Angelo Testa and Libera Testa v. Her Majesty the Queen, [1993] 1 CTC 2722, 93 DTC 413

Mogan, T.C.C.J.:—The appeals of Angelo Testa and Libera Testa (husband and wife) were heard together on common evidence. The only issue in these appeals is the fair market value at December 31, 1971 (the "V-Day Value") of a certain parcel of land in the Municipality of Delta, British Columbia, a few miles south of Vancouver.

The subject property is located near the southwest corner of the intersection of Scott Road (running north and south) and 64th Avenue (running east and north). The subject property does not contain the comer itself but is both south and west of two small commercial sites which occupy the corner. In 1971, the commercial site on the corner was a convenience store and there was a real estate office adjoining it to the west on the south side of 64th Avenue. The area occupied by these two commercial sites was 117 feet along Scott Road and 270 feet along 64th Avenue. The subject property contained 3.02 acres and was immediately south of the two commercial sites having a frontage of 421 feet along Scott Road and a depth of 303 feet. The subject property also had a panhandle 33 feet wide running 117 feet up the western limit of the real estate office, giving it narrow (33 foot) frontage on 64th Avenue.

In September 1970, the appellants purchased the subject property (hereafter referred to as the "property") for a price of $22,500 or $7,450 per acre. At that time, there was very little development on the surrounding land most of which was zoned R7 (residential) requiring five acres for each dwelling. The area had low density residential zoning because in 1971 there were no sanitary sewers at Scott Road and 64th Avenue. There was an old single storey house on the property making it a non-conforming use because it was zoned R7 and had only 3.02 acres. In 1987, the property was sold for $1,300,000 and immediately rezoned and developed as a small shopping centre.

When the appellants filed their 1987 income tax returns, they used a V-Day value of $400,000 to compute the amount of their capital gain. When assessing the appellants’ income tax for 1987, the Minister of National Revenue used a V-Day value of $45,300 to determine the amount of that same gain. The appellants objected to and appealed from their assessments; and so the parties have come to Court claiming that the V- Day value of the property was respectively $400,000 and not more than $45,300. The appellants’ burden in these appeals is truly daunting because, in order to succeed, they must prove that the V-Day value of the property is approximately 18 times greater than the price ($22,500) which they paid for the property in September 1970, just 15 months before V- Day.

Angelo Testa was the only appellant to testify. He started business as a land developer in 1966 and has engaged in construction and equipment rentals ever since. In 1970-71, he was working on commercial and industrial subdivisions all over the lower mainland of British Columbia but mainly in the Surrey/Delta area. In September 1970, he decided to purchase the property because he thought that it had good potential for commercial development. In particular, he was attracted by the following features: it was at the intersection of two main arteries (Scott Road and 64th Avenue); it had excellent frontage on Scott Road and also frontage on 64th Avenue through its panhandle; Scott Road was serviced in 1970 with electricity, water and gas; although the property was zoned R7 residential, the two adjoining sites on the corner were already zoned commercial; and the grade of the land was generally level with Scott Road sloping gently to the south.

In April 1976, the appellants applied to rezone the property for office/ commercial/retail use but their application was refused in June 1976. Again in November 1978, there was a further application to rezone to Cl Commercial but this later application was either withdrawn or not processed because it was not successful. The very strong inference which I drew from the testimony of Angelo Testa and the respondent's expert witness was that the municipality would probably not rezone the property until it had been serviced with sanitary sewers. This inference is reinforced by the following statement taken from a report dated November 26, 1975 prepared by the Delta Planning Department:

All the area south of Bemi Road and west of Scott Road requires a new sanitary trunk sewer which needs to be connected to the G.V.R.D. sanitary trunk line. Therefore no development should take place in this area until the trunk line has been committed.

The emphasis was part of the report which is Exhibit A-2, one of the appellants' exhibits. The above quotation is taken from the section headed "H. Engineering Services (Utilities)". I should add that the property is south of Bemi Road and west of Scott Road.

I am satisfied that there was virtually no chance of rezoning the property until it was serviced with sanitary sewers. Mr. Testa explained that the sanitary sewers would have to come from the south because the land sloped to the south; and Map No. 9 in Exhibit A-2 confirms his statement. It is a fact that the property was not serviced with sanitary sewers until 1984, and it was not rezoned and developed as a shopping centre until 1987.

Normally, in a case like this, each party will call an expert witness to prove the fair market value of the particular property at the relevant date. In these appeals, the appellants did not call an expert witness but attempted to prove their claimed V-Day value through an offer to purchase received in 1971. Joseph Andruschak was a car dealer who serviced the appellants' cars. Angelo Testa had known Mr. Andruschak since 1957 both in business and socially. According to the evidence of both Angelo Testa and Mr. Andruschak, in early 1971, Mr. Testa went to buy a car for his wife from Mr. Andruschak. He told Mr. Andruschak about his three-acre site at Scott Road and 64th Avenue. Mr. Andruschak went out to see it and decided to buy it. He went back to his office and, in his own hand, printed out an offer to purchase which, in its entirety, read as follows:

Feb. 22, 1971

Mr. Angelo Testa

This offer to purchase property at 6345 120th St. Delta B.C. for the sum of $400,000 subject to rezoning for auto dealership.

Yours truly

Joseph Andruschak

This document was entered as Exhibit A-3. Mr. Andruschak handed the above offer to Mr. Testa who then wrote in the lower left corner "Simon Fraser Sales Ltd.”, the name of Mr. Andruschak's auto dealership. It was on the strength of this offer that the appellants reported a V-Day value of $400,000 in their 1987 income tax returns.

The Andruschak offer requires close scrutiny because it is the heart of the appellants' case. It is handwritten, informal and terse. There is no time limit for its acceptance. It is conditional upon rezoning without designating whether the vendor or purchaser will be responsible to apply for rezoning and without setting a time limit for the rezoning to be achieved. There is no deposit to prove that it is a serious offer. Mr. Andruschak admitted that he had not made any inquiries about the selling prices of other lands sold recently in the immediate vicinity and, in particular, he did not know that Mr. Testa had purchased the property for $22,500 just five months previously. Mr. Andruschak made no prior or subsequent attempt to locate an auto dealership in the vicinity of the property or even in the municipalities of Delta or Surrey. Mr. Andruschak stated that the 421-foot frontage on Scott Road would permit an auto dealer to display many cars for sale but, according to other reliable evidence given by the respondent's expert witness, he could have assembled 400 feet of frontage on Scott Road for much less than $400,000 and then applied for rezoning. In February, 1971, the offer price ($400,000) was more than 15 times greater than the prices at which comparable lands were selling in the vicinity of the property. At the time of the offer, Mr. Andruschak was a successful auto dealer with a site on Hastings Street worth close to a million dollars. That being so, the form of the offer is not consistent with the form in which an astute and successful businessman would normally initiate a transaction of such magnitude.

Appellants' counsel relied on the decision in Friedman v. M.N.R., [1978] C.T.C. 2809, 78 D.T.C. 1599 (T.R.B.) to support his proposition that a bona fide offer to purchase may be evidence of fair market value. In Friedman, the taxpayers (appellants) listed certain property for sale for $1,600,000. A formal offer was received for $1,500,000 conditional upon the vendors (through their company) leasing back the property for 20 years and securing the lease with a second mortgage for $500,000 representing the balance of the sale price. The offer was not accepted for the following reasons as set out by the learned chairman of the Tax Review Board at page 2810 (D.T.C. 1601):

Although the purchase price was considered adequate Mr. David Friedman, who was 64 years old at the time, and his brother Hyman, who I understand was older, did not accept the condition by which the 20-year lease would be personally secured by the appellants. The purchaser, not being willing to purchase the property without the secured lease, the sale did not take place.

The chairman concluded at page 2816 (D.T.C. 1604):

The fact that the offer was not accepted and that the sale did not go through does not, in my opinion, mean that it cannot represent the fair market value in December of 1971. Since the offer to purchase was not proven to be invalid or fraudulent . .. I must conclude that the fair market value of the subject property on December 31, 1971, was $1,500,000 as set out in the offer to purchase dated October 22, 1971.

With respect, I should have thought that the significant condition in the offer and the refusal of the vendors (appellants) to accept that condition would mean that the offer did not represent fair market value. It may have been the vendors' 20-year secured lease which permitted the prospective purchaser to offer such a high price. Without the secured lease, the offered price may have been much lower. It appears to me that the learned chairman in Friedman was preoccupied with whether the offer was invalid or fraudulent when he should have been equally concerned with whether it was unconditional and expressed in only monetary terms.

Having listened carefully to the testimony and diction of Mr. Testa and Mr. Andruschak, I conclude that the offer reads as if it were drafted by or dictated by Mr. Testa. The offer was refused soon after it was delivered to Mr. Testa.

I do not place much weight on the Andruschak offer because, firstly and most importantly, it was conditional upon a specific type of rezoning with no evidence that there was any chance in 1971 to obtain such rezoning. And secondly, all of the surrounding circumstances indicate a deficiency of either business acumen or good faith. If the offer was made in good faith, then Mr. Andruschak was not the hypothetical prudent buyer contemplated in the classic test of fair market value because he offered to pay more than 15 times the prevailing cost of comparable land. And if the offer was not made in good faith, then it cannot be evidence of fair market value. Notwithstanding the puzzling reluctance of the respondent's counsel to challenge in cross- examination the bona fides of the Andruschak offer, I find that the document does not have a true ring.

The respondent called an expert witness, Gerald A. Folstad, to prove the fair market value of the property at V-Day. Mr. Folstad earned the designation AACI from the Appraisal Institute of Canada and has had many years of experience appraising real estate. He chose six sales in the period 1970-72 as comparable sales and accepted the R7 zoning because it determined the possible uses of the property in 1971. Four of his six sales which were zoned residential in 1971 were later developed as residential. Appellants’ counsel cross-examined Mr. Folstad closely on his use of R7 lands as comparable sales when the property was at the intersection of two main arteries. He was also cross-examined in evidence (and criticized in argument) on his refusal to consider possible commercial uses in his concept of highest and best use.

Subsequent events like the 1975 Planning Report (Exhibit A-2 quoted above) proved that the property could not be rezoned until it was serviced with sanitary sewers; the sewers did not come until 1984; and the property was not rezoned commercial until 1987: 15 years after V-Day. For any consideration of possible commercial uses, Mr. Folstad would have had to make assumptions as to the type of rezoning that might be permitted after V-Day; the type of building that might be constructed in accordance with the new zoning; and the future year (holding period) when the new zoning might take effect. In my view, Mr. Folstad was wise to stay with the zoning which was in place on V-Day and not speculate on possible commercial uses at some undetermined time in the future. It is, after all, the fair market value on V-Day which is most important. I accept Mr. Folstad’s six comparable sales as reasonable in relation to size, location, zoning and time.

Mr. Folstad produced a 17-page report (Exhibit R-1) which expressed his opinion that the fair market value of the property on V-Day was $9,000 per acre or $27,000 for the site. His opinion is consistent with the price ($7,450 per acre) paid by the appellants for the property just 15 months prior to V-Day. There is no reason for me to conclude that the vendor who sold to the appellants in September 1970 was not prudent when he accepted a sale price of $22,500. Indeed, that unknown vendor appears to have been much more prudent than Mr. Andruschak who made a conditional offer of $400,000 for the same property just five months later when comparable properties were selling in the range of $8,000 to $9,000 per acre.

Mr. Folstad’s report and his expert opinion are the best evidence before me concerning the fair market value of the property at December 31, 1971. In his opinion, the V-Day value of the property was $27,000. When issuing the assessments under appeal, the Minister of National Revenue accepted a V-Day value of $45,300 which was generous having regard to the evidence before me. The appeals herein are dismissed.

Appeals dismissed.