Norbert Lacroix v. Minister of National Revenue, [1992] 2 CTC 2268, [1992] DTC 2162, [1992] 2 CTC 2718, [1992] DTC 2169

Tremblay, T.C.C J.:—

1. The point at issue

According to the proceedings, the point at issue is whether the appellant, a former farmer, is correct in the computation of his income with respect to the 1979 taxation year, and in order to establish the capital gain upon disposition of his farm, to consider the adjusted cost base of his farm on December 31, 1971 to have been $132,000.

The respondent argues that the market value on December 31, 1971 was only $58,500.

2. The burden of proof

2.01 The burden of proof is on the appellant to show that the respondent's assessment is incorrect. This burden of proof results from several judicial decisions, including the judgment by the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R.486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 In that same judgment, the Court decided that the facts assumed by the respondent in support of the assessment are also presumed to be true until proved otherwise.

The facts presumed by the respondent are described in subparagraphs (a) and of paragraph 5 of the respondent's reply to the notice of appeal. This paragraph reads as follows:

5. In assessing the appellant for the 1979 taxation year, the respondent took the following facts into account, inter alia:

(a) During the 1979 taxation year, the appellant disposed of his farm and of his residence which was situated thereon;

(b) The appellant realized a capital gain of $120,770, calculated as follows: less

Proceeds of disposition	$228,316
less
Residence portion	($24,991)

Adjusted cost base	($58,500)
Outlays attributable
to the sale of the farm	($24,055)
Capital gain	$120,770
	[Translation.]

3. The facts

3.01 The appellant became the purchaser of the lots of land described below on June 4, 1952, which lots were used by him as farm land.

3.02 During 1979 the appellant divested himself of his farm, as a result of the expropriation carried out by the Quebec ministère des Transports.

3.03 In his income tax return for 1979, the appellant reported a capital gain of $46,900, computed as follows:.

3.04 At the beginning of the hearing, the parties agreed on the manner of computing the appellants capital gain for the fiscal year ending on December 31, 1979:

3.05 It remains only to determine the adjusted cost base of the property which was the subject of the disposition and created a capital gain for the appellant. This property was as follows:

1. property known and designated as subdivision No. 2 on original lot No. 209 (209-2) on the official plan and reference book of the parish of Ste-Dorothée, city of Laval, which lot had an area of about 16,000 square feet.

2. property composed of lot 211 and part of lot 212 on the official plan and reference book of the parish of Ste- Dorothée, which lot had an area of about 1,239,721.5 square feet or 33.69 arpents.

3. farm buildings were located on the land described in No. 2 above.

During and after the hearing, the parties agreed to evaluate item 1 above at $16,000 and item 3 at $6,423 at December 31, 1971.

The only point in issue remaining now is therefore to evaluate the appellant's land, more fully described in item 2 above, as at December 31, 1971.

Given, however, that we must deduct one arpent which is attributable to the principal residence, the balance to be evaluated should read 32.5.

3.06 The land is located at the extreme northwest of the former municipality of Ste-Dorothée which today forms part of the city of Laval. Originally, the territory of the present city of Laval included 14 municipalities, and these 14 municipalities were amalgamated in 1965.

The subject property is located in a sector which is in part devoted to market gardening and in part to single family residential development. It is located near four golf clubs: Golf UFO, Golf Cardinal, Golf Islemère and Golf Laval-sur-le-Lac.

3.07 In 1971, the appellant was using an artesian well for his water supply, and accordingly he was not hooked up to the water supply system. The water system's pipes ended at 59th Avenue, several feet away from the appellant's lot.

The sewage disposal also ended at 59th Avenue. It was a mixed-use or combination sewer, that is, it collected rainwater and sanitary sewage in a single pipe. In 1971, the city of Laval was still in the process of unifying its sewage disposal system, that is, making the systems belonging to the fourteen former municipalities homogeneous for the entire city of Laval. According to the appellant, that did not, however, hinder residential development, because when necessary the City would construct a pump system as it did for a development called Domaine Jolibourg. According to the respondent, however, the Jolibourg sector was partially subdivided and was therefore already covered by a plan of parcel subdivision. It is very clear that nothing of the sort existed in 1971 in the case of the subject property.

3.08 The subject property was zoned residential, type" RX",under by-law L-2000 which came into effect during 1970. The" RX" residential zone was an omnibus zone, that is, all the sectors of the city which were not zoned specifically were zoned "Ax"—it was a holding zone, subject to certain conditions: construction authorized on streets opened to traffic before August 3,1970; minimum area of 15,000 feet if there were no services; minimum area of 10,000 feet if there was service (sewer, water and so on). This permitted the city of Laval to change this zoning to another category when it agreed with a development plan or diagram for the sector in question. Moreover, section 68 of the"RX" zoning bylaw read as follows:

Article 68—Purpose of the by-law

To permit the development of units of complete neighbourhoods including all types of dwellings and the necessary community services in each residential “ RX” zone.

[Translation.]

In the first 15 years of by-law L-2000, there were more than 1,300 zoning changes.

3.09 According to Mr. Paquin, the appellant's appraiser, development was initiated in the early 1950s to the west of the subject property, on 55th, 57th and 59th Avenues. It was not massive development, but has been sustained and is still going on today, based on normal market changes. From 1970 to 1976, some 60 transactions took place to the west of the subject property.

Mr. Sauro, the respondent's appraiser, stated on the other hand that construction in that sector in fact started during 1982. He did admit that it had started slowly in 1950 and did not deny the 60 transactions between 1970 and 1976, which did not necessarily involve 60 cases of new development. According to the respondent, the development which occurred was on the northsouth axis and not toward the east, where the subject property is located. In 1976, on the other hand, the subject property having been expropriated for the construction of highway 440, it was impossible to proceed with development to the east. It therefore continued north-south. In any event, since the avenues concerned were in a north-south direction, development could move only in a north-south direction. Moreover, according to the appellant, the 60 transactions between 1970 and 1976 were on the fringe of the subject property and the attraction of the golf courses located in the sector might have led a number of people to settle there.

3.10 According to the testimony of the respondent's expert, the subject property was relatively remote (the distance not having been specified) in 1971 from public services: churches, schools, stores, grocery stores, public transit systems, and so on.

3.11 According to the appellant's appraiser, the highest and best use on December 31, 1971 was residential development. He relies mainly, first, on the development located to the west of the subject property, on 55th, 57th and 59th Avenues, which run north-south along the subject property, and second, on the existence of the golf courses located close by. These elements were thus a latent requirement for residential development.

The respondent's appraiser argues that the maximum use was the use then in effect: use for farming purposes. He relies mainly, first, on the fact that there was no specific development on the subject property in 1971. In 1976, at the time of the expropriation, the subject property had not yet been assigned temporary farmland zoning, which became permanent in November, 1978.

The respondent also relies on the fact that the development located to the west of the subject property was very limited and that the residential housing then in the active stage was rather located farther away: Fabreville, Chomedey, Vi mont, Village Ste-Dorothée.

3.12 The two appraisers based their appraisals of the subject property on what is called the comparison method, that is, based on comparable sales. The appellant's appraiser, Mr. Paquin, selected seven transactions involving vacant land within the borders of the sector under consideration (Exhibit A-1). These transactions are spread between January, 1970 and December, 1972. The appraiser selected three of these, sales Nos. 2, 3 and 6, as comprising the best index of value for the land being considered here. He arrives at a value for the subject property of $3,500 per arpent as of December 31, 1971.

In his appraisal report (Exhibit 1-2), Mr. Sauro, the respondent's appraiser, first considered 15 comparable sales (9 unsubdivided and 6 subdivided). He selected the 9 unsubdivided sales. They took place between February 17, 1969 and November 31, 1972. After studying them, he concluded that on December 31, 1971 the subject property had a fair market value of $1,725 per arpent.

3.13 According to Mr. Paquin, the difference between $5,200 per arpent of the subject property, established after negotiations on March 29, 1976, and the value of $3,500 as of December 31, 1971 at which he arrives represents an annual rate of increase of 11.4 per cent, which corresponds to the average increase in value for the Laval real estate market during the period in question. According to Mr. Paquin, there were no general damages included in the $5,200 per arpent paid by the ministère des Transports for the land. Each of the items, for which the total of $228.316 was paid by the ministère, was clearly identified. The land item cannot include damages.

3.14 The appellant's three comparables sales

3.14.1 The three sales selected by the appellant's appraiser to determine the market value of the subject property, sales Nos. 2, 3 and 6, were not mentioned by the respondent's appraiser in his report. The respondent's appraiser testifies, however, that he would not have selected them.

3.14.2 The appellant's appraiser's sale No. 2

This sale is described as follows in his appraisal report (Exhibit A-1).

It represents the acquisition of part of lot 188 in the parish of Ste-Dorothée, comprising an area of 24.76 arpents, sold on November 13, 1972, for the sum of $111,420,or $4,500 per arpent.

This lot, fronting on Rang St-Antoine, was acquired by Home Smith Properties Ltd. first, for the purpose of a residential development, and second, for the purpose of creating an access to the public road, St-Antoine Rd., for a planned development. This sale and sale No. 3, consisting of a residential development project, go from Boulevard du Bord de l’Bau south to Rang St-Antoine north.

As with the subject property, this was a lot which was not served by public services, offering possibilities with residential development.

[Translation.]

According to the respondent, this sale cannot be considered to be a good comparable because it was concluded for special reasons: to create an access route and for land assembly with another lot.

3.14.3 The appellant's appraiser's sale No. 3

The appellant's appraiser describes this sale as follows in Exhibit A-1.

This transaction took place on December 1, 1972, and represents the acquisition of part of lots P-73, P-74, P-75, P-76, P-77, P-78, P-80, 81-18 to 81-48 and 82-11, comprising a total area of 323,095 arpents. This acquisition involves a group of lots covering a sector bounded on the north by the line dividing the parish of Ste-Dorothée and the parish of Ste-Rose, on the east by lots 68, 72 and 73, on the south by Boulevard du Bord de I'Eau in part and by other subdivisions in part, and on the west by the Laval-sur-le-Lac golf course.

This case is a typical example of an acquisition of a large area for the purpose of residential development, and while this lot was at the outset a large block unserved by public services, the unit price per arpent was $3,405, representing a total acquisition price of $1,100,000.

[Translation.]

According to the respondent, this sale comprises an assembly with the appellant's sale No. 2, the purchaser being the same. The sale was therefore concluded for special reasons. Moreover, the location was remote from the subject property: one mile away. For all these reasons, this sale cannot be considered to be a valid comparable, according to the respondent.

3.14.4 The appellant's appraiser's sale No. 6

This sale is described as follows in Exhibit A-1.

It represents the acquisition of part of lot 120 in the parish of Ste-Dorothée, having an area of 30.56 arpents, for the price of $95,000,or $3,109.00 per arpent.

This property, like the subject lot, offers possibilities for residential development, given its proximity to neighbouring sectors which had already been developed.

[Translation.]

According to the respondent's appraiser, the zoning of that land is type "PA", or public utilities, and is therefore different from that of the subject property, which is"RX". This sale should therefore not be used, according to the respondent. Moreover, there were special reasons for this purchase. The acquisition by Diltaphan was incidental to the operation of the Mont Laval recreation centre, which is a skiing and tobogganing centre.

3.15

3.15.1 Four of the nine sales selected by the respondent's appraiser, sales Nos. 5, 6, 8 and 9, were adjusted for the site, given that they were farm sales.

The appellant's appraiser rejects these four sales because the adjustment done for purposes of the site represents about 57 per cent of the sale price of the lots, which, in his view, is so great that the sales cannot be considered to be comparable.

In his report, Mr. Sauro even says that sale No. 9 is suspect because the property was resold at a price lower than the cost (Exhibit 1-2, page 27). Nonetheless, he takes it into consideration in computing the market value of the subject property (Exhibit 1-2, page 39).

Of the respondent's appraiser's five other comparables, sales Nos. 1, 2, 3, 4 and 7, three, sales No. 2, 3 and 4 are found among the seven examined by Mr. Paquin. However, after examining these sales, which were the appellant's comparables Nos. 4,1 and 5, Mr. Paquin did not use them, as explained below.

3.15.2 Mr. Sauro's sale No. 2 (Mr. Paquin's No. 4)

A lot belonging to Ferme horticole de Laval Inc. was sold in 1970 to the Ste- Dorothée golf club. The Club paid $70,000, or $1,667 per arpent, for this lot, which had an area of 41.98 arpents.

Mr. Raquin writes (Exhibit A-l, page 10): "The purchase, in this case, was to allow for the expansion of the Ste-Dorothée golf course. The shape and location of this land limited its potential” [translation]. According to Mr. Sauro, "the price paid is representative of the higher use enjoyed by some lots in the sector" [translation].

On the other hand, Mr. Raquin testifies that it was public knowledge in 1970 that this lot was eventually to be used for an extension of Arthur Sauve Blvd. It therefore cannot be considered to be a good comparable, in his view.

3.15.3 Mr. Sauro's sale No. 3 (Mr. Paquin's No. 1)

This sale of a lot of 52.34 arpents for $90,000 ($1,719 per arpent) took place in January 1970. The location was close to the appellant's land, but to the east. According to Mr. Paquin, “In order for this land to be developed, the subject property must first be developed. The probabilities of development are therefore slimmer and more remote. It cannot be considered to be a good comparable" [translation]. According to Mr. Sauro (Exhibit A-1, page 25), “this land is representative of the highest and best use" [translation].

3.15.4 Mr. Sauro's sale No. 4 (Mr. Paquin's No. 5)

This is a lot of 28.07 arpents sold in June 1970 for $54,200 ($1,930 per arpent) It is zoned “PA”, public utilities. According to Mr. Paquin, it offers little possibility for residential development, since it is not adjacent to another residential development like the subject property. He did not use this sale. Mr. Sauro says "that it has a lot of long-term development potential” [translation] (Exhibit 1-2, page 26). As well, this sale was also a reconveyance (Exhibit 1-2, annex VI).

3.16 There remain Mr. Sauro's last two comparables, sales Nos. 1 and 7:

3.16.1 Mr. Sauro's comparable No. 1

This sale, at a price of $135,000 for 59.12 arpents ($2,300 per arpent) (Exhibit 1-2, annex VI) was reconsidered by Mr. Sauro. He had ignored 9.63 arpents located in Chomedey, diminishing the proceeds of the sale by $50,000 and thus leaving $1,446 per arpent. However, he writes in this respect: "this sale was considered only for study purposes and does not reflect the fair market value of our subject property” [translation] (Exhibit 1-2, page 25). Despite this comment, he nonetheless took it into account in computing the market value of the subject property (Exhibit 1-2, page 34).

3.16.2 Mr. Sauro's comparable No. 7

This is a lot of 38.87 arpents, sold in July 1972 for $71,000, or $1,826 per arpent (Exhibit I-2, annex VI). According to the respondent, this lot, zoned class "A" industrial, is "a relatively good comparable” [translation] although it is rather distant from the subject property. It was used as a mobile home park.

According to Mr. Paquin, the class "A" industrial zoning is the main reason for excluding this sale.

4. Cases at law-^analysis

4.01 Cases at law

Counsel referred the Court to the following authorities:

1. Roberts and Bagwell v. The Queen, [1957] S.C.R. 28, 6 D.L.R. (2d) 11;

2. Joseph Simard & Cie, Ltée v. M.N.R., [1964] C.T.C. 461, 64 D.T.C. 5289;

3. Toronto Suburban Railuay Company v. Everson (Th. R.), [1917] S.C.R. 395;

4. Pawson v. The City of Sudbury, [1953] O.R. 988, [1954] 1 D.L.R. 10;

5. W.H. Crandall v. M.N.R., [1974] C.T.C. 2289, 74 D.T.C. 1204;

6. Produits LDG Products Inc. v. M.N.R., [1973] C.T.C. 273, 73 D.T.C. 5222;

7. Baxter v. FW. Gapp. and Co. Ltd., [1939] 2 All E.R. 752;

8. Forest (J.) v. M.N.R., [1982] C.T.C. 2524, 82 D.T.C. 1561;

9. Municipality of Metropolitan Toronto v. Loblaw Groceterias Company Ltd., [1972] S.C.R. 600, 21 D.L.R. (3d) 551;

10. McQuarrie v. County of York (1970), 1 L.C.R., 2791;

11. L'Évaluateur, Volume 9, Number 2, June 1979;

12. Bibby Estate v. The Queen, [1983] C.T.C. 121, 83 D.T.C. 5148;

13. Re Farlinger Developments Ltd. and Borough of East York (1976), 9 O.R. (2d) 553 at 565, 61 D.L.R. (3d) 193 (C.A. Ont., Holland J.);

14. Laycock v. The Queen, [1978] C.T.C. 471, 78 D.T.C. 6349 (F.C.T.D., Smith, J.);

15. Société de Gestion Richelieu Inc. v. The Queen, [1986] 1 C.T.C. 342, 86 D.T.C. 6149;

17. Eric C. Todd, The Law of Expropriation and Compensation in Canada, Toronto: Carswell, 1976, pages 161-63;

18. Eastern Trust Co. v. The King, [1945] Ex. C.R. 115;

19. Cardinal v. The Queen, [1961] Ex. C.R. 160;

20. Power v. M.N.R., [1986] 1 C.T.C. 2093, 86 D.T.C. 1065;

21. Sopinka and Lederman, The Law of Evidence, Toronto: Butterworths, 1974, pages 313-24;

22. Wigmore, On Evidence, Toronto: Little, Brown & Co., 1979, pages 942-47.

4.02 Analysis

4.02.1 Fortunately, the Court is not bound by expert testimony, because in this case none of the comparables chosen by the two experts would be accepted by the Court.

4.02.2 The respondent's main argument for rejecting the three comparables selected by the appellant is that the sales in question were concluded for special reasons (para. 3.14). The respondent relies on Laycock v. The Queen (para. 4.01(15)).

I cannot feel any real confidence in the prices paid for any of these five small parcels of land as being helpful for the purpose of determining the value of the subject land. . .in each case the land was acquired fora special purpose, which is a circumstance whose upward effect on the price varies greatly and in the present instances cannot be measured with any degree of accuracy on the evidence before me.

[Emphasis added.]

The Court does not doubt that the principle is correct, primarily when the land in question has a very small area, which is necessary for the better operation of an asset already located on a neighbouring larger lot, as was the case in; Laycock, supra, where the comparables were two to nine acres in size. The lots were acquired by a school board, by Hydro, and so on, in each case to complete a pre-existing parcel.

In the present case, the appellant's comparables Nos. 2 and 3, like the respondent's sale No. 2 (para. 3.15.2), involves the assembly of land for a golf club. The land was being sold in bulk, that is, not subdivided, which is common to all the comparables considered by both appraisers. On the other hand, it might be argued that the appellant's comparable No. 3 (para. 3.14.3), having an area of 323 arpents, cannot be a good comparable with respect to the subject property, which was only 32.5 arpents. Such a principle is valid only to the extent that the larger property chosen as a comparable has a much lower price than the price of the subject property: ordinarily, the unit price (per foot or arpent, etc.) of a large area is lower than the price of a similar property with a smaller area.

In this case, the price of the appellant's comparable No. 3, with its 323 arpents, was $3,405 per arpent, while the price in issue, of the subject property, varies between $1,725 and $3,500. The Court therefore believes that it is appropriate to accept it on the same basis as comparable property No. 2, which was purchased several weeks before comparable No. 3.

4.02.3 With respect to the appellant's sale No. 6, the respondent argues, in addition to special reasons, that the property was zoned PA, public utilities, which seems in itself to be a better basis for rejecting this comparable since the subject property is zoned RX”.

On the other hand, Mr. Sauro himself had accepted his sale No. 4 (Mr. Paquin’s sale No. 5), which was also zoned" PA”, public utilities (para. 3.15.4 Mr. Paquin, on the other hand, who had not selected his comparable No. 5, had selected his comparable No. 6 (para. 3.14.4).

Finally, it seems to me that the same principle should apply in the case of Mr. Sauro's sale No. 7, where the property is zoned class "A" industrial (para. 3.16.2).

4.02.4 With respect to the best use of the subject property in 1971, the Court is of the opinion that the subject property must be taken with all the surrounding circumstances (zoning, etc.) as they all existed at that time. The appraisers are also of this opinion, but the interpretation varies according to application.

In my view, the existence of residential development alongside the subject property to the west is of more importance than was given to it by the respondent's appraiser. Moreover, inexamining his comparable No. 8, he himself takes into consideration a development which was then adjacent to the property and which, in 1971, had only slight potential, but which is subsequently completed, so that he is able to adjust the value of the price of the property, from $1,300 per arpent to $1,925, to make it comparable to. the subject property.

It is difficult to take into consideration what subsequently happened with the residential development, particularly when market conditions have changed, as the courts have often noted, undoubtedly most recently in Power (para. 4.01(20).

In this case, the fact of this development which started in the early 1950s and continued until 1971, based on the normal market changes, must be taken into consideration regardless of whether there were 60 transactions until 1976 and a major development took place in 1982. Moreover, the existence of four golf clubs in 1971 in the vicinity of the subject property also cannot be ignored as being an attraction to purchase the property for residential purposes. Finally, the existence of the RX” zoning, the purpose of which is described in section 68, cited above (para. 3.08), indicates on its face that this is a residential zone for the purpose, inter alia, of dwellings.

4.02.5 With respect to the respondent's four sales, Nos. 5, 6, 8 and 9, where the adjustments made represented about 57 per cent of the sale price of the properties (para. 3.15.1), the Court is of the opinion that the sales cannot be selected as valid comparables: the adjustments are too substantial in relation to the sale price, and the secondary factor is of greater significance than the primary factor.

4.02.6 Nor does the Court accept Mr. Sauro’s comparables, sales No. 4 (property zoned “PA”) (para. 3. 16.3), No. 7 (property zoned class "A" industrial) (para. 3. 16.2) and No. 1, because the appraiser wanted to consider it for study purposes only (para. 3.16.1).

Of the respondent's comparables, the Court therefore retains only sales No. 2, at $1,667 per arpent (para. 3.15.2) and No. 3, at $1,719 per arpent (para. 3.15.3).

Of the appellant's comparables, the Court rejects sale No. 6 (property zoned PA") (para. 3.14.4) and retains sales No. 2, at $4,500 per arpent (para. 3.14.2) and No. 3, at $3,405 per arpent (para. 3.14.3).

Relying on the comparables selected, the Court is of the opinion that the price of $2,800 per arpent is the fair market value at December 31, 1971.

5. Conclusion

The appeal is allowed in part, with costs, and the matter is referred back to the respondent for reconsideration and reassessment in accordance with the reasons set out above.

Appeal allowed in part.