James N. Butler v. Minister of National Revenue, [1992] 2 CTC 2317, 92 DTC 1848

Moran, T.C.C.J.:—On February 24, 1982, the appellant sold two parcels of land for an aggregate consideration of $120,000. The appellant also received in 1982 the amount of $5,000 with respect to his rights concerning a third parcel of land. In his 1982 income tax return, the appellant reported total proceeds of disposition of $125,000 and an aggregate adjusted cost base of $120,000 resulting in a capital gain of $5,000. The appellant determined his adjusted cost base by assuming, firstly, that he had owned both parcels of land continuously from December 31, 1971 ("V-Day") until the time of sale and, secondly, that the fair market value of both parcels on V-Day was $120,000.

By notice of reassessment, the respondent determined that the fair market value of both parcels of land on V-Day was only $40,000. The respondent therefore computed the appellant's capital gain at $85,000. The issue in this appeal is to determine the fair market value of the two parcels of land on V-Day.

The appellant's acquisition and sale of the subject lands is a complicated story. Since 1950, Radio Station VOCM in St. John’s, Newfoundland has been operated by Colonial Broadcasting Systems Ltd. ("Colonial") and a significant majority of the shares of Colonial has been owned by the Butler family. In 1953, the Butler family acquired an unsurveyed tract of land comprising approximately 200 acres beyond the city limits at the west end of St. John’s. The location of the land was important because it had a high elevation appropriate for a radio transmitting tower and it was close to Kenmount Hill, one of the highest points in the St. John's area. Around 1957, Colonial built a transmitting tower on this land. Around 1962, Colonial purchased in an unrelated transaction about 12 acres of land on the south side of Kenmount Road as a site for the VOCM Radio Station and administrative offices. This 12-acre site on Kenmount Road will be referred to as the VOCM land. The northern limit of the VOCM land was Kenmount Road and the southern limit abutted the 200 acres which had been acquired by the Butler family in 1953. Over the next 28 years to 1981 there were a number of transfers and purported transfers of land which were intended to distribute all of the 200 acres among members of the Butler family and Colonial. The chronology of relevant events is set out below:

1. According to a document dated January 14, 1953, certain lands (comprising approximately 200 acres) near the City of St. John's, Newfoundland were conveyed to Joseph L. Butler and his wife Evelyn Butler as trustees (i) to pay any income from the lands to Joseph L. Butler or Evelyn Butler during their lifetime; (ii) upon the death of the survivor of Joseph L. Butler and Evelyn Butler, to divide the lands in equal shares among their children Harold Butler, Joseph Butler and James Butler; and (iii) upon the sale of any part of the lands, to invest the proceeds and pay any resulting income in accordance with clause (i) and to divide the capital in accordance with clause (ii). The appellant is one of the sons of Joseph L. Butler and Evelyn Butler and the land which is the subject of this appeal is part of the 200 acres referred to in the trust document.

2. Joseph L. Butler, the appellant's father, died in 1954.

3. On June 3, 1958, Evelyn Butler acquired a right-of-way along the eastern limit of what later became the VOCM land to the northeast corner of what later became the appellant's ten-acre parcel.

4. In November, 1960, Evelyn Butler conveyed ten acres of land out of the trust to the appellant in consideration of natural love and affection. This ten- acre parcel abutted the VOCM land and is one of the two parcels which are the subject of this appeal.

5. On December 27, 1960, Evelyn Butler conveyed 60 acres of land out of the trust to Colonial for $60,000. The transmitting tower built around 1957 was on this 60-acre site.

6. On April 30, 1979, Evelyn Butler conveyed to Harold Butler and the appellant (two of her sons) all the remaining lands in the trust which they thought comprised about 90 acres but which in fact comprised 120 acres.

7. On April 3, 1980, Evelyn Butler conveyed to the appellant the right-of-way which she had acquired on June 3, 1958 (item 3 above).

8. In August, 1980, Evelyn Butler granted to Colonial a rectifying deed confirming the conveyance of 60 acres on December 27, 1960 and apparently adding a right-of-way along the eastern limit of the appellants ten acres.

9. On January 20, 1981, Harold Butler and the appellant divided the 120 acres which they received from Evelyn Butler on April 30, 1979 (item 6 above) so that the appellant received 50 acres and Harold Butler received 70 acres. This 50-acre parcel is immediately west of the appellants 10-acre parcel and is the second of the two parcels which are the subject of this appeal.

The division of land reflected in the above transactions (particularly items 4, 5, 6 and 9) was intended to achieve an approximately equal allocation of the land in the original 1953 trust among the three brothers because the appellant received 60 acres (10 plus 50); Harold received 70 acres (farthest from the city and right- of-way) and Colonial received 60 acres after the shareholder control of Colonial had been acquired by the third brother, Joseph. All of these transactions were for nominal consideration except the purchase by Colonial in December, 1960 but, at that time, the land purchased by Colonial already had a transmitting tower constructed on it and there may have been non-family minority shareholders of Colonial. The three Butler brothers had been advised that there were doubts concerning the validity of their deeds. In the words of Harold Butler who testified in this appeal:

And it resulted in Jim having a parcel of land which he could not ever sell, develop, or do anything with. As a matter of fact, we were told by lawyers, from time to time, that all of our deeds were hopelessly illegal, or whatever the term should be. They were not valid. They would not probably hold up in a court of law, and that we should have a session to settle the whole thing, and have all these deeds confirmed.

The three brothers finally came to an agreement under which a number of documents all dated February 24, 1982 were executed as part of one consolidated transaction. Those documents confirmed or gave effect to the following conveyances:

10. A document signed by Evelyn, Harold, James and Joseph Butler confirmed the conveyance to Colonial of the 60 acres and right-of-way referred to in item 8 above.

11. A document signed by Evelyn, Harold, James and Joseph Butler confirmed the conveyance of ten acres to the appellant referred to in item 4 above.

12. A document signed by Evelyn, Harold, James and Joseph Butler confirmed the following conveyances:

(i) the transfer of the residual 70 acres to Harold (item 9);

(ii) the transfer of 50 acres to the appellant (item 9); and

(iii) the transfer of 20 acres to Joseph.

13. The appellant and his wife sold the ten-acre parcel to Joseph for $40,000.

14. The appellant and his wife sold the 50-acre parcel to Joseph for $80,000.

15. Evelyn Butler and the appellant released to Colonial the right-of-way referred to in items 3 and 7 above.

The circumstances surrounding the above transactions were described in evidence by the appellant, his brother Harold, and Robert Hall, a lawyer in St. John’s who represented the appellant for a period commencing in 1974. Although the appellant had received his ten acres in November, 1960, he was frustrated by his inability to do anything with the land. The main problem was that the ten acres did not front on any paved street or road. The closest main artery was Kenmount Road which, in that area, was also the Trans-Canada Highway running generally in an east-west direction into St. John’s. The northern limit of the appellant's ten acres is part of the northern limit for the entire 200 acres of land in the original Butler trust, and that northern limit is parallel to but about 850 feet south of Kenmount Road. The VOCM land is a rectangular parcel spanning the 850 feet distance from the northern limit of the appellant's ten acres to Kenmount Road with 700 feet of frontage on each. The right-of-way referred to in items 3 and 8 above provided access to Kenmount Road from the northeast corner of the appellant’s ten acres but the right-of-way did not belong to the appellant until August, 1980 and the right-of-way itself was a very steep gravel road proceeding south from Kenmount Road.

The appellant's ten acres could also be reached by Old Pennywell Road, another gravel road coming in from the east and generally parallel to Kenmount Road. Old Pennywell Road was joined to the right-of-way coming south along the eastern limit of the VOCM land and it proceeded southwest to join another gravel road known as C.N.T. Road which had about 260 feet of frontage on the appellant's 50-acre parcel. The appellant called evidence to prove that these gravel roads were graded in summer, ploughed in winter and kept open year round by the Department of Highways until sometime well after 1972. Although that evidence may prove that on V-Day there was access by gravel road to the appellant’s 10-acre parcel and 50-acre parcel, it does not prove that there was any particular demand on V-Day for the land contained in those two parcels.

Although the appellant, as a beneficiary of the Butler trust, may have had on V-Day an undivided interest in any of the 200 acres remaining in the trust, it is clear from the evidence that on V-Day he did not have sole ownership of or any identifiable title to the 50 acres which he sold on February 24, 1982 referred to in item 14 above. In argument, counsel did not address the question of whether the appellant should be regarded as having owned the 50 acres continuously from V-Day to the date of sale in February, 1982; and I am left to infer that some rollover or other provision will make the V-Day value of the 50 acres relevant. Because the appeal proceeded on the assumption that the V-Day values of both the 10-acre parcel and the 50-acre parcel were relevant to determine the amount of the appellant's capital gain in 1982, I shall decide the matter on that basis.

In appeals of this kind, the onus is on the taxpayer to demonstrate that the respondent's determination of fair market value on V-Day is wrong and that the value adopted by the taxpayer is the fair market value of the subject property on V-Day. To discharge that onus, the appellant called Gordon Nagle, a well qualified appraiser, to give expert evidence concerning the fair market value of the subject lands on V-Day. Mr. Nagle produced a 42-page report plus a number of addenda to support his opinion that the fair market value of the 10- acre and 50-acre parcels on V-Day was $121,000 and that the fair market value of the appellant's waiver of his one-third claim to 60 acres was an additional $44,000. In the course of his testimony, Mr. Nagle reduced his appraised value ($121,000) of the subject lands by approximately $13,000 for a reason which l will describe below.

There are certain defects in Mr. Nagle’s report which reduce its evidentiary value. Firstly, the report was not written by Mr. Nagle but was written by Harold Butler, the appellant's brother. This fact is significant because Harold Butler acquired out of the Butler trust (and still owned when this appeal was heard) the 70 acres of land adjoining and immediately to the west of the appellant's 50- acre parcel. Harold Butler testified at length and stated that he had no intention of selling his 70 acres because he was part of a group who had applied for a resident funded retirement co-op for seniors. He described a plan in which his land (70 acres) would be offered for a long-term lease at 5 per cent of its current value (re-valued every five years) and the co-op would have the right to purchase his land at a price equal to 20 times the ground rent. The basic plan was to provide a perpetual housing development for seniors.

Although Harold Butler may not have had any intention to sell his 70 acres at the time of hearing this appeal, I cannot accept the proposition that he did not have any financial interest in the outcome of the appeal. In particular, because Harold Butler received his 70 acres from the same source (the Butler trust) and in the same manner (by gift) as the appellant, he must hope for the appellant's success in this appeal in the expectation that a higher V-Day value for the appellant's 60 acres would indicate a higher V-Day value for Harold's adjoining 70 acres if Harold should ever sell. Harold Butler is not an objective or indifferent observer of this appeal. Otherwise, why would he have written a 42- page report in support of the appellant's position? He may have written the report in part out of brotherly love for the appellant but I find that he has a significant financial interest in the outcome of this appeal.

Mr. Nagle acknowledged that he had been retained by Harold Butler and part of his examination-in-chief is set out below:

Q. . . .who wrote the report?

A. In the end—

Q. No, no. Who wrote the First draft? How many drafts were there?

A. There was, basically, one draft, I suppose.

Q. Okay. Who wrote that draft?

A. Harold Butler wrote the draft.

Q. Did he do so on your direction?

A. Well, he did it with my consent, I suppose.

Q. Okay, explain what you mean by with your consent.

A. Well, he offered to do some—put some of this stuff together for me. And between knowing the person, knowing his background, I had no real difficulty with him doing that. But I had made it clear from the first time that I had sort of made up my mind as to what thrust this property or this valuation was going to take, that this was my report. I was having the say in what went in it and what the final value was going to be.

Q. Now, did you read the report before you signed it?

A. Yes.

Q. Did you make any changes to the report before you signed it?

A. I don’t recall that I did. When I saw that Harold was prepared to put a lot of this together, my main thought was—and I told him that in the end this will have to satisfy me. I will have to be completely satisfied that what's in here is acceptable to me. And I went through with him what the, you know, what the thrust of my report was, that I wanted to key in the highest and best use being something of an estate lot-type development I had selected the sale that I thought was most significant in the spread of sales that we had. And I told him that—I told him, basically, that, you know, this is how it'll have to go together. All right. I would do it in my own office now in the same manner. I would instruct my other appraiser—or my appraiser on this. My staff appraiser, if you like.

Q. Are you now prepared to stand behind this report if it is presented into evidence without reservation?

A. Yes, I have prepared this report and it’s mine. That Harold Butler put it together doesn't particularly bother me. I read it and reread and was satisfied that it expressed adequately what I wanted to say.

Harold Butler admitted that he had written the Nagle Report but claimed that Mr. Nagle had edited out some material that Harold would have included. Mr. Nagle made no reference to any such editing. I am satisfied that there was little, if any, editing because (i) the Nagle Report contains a long description of the radio broadcasting business (well known to Harold Butler who had managed one or two radio stations) which Mr. Nagle admitted that he did not understand or rely on; and (ii) the Nagle Report contains too many references to the conveyances which occurred on February 24, 1982 within the Butler family (well known to Harold Butler but not to Gordon Nagle).

The second defect in the Nagle Report is the emphasis on the appellants actual sales of 10 acres and 50 acres to his brother Joseph Butler on February 24, 1982. Those sales detract from what I think should be the expert's concentration on December 31, 1971. Some examples in the Nagle Report of this emphasis on February, 1982 are as follows:

OBJECTIVE OF THE APPRAISAL (page 7)

The objective of the appraisal, briefly stated is to provide an estimate of market value of the subject Land, and to distinguish between the price paid for that land from the value of other real property which was included in the same transaction.

The words "same transaction” apply to all the conveyances on February 24, 1982.

HIGHEST AND BEST USE THROUGH THE EYES OF THE BUYER (page 24)

The buyer in this instance also owns the Colonial Broadcasting System Ltd. (CBS) and collectively owns the land which surrounds the subject on all sides.

The words" the buyer in this instance" refer to Joseph Butler, the appellant's brother and principal shareholder of Colonial, who bought the two parcels in 1982 from the appellant.

SUMMARY HIGHEST AND BEST USE (page 30)

The Highest and Best Use analysis approaches the subject from two distinct points of view. The viewpoint of the buyer and that of the market. The special interest of the buyer has been examined because the evidence would be incomplete without knowledge of the special value imparted, by the subject, to other lands of the purchaser.

Again, the words "buyer" and "purchaser" refer to Joseph Butler who was the buyer in February, 1982. These references to the transactions of February, 1982 demonstrate that the real author of the Nagle Report (Harold Butler) was hypnotized by the appellant's actual sales to Joseph Butler on February 24, 1982, transactions which should have been irrelevant to the determination of fair market value on V-Day.

The third defect in the Nagle Report is the class of so-called comparable sales used to determine fair market value at December 31, 1971. The Nagle Report used six comparable sales each of which was a newly developed building lot serviced by a newly paved road. The problem of choosing building lots as comparable sales for the appellant’s raw land is well illustrated in the Nagle Report itself in which the author states at page 40: “The costs of preparing building lots from raw land were determined in an interview with the developer". The Nagle Report then proceeds to deduct from the actual sale price of each building lot the estimated costs for (i) survey fees; (ii) legal fees; and (iii) road construction.

The problem of making these adjustments in an attempt to get back to the value of raw land was further highlighted in oral testimony when Mr. Nagle stated, after filing his appraisal report as an exhibit, that he had forgotten to deduct from the actual sale price an additional estimated amount for the developer's profit. Alter deducting this additional estimated amount, Mr. Nagle expressed a final opinion that the fair market value of the appellant's 60 acres on V-Day was $107,300 (and not $121,000 as stated in the Nagle Report). That oversight, and the deduction of other estimated development costs, could have been avoided if the appellant's expert had selected actual sales of raw land. Having regard to the fact that the subject lands were 60 acres of undeveloped raw land, actual sales of other raw land would have provided a better basis for comparison.

A fourth defect in the Nagle Report is the volume of irrelevant material which tended to” muddy the water” as, for example, on pages 10, 12, 13 and 14 plus the information on radio broadcasting at pages 24, 25 and 26. In determining fair market value at V-Day, it should have been irrelevant that the owner of a radio station was in fact the purchaser of the subject lands in February, 1982.

Graham MacDonald, a well qualified real estate appraiser, testified as an expert witness for the respondent. Although he resided in Nova Scotia, Mr. MacDonald had made himself familiar with the area of St. John’s surrounding the subject lands. He selected seven sales in the period from 1971 to 1973 and two sales in 1966 and 1967 as comparable sales to determine the fair market value of the subject lands at V-Day. All of his comparables were parcels of undeveloped land; eight of them in the general vicinity of the subject lands and the ninth across the City on the east side of St. John's. Mr. MacDonald's report contained the following comment at page 16:

In relation to location, all sales possessed frontage on publicly maintained roads giving a strong locational plus for these sales. The subject does not have the benefit of publicly maintained roads.

The appellant spent considerable time at trial attempting to prove that Mr. MacDonald's assumption was wrong and that the subject lands did front on publicly maintained roads. There is no question that the appellant's 50-acre parcel had about 260 feet of frontage on the C.N.T. Road which was publicly maintained summer and winter. Having regard to the configuration of the 50- acre parcel, the 260 feet of frontage was not significant because it gave access only to an acute angle in the southeast corner (more like a point than a corner) of the land; and there would have been problems developing a road pattern to utilize efficiently all of the 50 acres. The ten-acre parcel could be reached by the right-of-way from Kenmount Road along the eastern limit of the VOCM land, and it seems that a second right-of-way along the eastern limit of the ten acres joined the VOCM right-of-way to Old Pennywell Road. There was some doubt, however, as to whether the overall route along the VOCM right-of-way to Old Pennywell Road was maintained all year round and whether Joseph Butler (owner of VOCM) could or did in fact block the right-of-way from time to time.

For the purpose of this appeal, I am prepared to hold that the ten-acre parcel was serviced year round by a publicly maintained road. Although Mr. MacDonald erred in his assumption as to the frontage of the subject lands on publicly maintained roads, and this was brought to his attention in cross- examination, he maintained that his appraisal was not affected because the nine properties he selected as comparable sales all had frontage on and access to paved roads that were superior to the gravel roads which serviced the subject lands. I accept Mr. MacDonald's evidence on this point because (i) there was no commercial development and there were very few residences along the gravel roads which serviced the subject lands; (ii) there was very little traffic on those gravel roads; and (iii) seven of the nine properties which MacDonald selected as comparable sales were on paved roads carrying a normal volume of urban traffic. The subject lands and the gravel roads were 850 feet south of Kenmount Road and on higher ground because they were part way up the incline which led to Kenmount Hill. In that sense, they were a little remote from the commercial development which was proceeding west along Kenmount Road in 1971; and there is no evidence that anyone viewed the subject lands as desirable for residential purposes immediately before or after 1971.

Appellant's counsel tried valiantly to undermine Mr. MacDonald's evidence because his report omitted the sale in August, 1973 to the St. John’s Housing Authority of the Roberts Farm (270 acres fronting on Kenmount Road almost across from the VOCM land). Mr. MacDonald distinguished that sale by explaining that (i) the Roberts Farm had about 1,300 feet of frontage on Kenmount Road but the subject lands did not front on any main artery; (ii) the Roberts Farm was cleared but the subject lands were covered with scrub; (iii) it is possible that some of the price paid for the Roberts Farm could be allocated to buildings because the land had been farmed for a long time but the subject lands had never been farmed and had no buildings; and (iv) a public authority may have paid a premium to acquire a large (270 acres) contiguous parcel of land.

In my opinion, it was Mr. MacDonald who undermined the Nagle Report because he selected as his No. 7 comparable the sale in December, 1972 of the 45 acres which were subdivided within a few months and resold as building lots, most of which became the Nagle comparables. This particular sale was a better comparable than any of the purported comparables in the Nagle Report because it was raw land like the subject lands and not a subdivided building lot. Even so, Mr. MacDonald did not choose No. 7 as his best comparable for the 50 acres because the two buyers were two of the seven persons who ended up with building lots for high quality executive homes and he felt that they might have paid a premium for the land which they had already determined would be their home sites.

For the appellant's 50-acre parcel, Mr. MacDonald relied most heavily on his numbers 1, 2, 5, 6 and 7 as the best comparables and determined the V-Day value to be $500 per acre. I think that MacDonald's numbers 1 and 6 were the best comparables and they still support a V-Day value of $500 per acre for the 50 acres.

For the appellant's ten-acre parcel, Mr. MacDonald relied on his numbers 3 and 4 as the best comparables because of their size, noting that their topography and road access made them superior to the ten-acre parcel. Certainly, access to MacDonald's numbers 3 and 4 was much superior to any of the appellants lands. Those two values were $907 per acre and $1,569 per acre respectively. Mr. MacDonald preferred the lower range and determined the V-Day value of the appellant's ten acres to be $900 per acre. In Mr. MacDonald's opinion, the fair market value of the appellant's 60 acres on V-Day was as follows:

When embarking on his appraisal, Mr. MacDonald did not know that the Minister of National Revenue had, upon making the assessment under appeal, determined that the fair market value of the appellant's 60 acres was $40,000. I have no inclination to adjust Mr. MacDonald's appraisal of the 50-acre parcel. Reflecting on all of the circumstances, I conclude that $500 per acre is the fair market value of those 50 acres on December 31, 1971. With respect to the ten- acre parcel, I might have averaged the two comparables (No. 3 at $907 per acre and No. 4 at $1,569 per acre) but that would produce an average value of $1,238 per acre which is only $338 per acre more than the amount ($900 per acre) determined by Mr. MacDonald. For ten acres, this would increase the value by only $3,380; not enough to bring his overall appraised value up to the amount ($40,000) used by the Minister of National Revenue for assessing purposes. On balance, I think that Mr. MacDonald was justified in adopting the lower value ($900 per acre) because the road access to numbers 3 and 4 is so much superior to the road access to the ten acres.

There is one final reason for accepting the MacDonald Report over the Nagle Report and I refer to common sense. The decade from 1972 to 1982 was probably the decade of highest inflation in Canadian history starting with the decision by OPEC countries in 1973/74 to turn off the taps and force the world price of oil to increase from $4 per barrel to over $20 per barrel. That decision triggered a ripple effect of inflation over the whole world. There may have been isolated pockets of commercial activity not affected by that inflation but I think that real estate in St. John’s, Newfoundland was not such an isolated pocket. Even the Nagle Report contains the following comment at page 14:

Finally, but certainly not least, is the onshore development activities associated with oil exploration off the coast of Newfoundland.

There was no evidence that oil exploration off the coast of Newfoundland had commenced as early as V-Day but it was certainly in progress during the following decade of high oil prices.

If l were to accept the Nagle Report, I would have to conclude that there was virtually no increase in the value of the subject lands from 1971 to 1982. I cannot reach such a conclusion. Indeed, if I were to accept Harold Butler's implication that Colonial (Radio Station VOCM) and/or Joseph Butler was a “special purchaser" prepared in 1982 to pay a premium (more than fair market value) for the subject lands, I would have to conclude that the fair market value of the subject lands did not increase at all (and perhaps decreased) from 1971 to 1982. The Nagle Report is not based on good comparable sales and is not acceptable. The MacDonald Report is based on good comparable sales and is acceptable.

The $44,000 value which the Nagle Report gives to the appellant's purported waiver of his one-third claim to 60 acres is, in my opinion, fatuous. Firstly, that value if it had any merit at all (and it does not) would have to be adjusted downward about 10 per cent consistent with the reduction of the other value from $121,000 to $107,300. But more important, the so-called waiver was really an assurance by the appellant, his mother and his brothers of Colonial's title to the 60 acres in item 10 above. Those assurances were mutual and concurrent with all the other conveyances on February 24, 1982. Colonial was the only transferee that paid real consideration ($60,000) for its land out of the Butler trust. And according to the terms of the trust, that $60,000 should have been available to the three brothers upon the death of their mother. Therefore, I would not attribute any marketable value to the assurances which all members of the Butler family granted on February 24, 1982 for the purpose of effecting all the concurrent conveyances. And if those assurances had any value in 1982, there is no evidence that they had any value on December 31, 1971.

The appeal is dismissed.

Appeal dismissed.