
[3]
In reporting its income
for its 2005 and 2006 taxation years, Sunrise allocated the purchase price of
the subject property as to land and other fixed assets as follows:
Land
|
$ 150,000
|
|
Building
|
1,429,484
|
|
Parking Lot
|
75,000
|
|
Fencing
|
20,000
|
|
Signage
|
25,000
|
[4]
The $1,429,484 was
allocated to the building in the following manner:
|
Building
|
|
$
1,400,000
|
|
Mortgage
brokerage fee
|
4,650
|
|
|
Land transfer
tax
|
23,675
|
|
|
Land transfer
tax registration
|
71
|
|
|
Title
insurance
|
1,088
|
29,484
|
|
|
|
1,429,484
|
[5]
The Canada Revenue
Agency ("CRA") did not agree with the appellant's allocation of the
purchase price of the property and after three appraisals of the property, in
2007, 2009 and finally in 2011, issued notices of assessment for all six years
on December 12, 2011 on the basis of the valuation of
Mr. Peter Petrovsky, a real estate appraiser with the CRA and a
member of the Appraisal Institute of Canada. Mr. Petrovsky was qualified
as an expert for purpose of this appeal.
[6]
Mr. Petrovsky's
valuation of the property was directed to the land on the property being vacant
land at time of sale and he concluded that the land component of the property
had a value, on August 23, 2004, of $760,000, the balance of the purchase
price of $1,680,000, namely $920,000, was the value of the improvements to the
vacant land, namely the building, the parking lot, fencing, signage and
landscape maintenance. Also included was an amount of $29,484 of costs on
closing and mortgage fees.
[7]
In its notice of
appeal, the appellant does not suggest its view of the value for the land or building,
simply stating that Mr. Petrovsky's value of the land that was used to
make the assessments "was not fair or accurate" and states his
reasons:
·
To determine the Land value, comparisons were
made with other commercial land sales in the area, however, no consideration
was given to the location of the property versus other comparables.
·
I believe that location, demographics,
accessibility and other factors play important part in land values, which were
ignored in general.
·
Appraisals were done multiple times, due to deficiencies
and errors in the reports, yet I believe that land value is still not a fair
value.
·
No reasons were provided for rejecting the
appraisal and land value assessed by our appraiser.
[8]
The appellant's agent,
Mr. Riaz Ahmad, also its president, concluded his submissions, a copy
of which was provided, that the value of the land at date of purchase was $557,000.
[9]
Mr. Riaz Ahmad
wished to produce a valuation prepared by another person. Notwithstanding that
this is an appeal under the Informal Procedure, I did not allow its production.
To allow production of a document prepared by a purported expert without the opposing
party having the opportunity to examine the author of the valuation would not
be fair to the other party.
[10]
The principal portions
of Mr. Petrovsky's valuation are attached as Apendix I to these
reasons.
[11]
Mr. Petrovsky's
valuation, although faulty in my view, can be used as basis to determine the
value of the land at time of purchase. Mr. Petrovsky made adjustments to six
of the seven land sales he compared to the subject property. He made
adjustments for lot size in comparing the 350 Burnhamthorpe, 3899 Trelawny,
5380‑90 Terry Fox, 33 Pearl and the 756‑60 Lakeshore
and 120 Lakeshore properties, adjustments for location in comparing the
Pearl and Thomas properties and an adjustment for "other" in
comparing the Thomas and the two Lakeshore properties. In fact, he increased
and decreased the Pearl and 753‑60 Lakeshore properties. There were net
adjustments upwards when comparing the subject property to the Burnhamthorpe,
Trelawny, Terry Fox and Thomas properties and a decrease in comparing the
120 Lakeshore property.
[12]
Finally, Mr. Petrovsky
considered the comparables of the Burnhamthorpe, Pearl and 756‑60
Lakeshore properties as closest in character to the subject property and
"presented a narrower unadjusted range from $19.90 to $31.40 per square
foot". He considered the subject property value to be in the middle of
this range, approximately $26 per square foot.
[13]
But how much of a
decrease or increase in value he allocated to each adjustment, by percentage or
otherwise, Mr. Petrovsky could not say. He simply stated that he made
adjustments. This is what I find the major flaw in his valuation. Also, he
referred to developments on comparable land that took place after 2004. I note
the Burnhamthorpe property was disposed of in 2002, the Pearl property in May
2002 and the 756‑60 Lakeshore property in mid 2003. This causes me some
concern since I cannot evaluate whether the adjustments themselves or the
amount of the adjustments were valid. Were there increases or decreases in land
values in the area to the date of purchase of the subject property? Was he
correct in concluding a "narrower unadjusted range" be used? I am, as
President Jackett was in National Capital Commission v. Benjamin Marcus,
"left … left completely in the dark as to how those sales … were made
for various factors influencing value." A judge cannot accept a valuation
if [he or she] cannot comprehend the reasoning by which a conclusion has been
derived from the comparable sales.
[14]
As well, in his
evidence, Mr. Ahmad criticized Mr. Petrovsky's report. Some of his
criticisms have merit, subject to how Mr. Petrovsky made his adjustments.
His view was that the Trelawny property was the closest comparable to the
subject property and "should have been used to calculate the subject
land's value". The Trelawny property has three times the frontage of the
subject property and more than twice the area. Mr. Petrovsky referred to
the Burnhamthorpe property as "representing the closest physical
characteristics in comparison to the subject". Mr. Ahmad disagreed
with Mr. Petrovsky's description of the visibility and exposure of the
Terry Fox property being inferior to the subject property. In his view, although
the Terry Fox property was superior to the subject property, "it is one of
the best comparables considering the location in the same neighbourhood"
as the subject property. He also criticized comparing the 756‑60
Lakeshore Road property, a property on a heavily travelled road near the Queen
Elizabeth Highway, to a property with a neighbourhood plaza on it. In sum,
Mr. Ahmad submitted that the value of the Trelawny and Terry Fox
properties compared most to the subject property and their values ought to have
been given greater weight by Mr. Petrovsky.
[15]
Mr. Ahmad was also
of the view that the subject property had certain disadvantages that would
reduce its market value. Indeed, Mr. Ahmad ran down the value of the
subject property. A winding road leading to the subject property coupled with a
"curb cut" to the south entrance of the property reduced vision of
the property to oncoming traffic, two traffic lights were within a block of the
property on another road approaching the subject property. A road at the north
entrance of the property was sloped and islands along a main road to the
property had, in his description, "wide islands with trees and dense
shrubs".
[16]
As I mentioned earlier,
Mr. Petrovsky did adjust the value of the properties Mr. Ahmad views most
comparable to the subject property. But by how much he adjusted the value, he
could not say.
[17]
In the appeal at bar, I
am not dealing with the various matters that were before President Jacket in Marcus.
While Mr. Petrovsky's valuation does carry significant weight, it is
flawed. At the same time, while the appellant did raise some valid concerns
about Mr. Petrovsky's valuation, he offered nothing in support of the
values he may be relying on.
[18]
Therefore, I will have
to determine the value of the land component of the subject property on the
incomplete information before me but not ignoring Mr. Petrovsky's
valuation. I will use Mr. Petrovsky's valuation as a starting point and
give some weight to Mr. Ahmad's concerns since, although he is an
interested party to this litigation, he is familiar with the neighbourhood. I
also had the opportunity of reviewing Google maps of the subject and comparable
properties that were produced by Mr. Ahmad.
[19]
The lot size of the
subject property, purchased on April 23, 2004, is 29,185 square feet with
134.63 feet of frontage. This compares to the five following properties which are
comparable to the subject property, albeit to different degrees:
|
|
Area
(square feet)
|
Frontage
(feet)
|
Date
of sale
|
Sale price $
|
Price per
square foot $
|
|
Burnhamthorpe
|
40,128
|
200.03
|
Aug.
2002
|
800,000
|
19.90
|
|
Pearl3
|
10,355
|
86.00
|
May
2002
|
325,000
|
31.40
|
|
756‑60
Lakeshore3
|
17,750
|
175.76
|
July
2003
|
444,000
|
17.75
|
|
Trelawny3
|
77,101
|
306.06
|
May
2004
|
1,504,500
|
19.50
|
|
Terry Fox
|
77,188
|
305.17
|
July
2004
|
1,432,000
|
18.60
|
[20]
I would make
adjustments not too dissimilar from those made by Mr. Petrovsky bearing in
mind the valid concession of his comparables made by Mr. Ahmad.
[21]
Mr. Petrovsky
states that "Overall, the value for the subject would be higher than the
$19.90 per square foot indicated for the Burnhamthorpe property." I would
add 7.5 per cent to the value of the subject property based on time
and lot size, that is $21.39 per square foot.
[22]
To compare the Trelawny
property to the subject property would also require an increase in value of the
subject property due to area and frontage; I would increase the price of $19.50
per square foot also by 2.5 per cent, that is to $19.99 per square
foot.
[23]
Similarly, the Pearl property would require a similar increase of 2.5 per cent, that is from
$31.40 per square foot to $32.19.
[24]
I would not adjust the
value of the subject property to compare with the Lakeshore property except for
the fact that the Lakeshore property is on a street having heavy traffic. For
this reason I would adjust its value downward by 5 per cent, that is
to $23.75.
[25]
As far as the
Terry Fox property is concerned, its area is more than twice as that of
the subject property and its frontage about two and a half times greater than
that of the subject property. It would require an adjusted increase in price
per square foot for it to be a comparable, not less than 5 per cent,
that is, to $19.53 per square foot.
[26]
The properties that are
arguably the closest in character to the subject property, as described by
Mr. Petrovsky and Mr. Ahmad, are the Burnhamthorpe, Trelawny,
Terry Fox, Pearl and 756‑60 Lakeshore properties. The adjusted
range is from $19.50 to $30.61 per square foot, the mid‑range at
approximately $25.05 per square foot which would give the land portion of the
subject property the value of $731,081.
[27]
The appeal will
therefore be allowed and the matter referred back to Minister of National
Revenue for reconsideration and reassessment on the basis that the value of the
vacant land at time of acquisition was $25.05 per square foot, or $731,081, and
the building value was $948,916.
Signed at Ottawa, Canada, this 10th day of January 2013.
"Gerald J. Rip"
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