Date: 20010628
Docket: A-465-98
Neutral citation: 2001 FCA 205
CORAM: ISAAC J.A.
SEXTON J.A.
SHARLOW J.A.
BETWEEN:
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
as represented herein by THE MINISTRY OF INDIAN
AFFAIRS AND NORTHERN DEVELOPMENT,
Appellant
(Defendant),
- and -
MAURICE ST. MARTIN, LUCIE ST. MARTIN, ALINE BONSALL,
ALBERT E. LEGAULT, GARY MacKENZIE, SCOTT TAYLOR,
PETER MERCHART, SHIRLEY BERTRAND, DENNIS BERTRAND,
ROBERT DEACON, JEANNETTE DEACON, JOHN W. SMITH,
JAMES REID, LINDA REID, BRUCE JEWITT, JUDY JEWITT,
HARVEY CORMIER, LOLA CORMIER, JOYCE FARQUHAR,
JEAN FARQUHAR, GEORGE DESCHAMPS, VIOLA DESCHAMPS,
HOMER SAMMET, RICHARD GILBERT, MORLEY GILBERT,
WAYNE MINOR, DIANE MINOR, ROLAND SAVARIE, AGNES SAVARIE,
PETER MORRIS, SUSAN A. DESJARDINS, NICK MATASICH,
PIERRETTE MATASICH, ERIC HART, MARIE HART, EDWARD GRASSI,
PAULETTE GRASSI, DENNIS TORNOPOLSKY, DELMO P. BALDELLI,
JENNY BALDELLI, WILLIAM STEVENSON, MARY STEVENSON,
GRAHAM W. ROSS, CHARLES LARMONDIN, ELIZABETH LARMONDIN,
JACK A. LEPPINEN, DAWN LEPPINEN, NICK ZATEZALO,
CARMEN ZATEZALO, JAMES K. BROWN, TERRENCE MURPHY,
DOROTHY MURPHY, MARIA JACOBA HUFFELS, ALAIN PAQUETTE,
DIANE PAQUETTE, MARY ELEANOR SANCHIIONI, DAVID BENSON,
RICHARD LALONDE, JACQUELINE LALONDE, EDWARD J. GORC,
RICHARD PETER PROCEVIAT, NORMAN JAMES MILES,
LAURENT POULIN, CLAUDETTE DERANGERE MUSICO,
ROBERT RUSSELL, JAMES BULLOCK, CECIL ACE,
DONALD LACHANCE, CHRISTINE LACHANCE,
RICHARD O'BONSAWIN, DIANE O'BONSAWIN,
OLIMPIO MAZZA, ARCADIA MAZZA, ALDO ORASI,
RAYMOND MARION, AUDREY MARION, GILLES MAINVILLE,
JACQUELINE MAINVILLE, CLAUDE MALETTE,
GABRIEL FERNANDEZ, LORNE CHUIPKA, MARLENE CHUIPKA,
RENALD LAPLANTE, SYLVIA LAPLANTE, MAURICE M. BRABANT,
BARBARA BRABANT, SAMUEL ZATEZALO, RUBY ZATEZALO,
JERRY LOISELLE, MARLINE LOISELLE, HERMAN BOIVIN,
PAULINE BOIVIN, BRIAN MacKENZIE, SANDRA BOYUK,
JOSEPH KOSIOR, HARMON MALLOY, ANNETTE MALLOY,
ROBERT DIEBEL, GARY MERKLEY, ELMER C. MERKLEY,
GLORYANN DORE, GARRY MARKLEY, JANET MILLER,
JACQUELINE M. PETRILLI, JILL PACEY,
INNOCINZO COSTANZI, JOSEPH PURIFICATI,
ANNE MARIE PURIFICATI, DAVID GLOVER, JUDITH POGUE,
JOHN LANTEIGNE, DIANE LANTEIGNE, JACK LEONARD,
LYLE PERRY, CAROL PERRY and GEORGE GARDNER,
Respondents
(Plaintiffs)
Heard at Toronto, Ontario on Wednesday, April 4, 2001
JUDGMENT delivered at Ottawa, Ontario, on Thursday, June 28, 2001
REASONS FOR JUDGMENT BY: ISAAC J.A.
CONCURRED IN BY: SEXTON J.A.
SHARLOW J.A.
Date: 20010628
Docket: A-465-98
Neutral citation: 2001 FCA 205
CORAM: ISAAC J.A.
SEXTON J.A.
SHARLOW J.A.
BETWEEN:
HER MAJESTY THE QUEEN IN RIGHT OF CANADA
as represented herein by THE MINISTRY OF INDIAN
AFFAIRS AND NORTHERN DEVELOPMENT,
Appellant
(Defendant),
- and -
MAURICE ST. MARTIN, LUCIE ST. MARTIN, ALINE BONSALL,
ALBERT E. LEGAULT, GARY MacKENZIE, SCOTT TAYLOR,
PETER MERCHART, SHIRLEY BERTRAND, DENNIS BERTRAND,
ROBERT DEACON, JEANNETTE DEACON, JOHN W. SMITH,
JAMES REID, LINDA REID, BRUCE JEWITT, JUDY JEWITT,
HARVEY CORMIER, LOLA CORMIER, JOYCE FARQUHAR,
JEAN FARQUHAR, GEORGE DESCHAMPS, VIOLA DESCHAMPS,
HOMER SAMMET, RICHARD GILBERT, MORLEY GILBERT,
WAYNE MINOR, DIANE MINOR, ROLAND SAVARIE, AGNES SAVARIE,
PETER MORRIS, SUSAN A. DESJARDINS, NICK MATASICH,
PIERRETTE MATASICH, ERIC HART, MARIE HART, EDWARD GRASSI,
PAULETTE GRASSI, DENNIS TORNOPOLSKY, DELMO P. BALDELLI,
JENNY BALDELLI, WILLIAM STEVENSON, MARY STEVENSON,
GRAHAM W. ROSS, CHARLES LARMONDIN, ELIZABETH LARMONDIN,
JACK A. LEPPINEN, DAWN LEPPINEN, NICK ZATEZALO,
CARMEN ZATEZALO, JAMES K. BROWN, TERRENCE MURPHY,
DOROTHY MURPHY, MARIA JACOBA HUFFELS, ALAIN PAQUETTE,
DIANE PAQUETTE, MARY ELEANOR SANCHIIONI, DAVID BENSON,
RICHARD LALONDE, JACQUELINE LALONDE, EDWARD J. GORC,
RICHARD PETER PROCEVIAT, NORMAN JAMES MILES,
LAURENT POULIN, CLAUDETTE DERANGERE MUSICO,
ROBERT RUSSELL, JAMES BULLOCK, CECIL ACE,
DONALD LACHANCE, CHRISTINE LACHANCE,
RICHARD O'BONSAWIN, DIANE O'BONSAWIN,
OLIMPIO MAZZA, ARCADIA MAZZA, ALDO ORASI,
RAYMOND MARION, AUDREY MARION, GILLES MAINVILLE,
JACQUELINE MAINVILLE, CLAUDE MALETTE,
GABRIEL FERNANDEZ, LORNE CHUIPKA, MARLENE CHUIPKA,
RENALD LAPLANTE, SYLVIA LAPLANTE, MAURICE M. BRABANT,
BARBARA BRABANT, SAMUEL ZATEZALO, RUBY ZATEZALO,
JERRY LOISELLE, MARLINE LOISELLE, HERMAN BOIVIN,
PAULINE BOIVIN, BRIAN MacKENZIE, SANDRA BOYUK,
JOSEPH KOSIOR, HARMON MALLOY, ANNETTE MALLOY,
ROBERT DIEBEL, GARY MERKLEY, ELMER C. MERKLEY,
GLORYANN DORE, GARRY MARKLEY, JANET MILLER,
JACQUELINE M. PETRILLI, JILL PACEY,
INNOCINZO COSTANZI, JOSEPH PURIFICATI,
ANNE MARIE PURIFICATI, DAVID GLOVER, JUDITH POGUE,
JOHN LANTEIGNE, DIANE LANTEIGNE, JACK LEONARD,
LYLE PERRY, CAROL PERRY and GEORGE GARDNER,
Respondents
(Plaintiffs).
REASONS FOR JUDGMENT
ISAAC J.A.
[1] This is an appeal from a judgment of the Trial Division pronounced 16 July, 1998 determining the annual rents for the period 1 April, 1991 to 31 March, 1998, payable by 61 lessees of individual lots situated on Whitefish River Indian Reserve No. 4 near Birch Island, Ontario.
[2] The appellant does not dispute the finding of the learned Trial Judge as to the fair market value of the demised land, but does dispute the application of a 40% discount factor against the fair market value of the land as determined by the Trial Judge. The appellant contends that a 30% discount is the appropriate factor to apply. The appellant also disputes the decision of the Trial Judge to apply to the discounted fair market value the Bank of Canada's prime lending rate as at 31 March, 1991. The appellant contends that the rate as published 90 days prior to the commencement of the new rental period is more appropriate.
Background
[3] The demised land is situated in a subdivision in the Georgian Bay area of Lake Huron approximately 60 miles southwest of Sudbury. The subdivision consists of 83 cottage lots on the shore of McGregor Bay. The lots are subject to separate but virtually identical leases entered into between the appellant-lessor and the respondent-lessees. The Trial Judge therefore referred to "a common lease" applicable to the parties. The lease has a term of 21 years effective 1 April, 1977 with the possibility of renewal for each of three separate and additional successive periods of 7 years. The parties rely on the following clauses in the lease:
That the rental for the seven year period of the said term beginning the first day of April, 1984, and for each succeeding seven year period of the said term and any renewal thereof, shall be determined prior to the beginning of each such period and shall be based on the fair market value for the land at that time, without regard to the value of the improvements placed thereon by the lessee, but having due regard to the value of other demised lands in the area.
The rental will be assessed by applying the current prime lending factor of the Bank of Canada to the said market value of the land.
In the event that the parties hereto fail to reach agreement on the fair market rent, the Minister shall make the determination. The Lessee shall have the right, if he (they, it) disagrees with the Minister's determination of the rent to refer the question of rental to the Trial Division of the Federal Court of Canada at his own expense. In the event of such referral by the Lessee, he (they, it) shall pay and continue to pay the annual rental determined by the Minister PROVIDED that after determination by the Federal Court aforesaid any amount paid by the Lessee with respect to the seven year period in question shall be adjusted in accordance with such determination by way of rebate or additional payment.[1] [emphasis added]
[4] In December, 1990, the respondents were notified by letter that the rent would increase effective 1 April, 1991. The letter advised of the increased rent but it did not indicate the method or basis of its calculation. In a subsequent letter dated 10 May, 1991 the respondents were notified that the rent had been changed. The letter also indicated the market value assumption upon which the rent was based. The respondents formed a cottagers committee to contest the increase. Ultimately, the parties failed to reach an agreement on the annual rent applicable for the period 1 April, 1991 to 31 March, 1998. Accordingly, the procedure set out in the above clauses to the lease was invoked and the respondents exercised their right to refer the question of rental to the Trial Division of the Court.
[5] The Trial Judge concluded that the applicable rent was to be determined as follows:
1) it shall be based on the fair market value of the
land at that time,
a) without regard to the value of improvements,
b) but having due regard to the value of other
demised lands in the area.
2) it will be assessed by applying the current Bank of
Canada lending rate to the said market value.[2]
He also concluded that the fair market value of the land is to be assessed prior to the commencement of the 7 year renewal period and that the "current" lending rate is to be determined immediately prior to the commencement of the renewal period on April 1, 1991. Therefore, he determined that the prime lending rate of the Bank of Canada on March 31, 1991 is to be applied to the fair market value of the land.
[6] The Trial Judge then turned to the issue of determining the fair market value of the land. He noted that the rent is to be determined with regard to "the value of other demised lands in the area" which he took to mean leased lands including Indian land leased for similar purposes.[3] However, he found that the reference in the lease to the value of other demised lands in the area did not prevent an appraiser, in determining the fair market value of the demised lands, from having regard to lands held in fee simple.[4]
[7] At trial, each party called its own expert to determine the rents according to the method set out in the lease. Both appraisers based their fair market rent assessments on the estimated fee simple market value of the subject lots, less a discount reflecting the difference between the fee simple interest and the interests inherent in the demised land, multiplied by an interest rate. The fair market rents were also derived from a comparison of other First Nation cottage lot rentals. A major difference between the appraisals, however, was the magnitude of the discount factor to be applied to the fee simple fair market value of each lot. The respondents' expert applied a 50% discount while the appellant's expert applied a 30% discount. An example of the disparity between the competing appraisal reports may be seen in the estimates relating to lot 76 which is leased by the president of the Cottagers Association, Mr. Jim Reid. In the report prepared by the appellant's expert, the estimated fair market value of lot 76 is recorded as $25,400.00 discounted to $17,780.00 after applying a 30% factor.[5] By contrast, the report prepared by the respondents' expert estimates the fair market value of lot 76 to be $22,600.00 discounted to $11,300.00 after applying a 50% factor.[6]
[8] The Trial Judge preferred the appraisal report prepared by the appellant's expert to that prepared by the respondents' expert. However, he did not agree with the application by the appellant's expert of a 30% discount factor to the fee simple fair market value of the lots. Instead, he applied a 40% discount factor. In arriving at his conclusion, the Trial Judge stated:
¶ 86 In my view, the report prepared by Mr. Bell (Exhibit P-8, Tab 17, also filed as Exhibit D-1) is more logical and consistent and less arbitrary than the supplementary report prepared by Mr. Love (Exhibit P-8, Tab 18).
¶ 87 Mr. Bell has calculated a capital value and has compared it as the lease provides to comparable rental values.
¶ 88 I disagree, however, with his discount rate of 30% which appears to have resulted from discounting the 40% discount previously used by him to take account of an imputed tax advantage to the tenants.
¶ 89 I would substitute a discount of 40%.
CONCLUSION
¶ 90 The fair market rent, for the period April 1, 1991 to March 31, 1998, is the estimated market value of each lot as calculated by Mr. Bell in his report (Exhibit P-8, Tab. 17) at pages 82 to 83 with a discount of 40% to arrive at the discounted market value, times the lending rate of 9.92% or such other rate as was in effect on March 31, 1991...
Submissions of the Parties
A – The Discount Factor
[9] The appellant disputes the 40% discount factor applied by the Trial Judge to the fee simple fair market value of the lots. In support of its position, the appellant invokes the recent Supreme Court decision in Musqueam Indian Band v. Glass[7] where the approach to placing a value on the fair market rents, applicable to reserve lands, was broadly canvassed. The appellant notes that the majority in Musqueam determined that the appropriate discount factor applicable to reflect the legal restrictions and market conditions prevailing on demised reserve lands is a question of fact.[8] However, the appellant contends that the Trial Judge failed to base his assessment of a 40% discount on any findings of fact. On the contrary, the 40% discount was applied despite the Trial Judge's acceptance of the report tendered by the appellant's expert as "more logical and consistent and less arbitrary"[9] than that of the respondents' witness.
[10] The appellant contends further that the Trial Judge misunderstood the genesis of the 30% discount factor arrived at by the appellant's appraiser in his 1997 appraisal report prepared for the appellant in contemplation of the litigation before the Trial Judge.[10] The appellant concedes that its expert had applied a 40% discount factor instead of a 30% discount in an earlier 1990 appraisal report[11] prepared for the appellant with respect to the Whitefish Reserve and upon which the appellant relied in assessing the new rentals.[12] However, the appellant submits that its expert explained this difference in cross-examination and re-examination without being challenged.
[11] That explanation was that when he previously applied a 40% discount factor to the fee simple fair market value of the lots he subsequently added an amount to the discounted fee simple fair market value that reflected the value of the advantage to the respondents of not having to pay taxes on reserve lands. The appellant's expert went on to explain that he eventually changed his methodology on the basis that a 30% discount factor better reflected the tax advantage to the respondents than the amount he had previously been adding back in after a 40% discount. In light of the uncontroverted explanation for adopting a 30% discount to the fee simple fair market value of the lots, the appellant contends that the Trial Judge made a palpable and overriding error in substituting a 40% discount factor without factual support. Such error, in the appellant's submission, warrants reversal.
[12] The respondents reply that the determination of the appropriate discount factor is a clear process to be left to the Trial Judge. The respondents contend further that his determination was supported by the evidence which demonstrated that the appellant's expert applied a 40% discount factor as late as 1997, well after he had ceased adding the imputed tax variable in 1993. In the circumstances, the respondents submit that the factual finding of the Trial Judge was appropriate and therefore should not be disturbed by this Court.
B – The Applicable Interest Rate
[13] The appellant also disputes the decision of the Trial Judge to apply the prime lending rate as at March 31, 1991 to the discounted fee simple fair market value of the lots. Specifically, the appellant argues that the Trial Judge erred in failing to read into the lease an implied term that the Minister must provide sufficient notice to the respondents, prior to the commencement of the new rental period, as to what the new rents will be. In this connection, the appellant submits that business efficacy requires that lessees to such a long term lease be given sufficient notice of any change in rents. Otherwise, the lessees would be put at risk of being in default. On this reasoning, the appellant urges the Court to apply the prime lending rate as published 90 days prior to the commencement of the new rental period.
[14] The respondents, for their part, contend that the appellant's argument cannot be sustained on a plain reading of the lease. They maintain that interpreting the word "current" to mean the day prior to the commencement of the new rental period, as the Trial Judge did, is entirely consistent with the wording of the lease. Accordingly, the respondents urge the Court not to disturb the finding of the Trial Judge that the prime lending rate applicable to the discounted fee simple fair market value of the lots is the rate as published on March 31, 1991.
Analysis
A – The Impact of Musqueam Indian Band v. Glass, [2000] 2 S.C.R. 633
[15] Before considering the issues raised by the parties in their pleadings, the Court must address a preliminary matter of potential consequence to the outcome of this appeal.
[16] After the Trial Judge had pronounced his judgment in this appeal, this Court and the Supreme Court of Canada decided the appeals in Musqueam Indian Band v. Glass. In Musqueam,[13] this Court held, on appeal from the Trial Division, that in determining the fair market value of lands on the Indian reserve in issue in that appeal one could take into account the fair market value of lands held in fee simple in the area and further that there was no legal basis for discounting the fee simple value of the reserve land in question to reflect the Band's sui generis interest in it. The Supreme Court of Canada, by a five to four majority, disagreed and concluded that a 50% discount was warranted on the facts of that case. Three members of the Court agreed with the opinion of Gonthier J. that a discount was warranted on the facts because the fee simple value of reserve lands is merely hypothetical and so must be determined by "adapting the off-reserve value [of the lands] to take into account the actual features of the land and of the market".[14] Bastarache J. wrote separate reasons agreeing in the result that a 50% discount was applicable because the value of the land "should be calculated as leasehold land including its status as reserve land".[15] McLachlin C.J.C., writing for herself and three other members of the Court, would have affirmed the decision of this Court.
[17] Despite their disagreement on the applicability of a discount factor, however, eight of the nine Justices of the Supreme Court were in agreement that the interest to be valued was the fee simple interest in the demised lands. In Musqueam, the Supreme Court dealt with a rent assessment of lands similar to those in question in the present appeal, namely Indian reserve lands surrendered for leasing. Gonthier J., writing for the majority, excluded lease-specific conditions from the determination of the fair market value of the land. He explained the exclusion as follows:
[para38] Market value generally is the exchange value of land, rather than its use value to the lessee. This distinction was articulated in Bullock's, Inc. v. Security-First National Bank of Los Angeles, 325 P.2d 185 (Cal. Dist. Ct. App. 1958) at p. 188, where the lease "calls for a determination of the value of the land, not the value of the use of the land for any particular purpose". Land is valued without regard to the tenant's interest in it, for it does not reduce the land's exchange value if the tenant chooses not to use the land for its highest use. This case has been cited in Canada (e.g., Revenue Properties, supra) and the principle is part of Canadian law. It was applied in Gulf Oil Canada Ltd. v. National Harbours Board, F.C.T.D., No. T-1478-71, September 15, 1972, at p. 19, which was followed in Burrard Dry Dock Co. v. Canada, [1974] F.C.J. No. 417 (QL) (T.D.), at para. 9. Most recently, in No. 100 Sail View Ventures Ltd. v. Janwest Equities Ltd. (1993), 84 B.C.L.R. (2d) 273, leave to appeal refused [1994] 2 S.C.R. viii, the majority of the British Columbia Court of Appeal held at p. 281 that the specific terms of a lease were not relevant when determining "fair market value of the Leased Premises as bare land" (emphasis added) for a rent review.
[para39] Like the Musqueam leases, the lease in Bullock's, supra, referred only to land value. The court held that if the parties "had intended anything other than market value, they would have said so expressly" (p. 189 (emphasis in original)). This is true of the Musqueam leases as well. The leases do not refer to "current leasehold value" or to "the value of the land leased on the terms and conditions contained in this lease" as did the lease on reserve land in Leighton, supra. In the absence of any indication that the leasehold value is to be used to set the rent, "current land value" means freehold value. [Emphasis added]
[18] Like the lease in Musqueam, the present lease makes reference only to the "value of the land", not to the value of the land under lease. For ease of reference, the relevant paragraph of the lease is reproduced below:
That the rental for the seven year period of the said term beginning the first day of April, 1984, and for each succeeding seven year period of the said term and any renewal thereof, shall be determined prior to the beginning of each such period and shall be based on the fair market value for the land at that time, without regard to the value of the improvements placed thereon by the lessee, but having due regard to the value of other demised lands in the area. [emphasis added]
[19] As Gonthier J. noted, the principle that, absent contractual terms to the contrary, lease conditions are not to be factored into a determination of the fair market value of the demised land has been a constant in Canadian jurisprudence and has been consistently applied by the Trial Division of this Court. Indeed, this was the approach followed by Rothstein J. (as he then was) at trial in Musqueam.[16] Although in that case the learned Trial Judge considered that the interest being valued for "current land value" purposes was a 99-year leasehold interest, being the greatest estate alienable by the Musqueam Indian Band – a position that was subsequently rejected on appeal – he nevertheless recognized that specific lease conditions could not be taken into account in the valuation of the demised lands. At paragraph 39 of his reasons, he explained why lease conditions are irrelevant to the analysis:
Further, valuing the interest granted under the current leases would require that account be taken of the impact on the value of the leasehold interest of the 6% annual rate (if that was lower than prevailing rates in 1995, thereby increasing the value of the leasehold interest), and uncertainty due to rent review, in addition to the declining balance of the lease term, (both latter considerations having the effect of decreasing the value of the leasehold interest). These are not considerations that are relevant in determining current land value because the object and purpose of periodic reevaluation is to treat the land as if it was not encumbered by the existing leases and was free to be leased under newly negotiated terms at the time of each rent review.[17]
[20] Notwithstanding the general exclusion of lease conditions from the fee simple fair market valuation process, the appraisal report prepared by the appellant's expert took into account conditions in the lease in determining the fair market value of the demised land. In that report, the appellant's expert states that "For the purposes of arriving at rental value, we must now consider the conditions of the lease agreement".[18] The report proceeds to account for various lease conditions in determining the appropriate discount factor to apply to the fee simple fair market value of the demised land, namely:
*the term of the lease and renewal options;
*the payment of rent on an up-front yearly basis,
*the requirement to remove any buildings erected by tenants within 180 days of the expiration or sooner termination of the lease;
*the Crown's right to search and drill for oil,
*the requirement to keep the property in good repair; and
*the requirement that tenants seek approval before cutting down any trees.[19]
[21] In Musqueam, Gonthier J. distinguished between legal restrictions on the land, which are properly accounted for in determining its fair market value, and lease restrictions, which are not properly included in the fair market value assessment. He said:
[para47] Legal restrictions on land use, as opposed to restrictions found in the lease, may affect the market value of freehold property. In Revenue Properties, supra, at p. 182, the court held that "[a]ll applicable statutes and laws relating to use such as zoning by-laws must be considered" when assessing land value. All three appraisers in the case at bar considered legal restrictions on land use, chiefly zoning, in their reports. This is consistent with professional appraisal practice in Canada. To determine land value, whether as vacant or as improved, the appraiser (unless otherwise instructed by the lease) considers the highest and best use that is "legally permissible, physically possible, financially feasible, and maximally productive". Legal impediments include "[p]rivate restrictions, zoning, building codes, historic district or other non-zoning land use controls, and environmental regulations" (Appraisal Institute of Canada, The Appraisal of Real Estate (Canadian ed. 1999), at p. 270).
[para48] The legal restrictions on land use imposed by a band on its land are analogous to land laws imposed by a municipal government. As the Federal Court of Appeal held in R. v. Guerin, [1983] 1 C.N.L.R. 21, at p. 75, which happened to concern the Musqueam Band, the Indian Act "confers on the Minister, the Governor in Council, and the band council certain powers of a local government nature for the management of the reserve". Subject to the Indian Act, R.S.C., 1985, c. I-5, the band council has some legislative powers to enact its own laws. Under s. 83, for example, this Band has enacted the Musqueam Indian Band Assessment By-Law and the Musqueam Indian Band Taxation By-Law. The decision about whether to surrender reserve land for leasing or for sale is a formal decision made by the Band under ss. 37-39 of the Indian Act. The decision derives from legislative power, and is not analogous to restrictions on land contained in a lease, which are based on contract. The legal environment on a reserve should therefore be taken into account when appraising the land's value. Of course, like municipal zoning, band restrictions could either increase or decrease land value depending on how the market responds to them. In Devil's Gap Cottages, supra, Strayer J. (as he then was) noted that favourable zoning on that reserve increased its value dramatically over non-reserve land.
[...]
[para52] ... Discounting the land because of its leasehold features is an error of law for, as I have explained above, "current land value" means freehold and not leasehold value... [Emphasis added].
[22] It seems to me quite clear that the assessment which the Trial Judge accepted was done in contravention of the approach in law accepted by Courts in Canada for several decades and recently restated by the Supreme Court in Musqueam. In accepting and acting upon the report of the appellant's appraiser, the Trial Judge erred in law.
[23] During the argument of this appeal, I asked counsel for the parties whether a new trial was not warranted given the decision of the Supreme Court in Musqueam. Counsel for the parties were understandably less than eager to contemplate a new trial, citing time and expense. However, they both agreed that the approach articulated by Gonthier J. in Musqueam was properly applicable to this case. In the circumstances, I am of the opinion that a new trial is required to determine the fair market rents in accordance with the terms of the lease and the principles laid down by the Supreme Court in Musqueam, particularly the principle that conditions in the lease are irrelevant to the fair market value of the demised lands. Of course, if the parties are concerned about the time and expense involved in a new trial, they may have recourse to other modalities of disposition available to them in this Court.
B – The Discount Factor
[24] The appellant asks the Court to determine whether the Trial Judge erred in substituting a 40% discount factor for the 30% factor which the appellant's expert applied. While the application of Musqueam has rendered the issue moot, the Court is of the opinion that some observations may, nonetheless, be useful to the parties.
[25] The Trial Judge substituted the discount factor of 40% for the 30% factor which the appellant's expert applied on the basis that the 30% factor applied by the appellant's expert appeared to have "resulted from discounting the 40% discount previously used by him to take account of an imputed tax advantage to the tenants".[20] Admittedly, there was some confusion as to the shift by the appellant's expert from a 40% discount factor to a 30% discount factor. A careful review of the trial transcript discloses, however, that this transition occurred as the result of a methodological adjustment designed to better reflect the tax exempt status of the demised lands. On re-examination, the appellant's expert explained the change as follows:
A. In the 1990 report, the discount of 40 per cent was applied. And then in order to arrive at the rental value, I added an amount that would take into consideration the fact that the tenants did not have to pay any taxes on the property.
In Ontario, the Province does not tax Indian lands and it does not tax tenants who reside on leased Indian lands. They tax neither the land nor the building. That is one of the few provinces that do that.
[...]
So the 30 per cent – 40 per cent discount, after deducting that, I've added a tax advantage. In the 1990 report, I added the tax advantage only as it related to the land, not to the buildings.
[...]
So that subsequent to [the Rogers case], because I do take guidance from court decisions, I decided that, rather than a specifically added amount of a tax benefit, that I should deduct 30 per cent and that would include a provision, without being specific with respect to the tax benefit. In other words, with the 30 per cent deduction, the tax benefit is included in the end result.[21]
[26] The explanation is clear. The Trial Judge's interpretation of the change in methodology adopted by the appellant's expert either misconstrued the nature of that change or regarded it as impermissible on the basis that a tax advantage could not be considered at all in determining the discount factor. If the Trial Judge was concerned with the change of methodology, he made a reversible error of fact since he accepted the uncontradicted evidence of the appellant's expert. The change in methodology was clearly explained by the appellant's expert at trial and cannot, without further explanation by the Trial Judge, be a basis for substituting a different discount factor.
[27] On the other hand, if the Trial Judge rejected the possibility of calculating a tax advantage in the discount factor, he may have committed a reversible error of law. The appellant's expert noted that Ontario is one of the few provinces that do not tax Indian lands or tenants who reside on those lands. He offered nothing in the way of legislative provisions to support this observation. However, in his report, the appellant's expert refers to the tax savings accruing to tenants of the Whitefish Reserve as flowing from the absence of "municipal and education taxes", or, as he puts it later in his report, "property and service taxes".[22] If provincial laws exist which exempt tenants on Indian lands from taxation, as the appellant's expert suggests, then it remains to be determined whether such laws are properly construed to be, in the words of Gonthier J., "legal restrictions on land use" which may be used in the determination of the fee simple fair market value of the demised lands.
[28] If the tax exempt status of the Whitefish Reserve arises not from provincial law but from longstanding practice, the tax benefit to tenants of the reserve may still be accounted for on the basis that it arises from a custom. As Bastarache J. noted in his separate concurring reasons in Musqueam, supra, the Appraisal Institute of Canada has recognized that the value of land may depend upon "custom, encumbrances, and conditions" as well as legal restrictions on the land.[23]
[29] In any event, the proper characterisation of the province's tax treatment of the Whitefish Reserve will be a matter for the judge presiding at the new trial. These observations are intended solely to highlight the considerations involved in choosing to accept or reject the reserve's tax exempt status as a relevant factor in determining the fair market value of the demised lands. These considerations were not adverted to in the reasons of the Trial Judge, and indeed the parties should be put on notice that a decision to include or exclude the tax benefit to tenants on a reserve in the fee simple fair market value assessment likely requires more information than was made available to the Trial Judge or this Court.
C – The Applicable Interest Rate
[30] We did not call upon counsel for the respondent to make submissions on this issue because we were all in agreement with the conclusion of the Trial Judge on the issue and with the reasons that he gave for it.
Disposition
[31] For these reasons, I would allow the appeal in part and direct a new trial on the first issue. I would dismiss the appeal on the second issue. Success being divided, there will be no order as to costs.
"Julius A. Isaac"
_________________________
J.A.
"I agree
J.E. Sexton J.A."
"I agree
Karen R. Sharlow J.A."
[1] Lease between the Minister of Indian Affairs and Northern Development and Fernand and Nellie Malette dated 1 April, 1981, Appeal Book, Vol. II, Tab 3.
[2] St. Martin v. Canada (Ministry of Indian Affairs and Northern Development), [1998] F.C.J. No. 1032 at para. 45 [hereinafter "Reasons of the Trial Judge"].
[5] Appraisal Report of Mr. F. Bell dated 10 December, 1997, Appeal Book, Vol. IV, Tab 17 at 81.
[6] Appraisal Report of Mr. H. A. Love dated 12 February, 1998, Appeal Book, Vol. IV, Tab 18 at 22.
[9] Reasons of the Trial Judge at para. 86.
[10] See Appraisal Report of Mr. F. Bell dated 10 December, 1997, Appeal Book, Vol. IV, Tab 17.
[11] Appraisal Report of Mr. F. Bell dated 3 October, 1990, Appeal Book, Vol. II, Tab 11 at 24.
[12] See Rental Review letter from Mr. Howard Fanjoy to Mr. Graham Ross dated May 13, 1991, Appeal Book, Vol I, Tab J.
[13] Musqueam Indian Band v. Glass, [1999] 2 F.C. 138, [1998] F.C.J. No. 1893.
[14] Musqueam Indian Band v. Glass, [2000] 2 S.C.R. at para. 49.
[16] Musqueam Indian Band v. Glass (1997), 137 F.T.R. 1, [1997] F.C.J. No. 1339.
[18] Appraisal Report of Mr. F. Bell dated 10 December, 1997, Appeal Book, Vol. IV, Tab 17 at 75.
[20] Reasons of the Trial Judge, supra at para. 88.
[21] Trial Transcript, Vol. III at 555-556.
[22] Appraisal Report of Mr. F. Bell dated 10 December, 1997, Appeal Book, Vol. IV, Tab 17 at 85.
[23] Musqueam, supra, at para. 65
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