Silver Rapids Holdings Ltd. v. Minister of National Revenue, [1987] 2 CTC 2065, 87 DTC 413

Taylor, T.C.J.:—These are appeals heard in Ottawa, Ontario, on May 20 and 21, 1987, against income tax assessments for the years 1978, 1979, 1980, 1981 and 1982, in which the Minister of National Revenue increased the reported fair market value of certain properties, sold by the appellant. The essential portions of the notice of appeal are:

— In 1974 . . . a property was acquired by the taxpayer.

— A home was constructed on the . . . property and this home was rented to the Company President.

— In approximately 1978, the taxpayer had the . . . property subdivided for the purpose of constructing homes on the vacant land.

— Commencing in 1978, the taxpayer sold certain of the newly constructed homes on an arm's length basis.

— In 1981, the taxpayer sold one of the newly subdivided lots to the Company President's son (for $10,000). An appraisal from a duly qualified appraiser indicated that the fair market value of the lot at the time of disposition was $15,000.00. Revenue Canada subsequently appraised the property at $25,000.00 as of the date of disposition and reassessed the taxpayer on this basis.

— In 1982 the home constructed on the . . . property which had been rented by the Company President was transferred to his wife for a price of $140,000.00. The taxpayer obtained an appraisal indicating that the fair market value as of the date of disposition was $139,000.00.

With regard to the sale in 1981 (supra) the Minister contended:

— . . . the fair market value of the lot was $25,000.00 at the time of the disposition.

Equally with regard to the 1982 sale (supra) the Minister contended

— . . . the fair market value of the property was $200,000.00 as of the date of disposition.

The appellant provided the Court with testimonies from Mr. David Patrick Reid, son of the president of the Company; Mr. Dan J. Gary MacDonald, independent appraiser; and Mr. Charles Stanley Reid, president of the Corporation. For the Minister, Mr. Bernard Patrick Murphy, appraiser with Revenue Canada, presented his report.

Analysis

The appeals cannot be dealt with simply on the basis of whether the appellant completely substantiated its valuation of $140,000 for Lot #1 and $15,000 for Lot #7.

I do agree with the judgment in Dubbel Wear Holdings Ltd. v. M.N.R.,

[1981] C.T.C. 2348; 81 D.T.C. 351, wherein on page 2350 (D.T.C. 353) it states:

The onus in an appeal such as this is on the appellant. It is not enough for the appellant simply to attempt to cast doubt on the value used on assessment. In order to succeed the appellant must affirmatively establish, on the balance of probabilities, that the value used by the Minister is too low and he must show, with some degree of accuracy, by how much.

Similar sentiments were expressed in Eric W. Lewis v. M.N.R., [1983] C.T.C. 2122 at 2124; 83 D.T.C. 104 at 105:

. . . As I see it, the appellant has failed to establish even a prima facie case for the valuation he used in filing his tax return for the year of $375,000, and certainly not for the $416,000 estimate suggested by his appraiser, or any figure remotely approaching either one of them .

In this matter, while the appellant's appraisal report was insufficient in itself to fulfill the appellant’s responsibilities (see later), when taken in the context of the testimony of Mr. Charles Stanley Reid, president of the Corporation, there was [sic] good reasons advanced to look carefully at the appellant's contentions.

I shall deal with Lot #1 first, for reasons which will become obvious.

The appraisal reports presented by Mr. MacDonald — Exhibit A-1 — and by Mr. Murphy — Exhibit R-2 — have much in common with regard to valuing the building on Lot #1. In general the methodology of each (while different) is acceptable, along with relevant supporting documentation and testimony. I would however comment that I do not consider the “appraisal report" prepared and presented by Mr. MacDonald alone as being acceptable — in fact I do not consider it to be an appraisal report, it is merely an opinion — an expert opinion perhaps, but nevertheless just an opinion as I see it, which is quite different from a professional appraisal report. When related back to its source data — the calculations presented on Exhibits A-5 and A-6, and reliance placed therein the appraisal report does have substance.

In general, the approach used by Mr. MacDonald for the building was to select four sales as "comparables" and make adjustments to the known selling prices of each of these "comparables" to produce an amount in each case which he could reference as that for which the subject property should have sold at the critical date. The first three of these "comparables" were in another subdivision "Dochart Estates" — by any reasonable standards one of lesser quality, restrictions and environment then “Old Orchard Estates", in which the subject was located. The selling prices of these three selected sales were respectively $62,000, $90,000 and $87,000 — including the land, which Mr. MacDonald understood to have been available at $15,000 for each two-acre subdivided lot in Dochart Estates. Mr. MacDonald's attempts to bridge this price differential (by calculated adjustments) were subject to substantial criticism, but the deficiencies in carrying out his methodology were most noticeable in two specific very important areas of these adjustments — notably those for difference in size (square feet of living space); and for relative quality of the buidings — inferior or similar.

With regard to the first noted deficiency, the evidence from Mr. David Reid, a witness who was an engineer, indicated that relative costs for buildings was estimated at $50 per square foot for larger buildings, $52 per square foot for smaller buildings. Both Mr. Murphy and Mr. MacDonald seemed to agree with this in general, but Mr. MacDonald did not follow it in his report as I see it. I did not find any support for MacDonald's clearly expressed view that the total costs of houses of similar quality decreased dramatically as the square footage of the house increased — in other words if a house of 1200 square feet cost $60,000 to construct (at $50 per square foot), a house of 2400 square feet would not cost something close to $120,000 to construct (according to Mr. MacDonald's view) but perhaps something closer to $75,000 to construct. I shall deal with the #2 comparable presented by Mr. MacDonald as an example — favoured by him as the best comparable. Mr. MacDonald considered the building on #2 to be valued at $75,000 ($90,000 = $15,000 for land) and since it contained only 1400 square feet of space he added on 15 per cent to make it comparable to the subject property which had 2150 square feet — an addition of $11,300. In my view, there was no reasonable basis supplied to the Court by Mr. MacDonald which should deter an appraiser from increasing the $75,000 amount above (#2) by 50 per cent for this factor alone, an amount of as much as $37,500, thereby increasing Mr. MacDonald's building estimates by a further $26,200. On the “quality” point above Mr. MacDonald regarded #2 and the subject property as similar. From my review of the description provided of the properties during the hearing, an increase of at least 10 per cent possibly 20 per cent for overall better quality in the subject would not be unreasonable — at least $11,250 (10 per cent of $75,000 # $37,500). Without even considering other factors, that would increase Mr. MacDonald's comparable building estimate of $110,400 to $159,150 even using Mr. MacDonald's own value of the land at the subject property of $27,000. That would bring his estimate to $186,150 — not too distant from the Minister's appraisal. I shall leave comments about the "land" value question for later in this decision. Mr. MacDonald also provided as “comparable” the sale of a property right in the same subdivision — Old Orchard Estates as his #4, but in my view a similar critical examination of the adjustments made in his report, would show the same general magnitude of differential. Simply put, Mr. MacDonald's appraisal report — at least as it refers to the nature of the buildings on the subject property — does not support the contention of the appellant, but rather goes some considerable distance toward substantiating the Minister's value.

I would quote for the record, the concluding portion of each report:

Mr. MacDonald —

Sales were in the range of $62,000 to $139,000. The lowest is not a good comparable, being much smaller, with few extras. It does, however, indicate a typical price for a standard home in the area, on a 2 acre lot. Hence, the range narrows from $87,000 to $139,000. Sale #3 although large, with extra plumbing, basement finish, 2 car garage 2 acre lot is of inferior quality. Sale #2, is similar quality, with extra plumbing, full basement finish, fireplace, double garage, and central air conditioning. At time of sale it was 10% unfinished and subsequently may have sold for $100,000 plus. Sale #4 the passive solar heated home had similar size, location and quality as that of the subject. It had extra plumbing, double garage, heat pump, vacuum system, fireplace and part basement finish. Due to its design, the windows were superior quality to that of the subject. Lot size is smaller.

Taking these sales into consideration, it is estimated that as of the date of the appraisal (January 01 1982) the subject property had a market value of approximately

ONE HUNDRED AND THIRTY EIGHT THOUSAND DOLLARS

($138,000.00)

Mr. Murphy

In summary, we have obtained the following value indicators, as of February 1, 1982 for the property under appraisal:

Depreciated Value Estimate of $204,000.00

New construction equivalent purchase prices ranging from $151,400.00 to $214,000.00.

Market comparisons of new and relatively new housing stock indicate the subject would sell in a range from $176,100.00 to $205,700.00. From all the evidence analyzed herein, it is the opinion of this appraiser that as of February 1, 1982 the fair market value of the property under appraisal would realistically be $200,000.00.

Allocation of this is considered to be:

Land Value	$ 76,500.00
Value of Improvements	123,500.00
Total Value	200,000.00

There is little reason to seriously question any of the methodology used by Mr. Murphy in arriving at four separate “building” valuations for Lot #1 from the comparables used — of $135,600, $99,620, $114,171, $129,194. The average valuation for the buildings (per Mr. Murphy) I would calculate from the above at $119,646. Mr. Murphy also supplied background data (Analyses from a computer program available to Revenue Canada) in support of his alternate valuations of "Depreciated Value Estimate of $204,000.00” and "New Construction equivalent purchase price ranging from $151,400.06 to $214,000.00”. From these amounts and analyses, the “building” segment valuations would have been $127,400 (depreciated value) and $153,207 (new construction equivalent). I frankly have some reservations about these computer produced valuations (perhaps only because they were not as familiar to me as the “comparable” approach), and to his credit, Mr. Murphy did not rely upon them too heavily, but he did consider them in arriving at his final valuations. Since they both produce “building” valuation amounts higher than the “comparable” approach I have decided to leave them out of this review — and rely more on Mr. Murphy's average of $119,646. (supra), recognizing that Mr. MacDonald's amount of $110,400 (supra) is too low (see above).

Turning then to the land question (for Lot #1 again only). Mr. MacDonald simply took the $15,000 per two-acre lot value for Dochart Estates, and added an estimated $12,000 to it, totalling $27,000 which he regarded as the lot value at the subject property. In the case of his comparable #4 — referred to above as another property in Old Orchard Estates, Mr. MacDonald arrived at a figure of $28,500, but I do not think that difference is significant — both are much too low for the reasons given later. For the land value we do turn to Mr. Murphy's valuation and calculation. Rather than taking just an estimated increase to a lot of similar size in Dochart Estates, as did Mr. MacDonald, Mr. Murphy took a total of 11 land sales, and two sales of both land and improvements, converted the amounts for each sale into a price per acre, and then in turn related that amount to the size of Lot #1. These land "comparables" covered a wide range of lot sizes as well as a lengthy time frame bracketing on both sides the date relevant for the sale of Lot #1. I would quote from the summation:

Final Land Value Estimate

Use of the median value estimate eliminates the extremes of high and low and provides a more normal market indicator of value. In this sales analysis, were (sic) are provided with three sets of median value indicators:

Amount Value

	Amount Sale	Indicator for
	Price per Acre	Subject Site
1. For All Sales Listed	$39,618.00	$ 67,500.00
2. Sales Closest in Time to
Appraisal Date	42,351.00	72,125.00
3. Sales Most Like Subject
Re: View & Privacy	74,165.00	126,300.00

As the subject site is considerably larger than most comparables, some adjustment must be made to allow for this fact as a larger site will normally reflect some allowance in a lesser unit rate. A marriage between the amenities of privacy and view combines with time of sale, site area, and location will provide the subject's fair market value site estimate. Said marriage is considered to be represented by a value per acre between that offered by 2 above (Sales Closest in time to Appraisal Date) at $42,351. per acre and sale #5 at $51,948.00 per acre.

Sale #5 is located closest to the subject site, offers a somewhat better view of the Ottawa River, has similar rear yard privacy as the subject, however, is considerably smaller than the subject (0.693 acres versus 1.703 acres) with time of sale being prior to the effective appraisal date by some 21 months.

Allowing downward adjustments to Sale #5's acreage rate of $51,948.00 due to view, site area, and location (directly overlooking the Ottawa river) and an upward adjustment for time of sale, I believe an acreage rate of $45,000.00 per acre most realistically represents the subject site’s fair market value as of February 1, 1982. This provides a site estimate as of February 1, 1982 of: $45,000.00 x 1.703 $76,500.00 (Rounded).

In principle, I cannot quarrel with the methodology for the value of $76,500 attributed to the only two-acre lot (Lot #1) at Old Orchard Estates at the relevant date, by Mr. Murphy. At the very least that result more related to identifiable comparison material than that which was contended by Mr. MacDonald in reality his figure of $27,000 for Lot #1. That could result in a valuation for the real property of the subject (land and buildings) of some $235,650 ($159,150 (above) + $76,500). Again, even if a more modest valuation per acre was given to the land at Lot #1 — (and I see little reason for doing so) — the result would exceed the estimate of total value used by the Minister in assessing — $200,000.

I have three small other reservations — in addition to my concerns regarding any great reliance on the "computer produced" building valuations, already expressed above. These arose from testimony provided by the appellant and witnesses on its behalf. First, that there is no record of any normal house and lot — in the general area of Arnprior — selling for more than $155,000 (that figure was indicated by the appellant's president from a sale with which he was familiar and it was not challenged by the respondent's witness); and second, that a very substantial part of Lot #1 is restricted from building purposes, by certain environmental protection provisions (to preserve the integrity of Dochart Creek) — buildings could only be constructed on the "upper" portion of the lot; and third, the difference in perspective between the appellant’s witnesses and Mr. Murphy

— that Lot #1 was not the choice lot in the subdivision, in effect having only been formed in order to make maximum use of the land and the subdivision (appellant's position), and that it was indeed the choice lot (view, contour, privacy, etc.) (Mr. Murphy's position).

Taking these above concerns, one at a time, I would note:

First — there was no evidence that there was real property comparable to the subject property in the general Arnprior area, the subject would appear to be if not the prominent home in the area, amongst the most prominent — by any comparison made by either party. There was also evidence of real estate listings for sale of the subject property — in years more recent than the dates relevant to these appeals — for amounts as much as $250,000, and there was clear evidence that an offer for some $180,000 had been received and rejected for Lot #1. While counsel for the two parties put different interpretations on this information, in my view, it can only tend to support two rather nebulous conslusions — one, that while the property now might be listed (two or three years after the time relevant to these appeals) for more than $200,000 — even $250,000, there was no clear indication it could sell for that; and two, that perhaps the demand for a home of the character of the subject property in that area was not great — maybe non-existent, for any amount approaching its "comparable value”, or "replacement cost". In any valuation exercise, as I see it, the bottom line must remain — would the property sell for the amount attributed to it as market value?

Second, the environmental protection restrictions do have an effect on this lot — but it can be argued, both good and bad. Clearly it limits the space available for building — but it puts no such restriction on the private use of the total area for any other purpose. I do not accept that on a two-acre lot, when the local and subdivision restrictions in themselves permit the construction of only one house (testimony at the hearing) that any additional building restrictions resulting form the environmental protection restrictions, would create a situation which would be a major impediment to its marketability.

Third, the basic layout of the subdivision plan does not support the contention of the appellant that this lot was in any way inferior. I would be inclined to agree with Mr. Murphy that it was the choice lot, but it is not necessary for me to so determine — only that in its general characteristics it was not of standards less than the others. While this may be a very desirable situation generally, it could also tend to strengthen some of the concerns expressed in #2 above, that the “intrinsic value" of the subject property may not be a real reflection of its "market value". I would note that the amount of environmental protected land is much more in Lot #1 than in any other lot in the subdivision. As noted earlier, Lot #1 has a total of some two acres, whereas the other lots in the subdivision, affected by the environmental protection restrictions are less than half that size — again with about one half of each lot subject to the environmental regulations which permit no construction. To make my point — I would suggest that if Lot #1 consisted of ten acres of land — and nine of the ten were restricted environmentally in the same way, that it would be inequitable to value that land by the same yardstick for valuing a one-acre lot with one half of the lot (one-half acre) suitable and zoned for building. This recognizes that for “view”, "privacy", etc., the environmentally protected area provides its owner with a lot of certain benefits — but when the prime purpose of the lot is to build a house, too much of a good thing may well become a liability in the eyes of a prospective purchaser. In terms of utility to the owner I am not convinced that an environmentally protected area twice the size (in Lot #1) in similar area as the other adjacent lots, should be valued at twice as much. I am prepared to agree that if Lot #1 was comprised of two lots of one acre each

— each would probably be worth somewhat more than any other one-acre lots in the subdivision — calculated on an acreage basis — because of its unique and attractive characteristics. But the total of two acres, as one lot, should not be calculated on that same basis. I do appreciate that Mr. Murphy in his calculation attempted to make some allowance for this situation, but in my view a somewhat larger concession would be warranted. Under the circumstances I have decided to attribute three quarters of Mr. Murphy's land valuation amount to the land component for Lot #1. That means an amount of $57,375.

Finally I will accept Mr. Murphy's “average” building value — as I calculated it above $119,646 and add a land value — above of $57,375, for a total of $177,021. That portion of the appeals will be allowed to the extent that the Minister’s valuation will be reduced from $200,000 to $177,021. As I indicated earlier, it is largely my reluctance to place more weight on the alternative building valuations provided by Mr. Murphy that results in this much reduced valuation. The fact that the "average" figure I have accepted is only slightly greater than that arrived at by Mr. MacDonald — which I recognize to be unreasonably low — gives me little comfort.

Turning then to the other property to be valued, Lot #7, it can be dealt with by saying there was little or nothing presented in support of the valuation contended by the appellant and the $25,500 amount suggested by the respondent in a separate report, is well within any range of land values arising out of the calculations by Mr. Murphy. It will remain as assessed.

At the hearing the Court was informed that the appeals for the years 1978, 1979 and 1980 were withdrawn by the appellant.

The appeals are allowed in part in order that the valuation for Lot #1 shall be $177,021 rather than $200,000. In all other respects the appeals are dismissed. The entire matter is referred back to the respondent for reconsideration and reassessment.

The appellant is entitled to party and party costs.

Appeal allowed in part.