Fevang Farms Ltd. v. Minister of National Revenue, [1986] 1 CTC 2086, 86 DTC 1041

Sarchuk, T.C.J. [ORALLY]:—The appellant, Fevang Farms Ltd. (Fevang), appeals from a reassessment with respect to its 1977 taxation year. Fevang was the owner of an 85-acre property located within the town limits of High Prairie, Alberta. In 1977 the land was sold to the Alberta Housing Corporation at a price of $4,000 per acre. The appellant in filing its return for the 1977 taxation year, claimed as its adjusted cost base, applicable to the said lands, the sum of $297,500.

The respondent reassessed and reduced the adjusted cost base to $43,000. The appellant filed a notice of objection and in that notice of objection, alleged that the proper adjusted cost base was $192,000. Notwithstanding the objection the reassessment was confirmed by the respondent. It is the appellant’s position that the proper value of the land as at December 31, 1971 was $192,000.

At the commencement of the trial, counsel for the respondent moved to amend paragraph 4(c) of the respondent's reply in the following manner:

. . . by substituting $119,400.00 or $1,200.00 per acre for the values contained in the original subparagraph.

There was no objection to this motion and an order amending paragraph 4(c) as aforesaid was granted.

The subject land is, as I have indicated, located in the northeast portion of High Prairie within the 1971 town boundary. Properties located at the north and east of the subject are farms; to the west are mainly residential developments and public schools; to the south is a nursing home, senior citizens' lodge, apartment building, hospital and residential dwelling.

Adjacent to the subject at the northwest is a residential subdivision developed by Alberta Housing Corporation in 1972. This subdivision contains approximately 33 residential sites and it was at the time of the appraisal in 1984, fully occupied. It is important to note that this subdivision originally was part of the subject site and that it was sold to the town of High Prairie by the appellant in 1969.

Accredited appraisers, whose qualifications entitled them to give expert evidence as to the fair market value of the land in issue were called to testify; Mr. Mendel for the appellant and Mr. Lee for the respondent.

Both experts agreed that the highest and best use of the subject property was for future residential development. As well, both agreed that of the four basic generally accepted methods of evaluating a property, that is, the extraction method, the land residual method, the development method and the comparative sales or market-data method, only the latter method would be likely to give the best indication of value in this case. Where the two experts parted company was on the issue of whether or not there were any sales which could properly form the basis of comparison.

It was Mr. Mendel’s conclusion that there was an absence of acceptable comparables and that as a consequence, an alternative method of determining a fair market value had to be employed. Mr. Lee, on the other hand, located six properties, which in his opinion, could logically be used as comparables, and accordingly, his conclusion as to fair market value was based on the market data method.

Expert evidence, if it is to have any value, must be moderate, fair and strictly professional. In assessing such evidence, the Court must be cognizant of the fact that these witnesses are occasionally, although perhaps unwittingly, biased in favour of the side which calls them. Accordingly, it is necessary for the Court to carefully consider the factual basis upon which their opinions are reached since it is not uncommon for such experts to consider irrelevant facts; to disregard existing facts; or in some cases to use facts without verifying them to support the interest of the party who calls them. Accordingly, it is necessary for the Court to carefully consider the factual basis upon which their opinions are reached since it is not uncommon for such experts to consider irrelevant facts; to disregard existing facts; or in some cases to use facts without verifying them to support the interest of the party who calls them.

With this caveat in mind, I turn to the evidence of the two experts. It was Mr. Mendel's view that the highest and best use of the property was for future residential development. I note that he did not offer any opinion as to the imminence of such development, although perhaps it was because that factor was not relevant to the method he used, since in his view there were no lands available similar enough in nature to warrant comparison not even with adjustment for such matters as size and location.

Mr. Mendel stated that it was appropriate to adopt the subject property as a comparable in itself by taking its 1977 purchase price and adjusting this price back to December 31, 1971. To do this, Mr. Mendel proceeded to identify sales of other parcels of land, albeit smaller in size, and in his words “by comparing like to like over a reasonable time period, I determined an average annual rate of increase for these transactions." He said, "I concluded that it would be reasonable to apply the same rate of increase in reverse to the subject property to arrive at a probable value at which the property would have sold in 1971."

To determine the ratio or average rate of increase, the following method was utilized:

# Subject site was found to have traded January 28, 1977 @ $4,000.00 per acre.

# Subject Land Site “h” (13.76 acres) is reported to have traded October, 1978 @ $2,750.00 per acre.

# Subject Land Site “B” (15.46 acres) is reported to have traded March, 1977 @ $4,000.00 per acre.

Therefore:

Using Comparable Sale #4 as a base (most similar site area and location to #2 and #3 above), the following calculations result:

Comparable Sale #4 — Transfer date: April, 1968

Indicated Value: $2,010.00 per acre

Indicated % Increase Re: Subject =

4000
2010	99% over 9 years.	11%/yr.
2010

Indicated % Increase Re: #2 (13.76 acres) =

2750

37% over 8 years. 4.6%/yr.

Indicated % Increase Re: #3 (15.46 acres)

4000

2010 99% over 9 years. 11%/yr.

2010

Therefore:

1/3 of the data supports a

4.6% increase per year = 4.6% X 33.3% 1.5%

2/3 of the data supports a

11% increase per year =11% X 66.6% 7.3%

Indicated Percentage

Increase Per Year 8.8%

Therefore:

Subject Sale Price (January, 1977)	$4,000.00/acre
Less 8.8% for 5 years (Dec. 31, 1971) =	.44%
	$1,760.00
Subject Sale Price (January, 1977)	$4,000.00/acre
Less Indicated Adjustment for Time	1,760.00/acre
Indicated Subject Site Value:	$2,240.00/acre
Therefore:
Subject Land Site: 85.58 acres @
$2,240 per acre	$192,304.00

Rounded to: $192,000.00 (December 31, 1971)

This method is not one of the standard methods normally used by appraisers in determining fair market value. It is a method which in essence relies on hindsight, a procedure not favoured by the Appraisal Institute nor the courts. The courts have on a number of occasions stated that reliance cannot be placed on evidence of facts which came into existence after Valuation Day. This general statement is tempered by the acceptability of some facts occurring within a reasonable time thereafter in circumstances where there has been no material change in conditions.

Mr. Lee, in his testimony, expressed the view that methods which involve the use of hindsight are not acceptable appraisal techniques, particularly when longer periods of time are involved.

The concerns expressed by Mr. Lee were conceded by Mr. Mendel to be valid in most instances. Notwithstanding that, he stated that he was satisfied that in the case at bar the result achieved, that is the average increase ratio, and his application of this ratio to the subject lands was reasonable. He testified that his experience in similar communities satisfied him that his conclusion was sound in a judgmental sense. Indeed, in his opinion, given the absence of appropriate comparables this method was a logical and entirely reasonable approach.

The method used by Mr. Mendel is of considerable concern to the Court. In the first place in dealing with real property, one cannot assume that the value of such property will appreciate evenly over a given period of time. Such an assumption ignores those periods of time when real estate markets are volatile and prices escalate at a tremendous pace, and ignores as well slow or stagnant periods in the real estate market.

If proof of the foregoing is needed, it can be found in the appraisal report submitted by Mr. Mendel (Ex. A-1). The property which was central to Mr. Mendel's method was a 9.95-acre piece of land designated for industrial use. The transfer documents registered in 1968 show that the sale price was $2,010 per acre. This price was taken by Mr. Mendel and was used as the base from which all subsequent calculations were made and from which Mr. Mendel's average value increase ratio was derived.

Mr. Lee referred to a very similar property, which in his appraisal report (Ex. R-11), is referred to as comparable number 4. This was a piece of land, 11.4-acres in size, also designated for industrial use, which was located in very close proximity to Mr. Mendel's key parcel of land. These properties are in my view, in almost all respects, comparable. What is significant is that the property referred to by Mr. Lee was sold in 1974 (that is six years after the property referred to by Mr. Mendel) for $1,737 per acre.

In the same vein, sites "A" and “B" used by Mr. Mendel in his calculations afford another example of the weakness of his method. These two sites were considered by him to be reasonably comparable. Both sites were intended for industrial development, yet site “B" sold in March of 1977 for $4,000 per acre, while site "A" was sold a year and a half later in October of 1978 for $2,750 per acre; that is $1,250 per acre less.

What does one make of these facts? If one wished to draw a conclusion, do they not, contrary to Mr. Mendel’s assumption, indicate at least the absence of a factual basis upon which one might assume that there is an equal annual increase in property values, or that some form of average can be derived therefrom?

Secondly in my view, the data base used by Mr. Mendel was far too small and cannot adequately support, in a statistical sense, the “even accrual of value” formula utilized by him.

Thirdly, the properties forming the data base for Mr. Mendel's method were industrial while the subject property was residential. According to Mr. Mendel, this made no difference, since in his view, both types of property appreciated at the same rate. The statement that both types of property increased in value at relatively the same rate or in tandem was not supported by any data, statistics or other evidence, and in my view in the absence of such evidentiary support, is not deserving of a great deal of weight.

A final point with respect to the appellant’s appraisal. The narrative report submitted was not prepared by Mr. Mendel. It had been researched and prepared by a Mr. Overland, an employee of Douglas L. Mendel Appraisal Company Ltd. He was not a member of the Appraisal Institute of Canada, and at the relevant time, was in training for accreditation as a certified residential appraiser, which, if ! understood Mr. Mendel correctly, is a lesser designation. Mr. Mendel relied on Mr. Overland’s report. He said, "I was Satisfied that Mr. Overland did not omit any pertinent data" and stated quite unequivocally that he relied upon and accepted the accuracy and validity of Mr Overland’s material.

It should be noted that Mr. Overland's narrative report, which is Exhibit A-1, appraised not only the value of the subject lands, but other properties as well, particulars of which were subsequently utilized by Mr. Mendel in his analysis. Furthermore, it was Mr. Overland's analysis of some 70 properties and his conclusion that none were comparable to the subject lands that led Mr. Mendel to discard the market approach and to utilize the method that he did.

Unfortunately, Mr. Overland's material was seriously flawed. I do not propse to review the totality of the narrative report, suffice it to say that cross-examination disclosed a number of discrepancies and inaccuracies. For example, with respect to the parcel of land Mr. Mendel used as the base for his formula, Mr. Overland's report indicated that it was sold in April of 1968. In fact, other evidence established that an agreement for sale had been entered into in June 1967, which agreement was registered in September 1967 and a transfer of land executed in December 1967. It became apparent that the information provided to Mr. Mendel was inaccurate and incomplete. However, he made no independent review of it, but simply relied on it for his formula. As a result, he made no adjustment for the fact that this key transaction took place one year earlier than stated in Mr. Overland's report.

There were other errors: a transaction referred to as sale number 1 in Mr Overland's report involved the disposition of 1.03 acres of land at a price of $5,000. In fact, this land had been sold by the appellant to the town of High Prairie at a price of $2,500 a month prior to the date given by Mr. Overland. High Prairie, after putting in approximately $2,500 in services, resold the land to the Province of Alberta for the sum of $5,000 shown in Mr. Overland's report. The earlier sale had not been disclosed either in evidence or in the report. Mr. Mendel did not appear to be aware of the fact of the earlier sale.

In other parts of Mr. Overland's report wrong dates are given; errors are found in the uses attributed to some lands; wrong total numbers are referred to; acreages are incorrectly stated and so on.

It has been said that valuation of property involves a process of analysis and synthesis of facts tempered by that judgment which arises from experience. In this case, it is the judgment of Mr. Mendel that the Court is asked to accept as the exclusive basis for the reasonableness of his appraisal method and his corresponding result. Many of the discrepancies in the appellant's appraisal report to which I have referred relate only peripherally to the lands in question and have little direct bearing on the issue before the Court. However, these inaccuracies and defects, coupled with Mr. Mendel's unwavering acceptance of the material prepared by Mr. Overland, casts doubt on the manner in which Mr. Mendel's judgment was exercised in this particular instance.

On the evidence before me, I reject entirely the appraisal information presented by Mr. Mendel. It is of no assistance to the Court in determining the fair market value of the land as at December 31, 1971, and does not assist the appellant in disproving the assumptions made by the respondent.

I cannot conclude these reasons without some reference to the effort to invalidate the respondent's assumptions by impeaching the evidence of the respondent's expert, Mr. Lee. The focus of this effort was Mr. Lee's opinion that appropriate comparables existed and his use of certain of them in his evaluation process. It was Mr. Lee's conclusion that of the six selected com- parables, the sale of an 11.46-acre parcel of land by the appellant to the town of High Prairie in June of 1969, was an excellent indication of fair market value of the subject property. He said:

Indicator Number 5 is considered as the best comparable. This site was originally part of the subject property. The town bought this site in 1969 at $1,500.00 per acre. Approximately 2 acres would be used for public housing projects and the remaining for residential development. The original Option to Purchase Agreement was made on March 13, 1969 for 10 acres of land at $1,500.00 per acre. The final transfer was completed in July 1969 for 11.46 acres. The site was then transferred to Alberta housing and Urban Renewal Corporation for subdivision. The land was subdivided under Plan 1040-T.R. The subdivision was completed in the latter part of 1972 which produced 33 residential lots.

He goes on to say, at another point of time:

When comparing this sale with the subject property, considerations have to be given to the difference in size and the date of sale.

And further:

As previously described in the Highest and Best Use section, the development of the subject site would probably not occur until 5 years after the date of the appraisal. If the subject site is to be subdivided totally at the date of appraisal, it will produce somewhere between 250 and 300 lots. Based on the estimated annual absorption rate, these lots will require 25 to 30 years to fill. . . . Therefore, when we compare Indicator No. (5) with the subject site, we have to consider the size of the subject and the holding period prior to development.

It was noted that in each case, both with respect to the comparable and the subject site, the appropriate adjustments were made.

Three exceptions were taken by the appellant to the manner in which this property was used as a comparable. In the first instance, counsel suggested that the $1,500 per acre did not accurately reflect the consideration paid by High Prairie for the site. It was submitted that the vendor, which happened to be the appellant, concurrently was relieved of a tax liability and that the amount so saved should be factored into the per acre value by way of an upwards adjustment. I note at this point that the exact nature of this agreement was never made clear and is not referred to in the agreement for sale or the transfer of land filed as exhibits.

Mr. Douglas Fevang, shareholder, testified that although this property was transferred to High Prairie in 1969 (which is what all of the documents disclose), the agreement had been made a year earlier, that is in 1968, by way of a handshake deal. According to counsel for the appellant this becomes relevant since Mr. Lee had adjusted the sale price per acre to reflect the fact that the sale took place two and one-half years prior to Valuation Day. Counsel for the appellant argued that Mr. Lee was in error and that he should have adjusted the value on the basis of a three and one-half year period. This argument was derived, of course, from the purported handshake deal being the effective date of sale.

Furthermore, it was argued that since Mr. Lee's comparable number 5 included within its boundary (according to counsel for the appellant) a 100- foot wide gas pipeline easement, this fact had the effect of reducing the amount of land available for development by some 12 per cent, as a result of which an adjustment should have been made by Mr. Lee.

The difficulty with all of these submissions is that there was no clear and cogent evidence adduced to support them. For example, if it were necessary to do so on the limited evidence before me, I could not reach a conclusion that Mr. Lee's comparable number 5 included the gas line corridor. In the absence of a reasonable evidentiary base, on this issue I can not accede to counsel’s suggestion that Mr. Lee should have made an adjustment for this factor.

Mr. Fevang testified and although I do not wish to cast any aspersions on his character or integrity, his evidence with respect to the negotiations; to the effective date of the sale of Mr. Lee's comparable number 5; to the gas line easement problem and its resolution, was, to put it charitably, so vague and imprecise as to have little or no probative value.

I do not propose to review Mr. Lee's evidence and narrative report in detail. I am satisfied that he selected the proper method to appraise the subject property and that the comparables utilized, particularly sale number 5 previously referred to, were appropriate for this purpose. He made a thorough analysis of the comparables; made the appropriate adjustments and reached, in my view, the correct conclusion. His analysis of the highest and best use, his opinion of the time delay to development and his method of dealing with that matter, was again in my view, correct. I have no hesitation in accepting his testimony and his valuation of the subject property.

On balance, I conclude that the appellant has failed to show that the respondent's reassessment was incorrect. Since the respondent conceded at the outset that the fair market value as originally assessed should be increased, the appeal of Fevang Farms Ltd. will be allowed to that extent and the matter is referred back to the respondent for reassessment on the basis that the fair market value of the subject lands as of December 31, 1971 was $119,400.

Appeal dismissed.