Ivan’s Auto Body Limited v. Her Majesty the Queen, [1994] 2 CTC 2210, [1994] DTC 1957

Bonner J.T.C.C.:—The appellant carries on the business of auto body repairs. It realized a substantial gain upon the disposition of a property which was a “former business property" within the meaning of subsection 248(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). On March 20, 1987, it acquired from Ivan and Rozika Curman a “replacement property" within the meaning of subsection 44(1) of the Act. The replacement property comprised two adjacent parcels of real property, numbers 3540 and 3550 Commercial Street, Vancouver. Each parcel had a building located thereon. The "aggregate of the cost" to the appellant of the replacement property must be determined for purposes of subsection 44(1) of the Act. Ivan and Rozika Curman were sole shareholders of the appellant. They did not deal with the appellant at arm's length. Subsection 69(1) of the Act provides:

69(1) Except as expressly otherwise provided in this Act,

(a) where a taxpayer has acquired anything from a person with whom he was not dealing at arm's length at an amount in excess of the fair market value thereof at the time he so acquired it, he shall be deemed to have acquired it at that fair market value;

The issue in these appeals from assessments under the Act is whether the appellant acquired the replacement property from the Curmans for an amount in excess of the fair market value at the time of acquisition.

The property at number 3550 Commercial Street was acquired by the Curmans in 1975. Thereafter and until the time of sale to the appellant it was leased by them to the appellant for use as an auto body repair shop. The property at number 3540 Commercial Street was purchased by Mr. and Mrs. Curman in an arm's length transaction in November 1986 for $165,000.

The position of the respondent was that the Minister of National Revenue correctly determined that at the time of the transfer of the Commercial Street properties to the appellant their fair market value did not exceed $108,000 for number 3550 and $116,000 for number 3540. At the hearing of the appeal two experts in the valuation of real estate were called to give evidence. Stephen Cunningham, the expert called by counsel for the appellant testified that in his view at the time of transfer to the appellant the fair market value of the properties were $180,000 for number 3550 and $170,000 for number 3540. Wilfred Cush- nie, the expert called by counsel for the respondent, testified that the total fair market value of both properties at the time of acquisition was $204,000. He arrived at that amount on the basis that the buildings which existed at the time of acquisition added nothing to the value of the land in the market place and that the value of the land alone was to be calculated at the rate of $25.50 per square foot multiplied by the total area of the two properties, 7,989 square feet.

Before dealing further with the opinions of the two experts more of the background must be set forth. Number 3550 consisted of a lot having an area of about 3,850 square feet on which stood a one storey concrete block building which had been erected in 1955. The property was leased by the Curmans to the appellant for $700 a month. That figure was fixed by the accountant for the Curmans. Mr. Curman testified that.the building at number 3550 was strongly built of concrete blocks with heavy beams supporting the roof. He said that the building was in very good condition at the time of the 1987 sale. It was, he said, suitable for continued use as a body repair shop.

Number 3540 Commercial Street was the parcel abutting the northerly boundary of number 3550. The property consisted of a lot having an area of 4,137 square feet and a one storey wooden building which had been erected in 1926. The building was lined with gyproc and apparently had little in the way of interior finishing or partitioning. The building encroached on the property to the north. I note that there was some sort of easement over a narrow strip of land where the boundary between numbers 3540 and 3550 intersected with the street line but it was not suggested that it affected value.

In 1985 and 1986 Mr. Curman sought larger premises for the appellant’s body repair business. The owner of the property adjoining number 3550 on the soutn refused to sell. In September of 1986 the owner of number 3540 listed it for sale at an asking price of $185,000. On September 24, 1986 Mr. and Mrs. Curman entered into an agreement to buy the property for $165,000. The agreement provided for a $5,000 price increase in the event that the vendor established that the building did not encroach on the adjacent property to the north. The vendor was unable to do so and the transaction closed on or about October 6, 1986 at the $165,000 price.

Mr. Curman testified that at the time number 3540 was purchased there was no intention to demolish the building. He stated that he planned to connect the two buildings and use the resultant structure for auto body repair work. If this plan was ever seriously considered it was quickly abandoned. There is clear evidence that, at least as early as November of 1986, plans for demolition of the building at number 3540 had been made. Demolition permits were in fact issued in March of 1987. In April of 1987 shortly after the sale of numbers 3540 and 3550 to the appellant the buildings situated on both properties were demolished. A new building was later erected by the appellant and is now being used for its business.

The properties were located in a built-up area on the east side of Vancouver. It is evident from photographs entered in evidence that the buildings in the area varied greatly in age, in condition and in use. Industrial, commercial and residential uses mingled freely. The experts called by both parties found few transactions involving property which I regard as reasonably comparable. Save for the transactions between the Curmans and the former owner of number 3540 there was little in the way of truly comparable sales which could be used for purposes of market data analysis. Where very substantial adjustments are required in such an analysis the result becomes increasingly unreliable.

There was a scarcity of reliable evidence which could be used in arriving at value on an income basis. Nothing in the evidence suggested that the rent paid by the appellant to the Curmans for number 3550 was in any way related to market rates. It was simply a figure arrived at some years before by the Curmans' accountant. There was evidence that number 3540 had been rented prior to the formation of the agreement in September 1986 with the Curmans but there were no evidence as to the rental rates paid. Thus the income approach which is often of great assistance in the determination of the value of a relatively unique commercial property was rendered less reliable by the absence of direct information as to the arm's length rents which the properties were capable of generating.

Mr. Cunningham, the appellant’s expert, attempted to evaluate the two properties utilizing the three standard appraisal techniques, namely, the cost approach, the income approach and the direct sales comparison approach. The fundamental problem with Mr. Cunningham’s work was that he failed to demonstrate that it was right. He may have arrived at the right conclusion but so much was lacking in the way of detail as to his factual premises, his analysis and the rationale supporting the conclusions that any acceptance of his work must rest on blind faith alone. It is well to note that what was said by Mahoney J., in National System of Baking Alberta Ltd. v. The Queen, [1978] C.T.C. 30, 78 D.T.C. 6018 (F.C.T.D.), at page 37 (D.T.C. 6023):

The Court is not justified in jumping with an expert to a conclusion that is sustained only by the evidence of his expertise; it simply must have evidence as to facts so that it can both understand and evaluate the process leading to the conclusion and the validity of the conclusion itself.

When Mr. Cunningham was questioned with respect to his statement that the effective age of the building number 3540 was assumed to be thirty years he admitted that he did not know what had been done to the building between the time it was erected and the time it was demolished. When questioned about inquiries made by him on the point he simply responded that he had no notes. The land value used by Mr. Cunningham for purposes of the cost approach was, he admitted, subjective. He commented that he came up with $32 per square foot and that someone else could come up with $28 per square foot or $34 per square foot. He admitted further that he had disregarded the presence of buildings when choosing comparables in the process of arriving at land values. Mr. Cunningham displayed little knowledge of the properties which he used as comparables in arriving at rental rates for purposes of valuing the subject properties on the basis of the income approach. He admitted that the rental rate which he chose for the subject was near the top end of the range. Nothing in his evidence justified selection of the figure chosen by him. When cross-examined with respect to properties used by him as comparables for purposes of the market data approach Mr. Cunningham displayed no familiarity with them and was unable to identify the factors used as adjustments for each comparable and the extent of those adjustments. Typically his answer was that he just did not have particulars with him in Court.

Mr. Cushnie attempted to determine value by the direct comparison approach. His work was much more painstaking than that of Mr. Cunningham. However, his conclusion that number 3540 when sold to the appellant in March of 1987 was worth substantially less than the amount paid for it by the Curmans in an arm's length transaction only a few months before is one which I find offensive to common sense and very difficult to accept. I recognize that a single transaction is not by itself determinative of the market. One of the parties may well make a bad bargain. I am not persuaded however that the Curmans paid too much for number 3540 when they bought it in the fall of 1986 nor am I persuaded that what they paid for number 3540 was not the best evidence of the value of number 3550 at the time of the sale of it to the appellant.

When questioned on the subject the respondent's expert stated, correctly I believe, that the Curmans had a special purpose in mind in purchasing number 3540. Further, he assumed in arriving at his conclusion, that because of the special situation or purpose of the Curmans as owners of the adjoining property, they were prepared to pay more than the general market. I am not convinced that Mr. Cushnie’s assumption was correct. The owner of number 3540 was a willing seller. He offered it for sale by listing it with a real estate agent. There was no need for the Curmans to pay more than the general prevailing market rate in those circumstances. In any event they, as adjoining owners, formed part of that general market which in theory is assumed to exist.

Mr. Cushnie’s ultimate conclusion rested on the premise that, at the time of the sale to the appellant, the highest and best use of numbers 3540 and 3550 was for redevelopment. He therefore considered that the buildings added nothing to the value of the land in the market place. His reasoning was that because number 3540 was bought by the owner of number 3550 with redevelopment in view the highest and best use changed from a continuation of the existing use and a drop in market value ensued. In his market data analysis he made a 40 per cent adjustment to the price paid by the Curmans for number 3540 in arriving at a rate per square foot of land. Here, in my view, Mr. Cushnie erred. The concept of highest and best use is not one which rests on the plans or intentions of an individual owner. In any event, when the Curmans dealt with number 3540, the property which they bought and the property which they sold to the appellant were one and the same. That property was one which, though improved, was a redevelopment property. In my view it was worth what they paid for it in the open market, namely, $165,000 divided by the land area, 4,137 square feet or $39.88 per square foot. In dealing with number 3550 what the Curmans sold to the appellant was the same thing, a redevelopment property. I can conceive of no reason for concluding that the fair market value of number 3550 should be calculated using any rate other than that in fact paid in the arm's length transaction for the immediately adjoining property, number 3540. Because number 3550 was redevelopment property the building, though in good condition, would add nothing to the value of the land in the market place. I have therefore concluded that the fair market value of the total property sold to the appellant is to be calculated by multiplying the total area, 7,989 square feet by $39.88 per square foot. The appeals will therefore be allowed with costs and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the fair market value of the property sold by the Curmans to the appellant was $318,600. In light of the inadequate work of the expert, Mr. Cunningham, I will direct that the costs awarded do not include any disbursement in respect of work done by him.

Appeal allowed.