931 Holdings Limited v. Minister of National Revenue, [1985] 2 CTC 2094, 85 DTC 388

Rip, TCJ:—The appellant appeals from a reassessment of income tax in respect of its 1974 taxation year in which the respondent increased its reported capital gain on the basis that the adjusted cost base of property sold in that year was not $614,487, as reported in the appellant’s income tax return, but $445,000.

The issue in this appeal is to determine the fair market value of property as at December 31, 1971. The difference between the parties is really what is to be valued rather than the valuation itself. on December 31, 1971 ("Valuation Day”) the appellant owned property consisting of land and building situated at 654 to 660 Pape Avenue and 90 Cavell Avenue in Toronto, comprising 67,630 square feet, which it leased to a wholly-owned subsidiary which carried on a dairy business. The subject property was located in the middle of a residential area and was zoned residential; however the property had a legal non-conforming use permitting the operation of the dairy. In the appellant’s view the legal non-conforming use is to be valued when determining the value of the subject property; the respondent says the property is to be valued as residential property only.

The appellant’s valuator in his report for trial estimated the highest and best use was "the continuation of the existing use until such time that a conforming residential use developed a value which warranted its replacement, or termination of the existing use was of sufficient benefit to the community to justify its acquisition in order to eliminate an undesirable neighbourhood use”. The respondent valued the land on the basis its highest and best use “would be in accordance with the Municipality Land Use By-Law permitted the erection of single family residential units on twenty foot lots”.

The appellant’s 1974 fiscal year ended on March 30.

The appellant valued the subject property on December 31, 1971 at $445,000. In August 1972 the appellant acquired a smaller property, contiguous to the subject property, for $100,000. On December 11, 1973 the appellant sold the properties in a single transaction to the City of Toronto for $775,000. The appellant determined its adjusted cost base of the properties to be $546,437, the aggregate of $445,000 and $101,437.* [1]

The respondent's valuator valued the subject property as at December 31, 1971 to be $253,000. The respondent did not offer any evidence or give any reason how, on reassessment, he arrived at the aggregate adjusted cost base of $445,000 for both the subject property and the property acquired in August 1972. In any event the Court cannot consider the adjusted cost base of the properties, the subject property and the subsequently acquired property, to be less than $445,000, since to consider any lesser amount would be in fact an appeal by the respondent against his own reassessment.

Pleadings

Prior to discussing further the matter in issue I think it is incumbent on me to comment on the reassessment material prepared by the respondent and reply to notice of appeal of the respondent, prepared by a lawyer with the Department of Justice other than Mr Erlichman.

Usually enclosed with a notice of reassessment, or sent out under separate cover, is a form T7W-C in which the respondent explains, or attempts to explain, changes made in the reassessment to the previous assessment. The form T7W-C sent to the appellant in respect of the reassessment under appeal reads, in part:

Add: Adjustments to Canadian Investment Income

Proceeds on sale of property	$775,000.00
Deduct: Revised V-Day value	445,000.00
	330,000.00
Deduct: Outlays and expenses	88,797.00
Revised capital gain	$241,203.00

The appellant filed a notice of objection against the reassessment. In the normal course of events representations, verbal or written, or both, would have been made by the appellant or its representative to the taxing authority to vary the reassessment. All the facts in respect of the value of the property in issue normally would be reviewed by officials of the respondent. After considering the notice of objection filed by the appellant the respondent confirmed the reassessment and the appellant filed a notice of appeal. The notice of appeal describes how the appellant originally calculated the adjusted cost base of the properties and refers to both the value of land owned by the appellant on Valuation Day and the cost of land acquired in August 1972.

In the reply to notice of appeal the respondent stated, amongst other things, that:

(i) he admits that the appellant for several years operated a dairy under the trade name Valley View Dairies at 660 Pape Avenue in the City of Toronto (the property);

(ii) the respondent denies that the Valuation Day value of the property and the value of the property as at the date of sale December 11, 1973 includes a value for the legal non-conforming use;

(iii) the fair market value of the property as at December 12, 1973 was the amount of $775,000; namely, the proceeds received from the Corporation of the City of Toronto;

(iv) the adjusted cost base of the property as at December 12, 1973, was the amount of $445,000 which amount represents the fair market value of said property at Valuation Day, December 31, 1971;

The Minister's reply conforms to form T7W-C. Reference in both the form and the reply is to a property that was sold. On reading the T7W-C and the respondent's reply one may reasonably conclude that he considered only the subject propery was sold in 1974 and the fair market value of that property on December 31, 1971, Valuation Day, was $445,000. According to the reply the portion of the property acquired in 1972 had no Valuation Day value to the appellant. It appears the respondent never considered its value, or even its existence. If the respondent's position is that both properties together had an adjusted cost base of $445,000, it did not say so: to merge the values of both properties into one value, and refer to the aggregate value as a Valuation Day value, as was done on form T7W-C and the Minister's reply, is sloppy and potentially misleading. The Minister erred in his description of the portions of the property and this error was not corrected by his solicitor when he drafted the reply. It appears to me that in preparing the reply the respondent's solicitor simply copied the information from the Minister’s file without reviewing the facts or considering the merits of his client’s case. Both the Minister and his solicitor have an obligation to a taxpayer to set out clearly how the assessment was made and the Minister's position in the appeal; the respondent must fully disclose to the taxpayer the precise findings of fact and rulings of law which have given rise to the controversy: Johnston v MNR, [1948] CTC 195; 3 DTC 1182 and 1183, per Rand, J. This was not done in this appeal.

Prior to the trial of this appeal the appellant retained the services of an appraiser to value that portion of the property he owned on December 31, 1971, as at that day; the appraised value was $445,000, the same value the Minister in his reply stated “represents the fair market value of said property at Valuation Day, December 31,1971". A person might reasonably conclude therefore that the parties were in agreement as to the Valuation Day value of the asset owned by the appellant on Valuation Day.

The Minister's position however is that the Valuation Day value of the portion of the land owned on December 31, 1971 was $445,000 less the appellant’s adjusted cost base of $101,487 of the land acquired in 1972, that is, $343,513. Counsel for the respondent, while not applying for judgment allowing the appeal on the pleadings, indicated his displeasure with the turn of events and I agreed with him. In my view to allow the appeal on a motion would cause the appellant unnecessary expense since the Minister has the right of appeal to the Federal Court, and his pleadings in that appeal presumably would be redrafted in clearer terms; I believe it would be preferable to decide the appeal on its merits at this time.

Valuation

The parties are not significantly apart in their valuation of the subject property as residential property: the respondent says the property's value was $253,000; in its notice of appeal the appellant indicated the value of the property for residential purposes was $262,000. To decide whether the property is to be valued for residential purposes or according to its legal non-conforming use is the first question for this Court to decide. The Court must then determine the value of the property.

The president of the appellant, Mr Arthur Walker, testified on its behalf. Mr Walker is also president of Algonquin Mercantile Corporation (“Algonquin”) a publicly traded corporation, which in 1971 acquired all of the issued and outstanding shares of the appellant. (The corporate name of the appellant at time of acquisition of its shares was Valley View Dairies Limited; it was changed to 931 Holdings Limited by Articles of Amendment dated January 14, 1974.)

Mr Walker testified in early 1970 a subsidiary of Algonquin, Hardee Farms International Ltd (“Hardee”), had divested itself of certain property and was looking to invest the proceeds of the divestment in food-related industries in Canada. A principal shareholder of the appellant approached the chairman of the board of directors of Hardee offering to sell Hardee all of the issued and outstanding shares of the appellant. The chairman of Hardee knew the shareholder and an agreement for sale was prepared and executed on September 8, 1971, to be effective October 31, 1971. Because of the relationship between the appellant’s former shareholder and the chairman of Hardee the purchaser did not make all the usual searches and inquiries normally made in a transaction of this type.

In March 1972 a meeting of residents of the neighbourhood where the dairy was located was held on the front lawn of Mr Walker's residence; Mr Walker stated this was the first time he learned of the neighbourhood opposition to the dairy’s location. He previously had not been made aware of neighbourhood opposition during negotiations with the vendor of the shares, notwithstanding the City of Toronto (sometimes referred to as “City”) was in communication with the appellant in September 1971, or any time prior to March 1972. He was surprised to learn of the pressure for the dairy to get out of the neighbourhood. Legal action against the vendor of the shares was contemplated.

In the meantime under pressure from residents of the area the City of Toronto undertook many inspections of the property to ensure the appellant was acting in conformity with health and other regulations. To the appellant these constant inspections dislocated normal business activities and dairy operations were made difficult.

Mr Walker testified that the purchase price for the shares, $600,000, subsequently reduced to $550,000 to reflect changes in the financial statements of the appellant, was calculated solely on the profits of the appellant as a going concern without consideration to the value of any realty. No exhaustive review was made of either assets or customers of the appellant.

Eventually the subject property was sold to the City of Toronto for $775,000. Mr Walker acknowledged in fact there was only one prospective purchaser of the property, the City. The property could have been offered for sale to another dairy but, as Mr Walker indicated, “no dairy was keen to expose themselves to our problems”. The non-conforming use, in Mr Walker’s view, thus had value only to the appellant and the City

The purchase price, testified Mr Walker, was for the land and was the best price it could get for the site and cease business operations; he indicated no portion of the purchase price was for relocation since moving would have been uneconomical and could not be justified since the dairy was small and dealt only in a certain area of Toronto; any new site would be remote from that area and would increase distribution costs and decrease profits. The City, he added, looked for sites for the dairy but reached the Same conclusion, in so far as he was aware.

The purchase price of $775,000 included the property owned by the appellant on which the dairy was located as well as the contiguous property acquired for $100,000 by the appellant in 1972 for use as a parking lot. Demolition of the dairy building was the responsibility of the appellant; during negotiations with the City it anticipated an expenditure of $75,000 for the demolition.

Mr Walker revealed that at one point in time the appellant considered converting the property to residential use and selling the property as such. But the appellant determined it would not realize as much for residential land as it would by selling the property to the City; it was anticipated the City’s purchase price would include a value for the non-conforming use it wanted to retire. Mr Walker stated that by this time the appellant had assembled various memos and recommendations concerning the subject property by the City’s Planning Board to the Board of Control of the City of Toronto and later to the City of Toronto Executive Committee, and in a memo dated August 30, 1965 from the Commissioner of Development for the City of Toronto to Board of Control it was indicated that the City would pay a premium for the non-conforming use; the memo states, in part, . . in all probability only 20 per cent or less of the acquisition price could be recovered by sale for residential purposes”. Thus the appellant negotiated on the basis the non-conforming use had a value. The appellant subsequently had an appraisal of the subject property made as of the date of sale, December 11, 1973, which indicated the value of the property for residential purposes to be $524, 000, that is $251,000 less than the selling price.

Another witness for the appellant was Mr Karl Jaffary, a solicitor of the City of Toronto. Mr Jaffary was an alderman for the City of Toronto from 1972 to 1974 and a member of the City’s Executive Committee for 1973 and 1974. He testified he was aware of City policy in respect of non-conforming use properties. The City was conscious of two types of non-conforming use properties: agreeable and obnoxious. The City had set aside money in a special account to acquire properties having obnoxious non-conforming uses and over the years had made lists of such properties in order of disagreeability; the City wanted to purchase the obnoxious non-conforming uses to retire them. Mr Jaffary testified he believed the City acquired all the obnoxious non-conforming use properties it purchased by sale and not by expropriation. The City was aware money was being made from the obnoxious non-conforming uses. In fixing a price for an obnoxious nonconforming use property the City would consider the price it could obtain on a resale of the property and the price at which it would pay for the property on an expropriation, and usually the City would acquire the property for some amount in between, depending on City Council’s priorities in retiring the obnoxious non-conforming use on a particular property.

A City of Toronto Executive Committee report adopted by City Council on April 12, 1973 provides a history of the City’s concern with the subject property. The Planning Board of the City had consistently recommended the removal of the dairy and in its report of December 7, 1965 the Board recognized the dairy as an objectionable industrial use and included it in a list of the 21 most obnoxious legal non-conforming uses in the City; the systematic removal of all of these uses was recommended in that report. By January 1968 the dairy property was among 17 obnoxious uses still remaining which the Planning Board suggested be eliminated, although the dairy property was given low priority for acquisition. Three years later, in 1971, there were 16 obnoxious non-conforming uses remaining in Toronto and, according to a Planning Board report, dated April 3, 1973, the Planning Board, on March 16, 1971, made the following reference to the dairy: “These uses constitute a long recognized nuisance and hazard in this area, and although their acquisition cost would be high, their removal should be a high priority”.

In September 1971 City Council adopted a report from the City of Toronto Executive Committee which listed the dairy operation as one of the six most obnoxious legal non-conforming uses in the City. The report recommended that the Commissioner of Real Estate be authorized to negotiate for the purchase of these uses if the properties are offered in the open market, provided that the degree of benefit to the City is deemed commensurate in each case with the provisionally agreed acquisition cost. In November 1971 the City of Toronto's Commissioner of Development wrote to the owners of the dairy property advising that because of the nonconforming use of the property the City would “like to be informed of any proposed sale so that it could consider a possible purchase if satisfactory terms can be agreed . . . Should a present and future sale of your property be contemplated, it would be very much appreciated if you would let me know”.

Mr Jaffary’s evidence was that in 1973 City Council knew that as raw land the dairy property was not worth $775,000 but that it was paying not only for land but also for an obnoxious legal non-conforming use, and when taken together, the purchase price was fair.

In my view it is clear that on December 31, 1971 the City of Toronto was interested in acquiring the dairy property to rid itself of the obnoxious nonconforming use and was willing to pay in excess of the price for the land as residential property.

Mr John Strung, a real estate appraiser in Toronto, gave evidence on the appellant’s behalf as an expert witness. Mr Strung is a member of several organizations, including the Appraisal Institute of Canada, Society of Real Estate Appraisers, and the American Institute of Real Estate Appraisers. He has carried out real estate appraisal assignments since 1952 for private industry and government in Toronto and elsewhere in Ontario and has lectured on appraisal to his peers and to university audiences. He is presently president of Strung Real Estate Limited.

Mr Strung's estimate of highest and best use of the subject property in 1971, as previously indicated, was the legal non-conforming use for which there was a demand, that is, the dairy use. And the dairy use developed a higher value for the land than residential use. Mr Strung valued the subject property on a sales comparison method, or "market data approach”; this valuation method involves comparing recent sales of comparable properties to the property being appraised, making allowance for variations and differences between the properties and time of sales. He gave the greatest weight to sales or acquisitions of non-conforming use properties by the City of Toronto, making a time adjustment to the various sales prices applying data published by the Toronto Real Estate Board.* [2]

Mr Strung allowed for the probability that the various sales were negotiated prior to date of registration and unless the deed bore an earlier date, the adjustment was made from two months prior to registration.

Thirteen sales were used by Mr Strung in his appraisal report. Three of the sales were in respect of the property sold by the appellant in 1973: the acquisition of 654-656 Paper Avenue, consisting of 4,800 square feet, in 1964, the acquisition by the appellant of the property, consisting of 25,300 square feet, acquired for use as a parking lot in 1972, and the sale of the subject property by the appellant to the City of Toronto. The first sale was for $6.67 a square foot which Mr Strung adjusted to $11.81 per square foot; the second sale was for $3.95 per square foot, which was adjusted by Mr Strung to $3.81 per square foot, and the sale to the City was for $11.46 per square foot, adjusted by Mr Strung to $7.98 per square foot. Mr Strung was of the view that in negotiations for the property to be used as a parking lot the appellant was in the “driver’s seat” since it was probably the only available buyer at the time; because of the dairy operation it was highly unlikely the site could have been marketed at the time for residential development. Mr Strung therefore concluded the sale price of this property is not a reliable guide to the value of the subject property as of December 31, 1971.

Four sales were of two properties having a non-conforming use which were acquired by the City of Toronto and subsequently resold. In 1968 the City purchased 190 Edwin Avenue and 95 Osler Street, consisting of 47,843 square feet, for $3.66 per square foot from owners who operated a salvage yard on the site. Mr Strung adjusted the price for time to $4.55 per square foot. In 1971 the City sold this land to the Metropolitan Separate School Board for $148,500, or $3.10 per square foot; Mr Strung adjusted the price for time to $3.22 per square foot. In Mr Strung’s view a premium was paid by the City to obtain these lands and eliminate the non-conforming use; the premium was 41.3 per cent.

In 1978 the City purchased property at 138-142 St. Helens Avenue used partly for animal slaughtering for the purpose of eliminating that use. The purchase price was $378,955, or $9.73 per square foot. Mr Strung adjusted the price for time to $4.55 per square foot. The City sold the property in 1979 for $265,000, or $6.80 per square foot, which Mr Strung adjusted to $3.15 per square foot for time. In Mr Strung’s view the time adjusted acquisition price per square foot was 44.44 per cent higher than the time adjusted selling price. Without any adjustment the purchase price was 43 per cent higher than the selling price. This would suggest the non-conforming use premium in this case was approximately 43 per cent.

The other sales used by Mr Strung are acquisitions of land between 1968 and 1978 by the City of Toronto in order to eliminate objectionable nonconforming uses. The price per square foot paid by the City, adjusted for time, varied between $4.19 per square foot (including demolition costs) to $11.36 per square foot. In Mr Strung’s view the price of the property (situated near Queen Street and Broadview Avenue) which sold for $4.19 per square foot, adjusted, would require a substantial further upward adjustment for its size, 275,280 square feet, its proximity to a Canadian Pacific Railway line and its less desirable location.

In Mr Strung’s opinion the most relevant sales to provide the best guide in valuing the subject property as at December 31, 1971 were the sale by the appellant of 654-656 Pape Avenue in 1964, the sale to the City in 1967 of 12,024 square feet at 118-122 Maria Street for an adjusted price of $11.36 per square foot, the sale of the property by the appellant to the City in 1974 and the sale in 1978 to the City of another property on Maria Street for an adjusted price for time of $9.32 per square foot. The other sales all had less desirable locations and thus Mr Strung did not consider them to be a good guide in valuing the subject property.

The City acquired 118-122 Maria Street to get rid of a salvage yard operation in a predominantly residential area. This property was smaller than the subject property and, in Mr Strung’s view, in a less desirable location. The other property on Maria Street was about one block from the former property and consisted of 6,038 square feet. It had a less desirable location as well, according to Mr Strung.

Mr Strung calculated the average adjusted sale price of the four “best guide’’ properties was $10.12 per square foot; if the price paid by the City for the subject property is excluded, the average adjusted sale price is $10.86 per square foot. Mr Strung then accorded a value as at December 31, 1971 to the subject property of $10.50 per square foot; at 42,330 square feet the property value as at December 31, 1971 of $444,465, which Mr Strung reduced to $444,000.

Then Mr Strung reviewed the transaction between the appellant and the City. The purchase price was $775,000. The property sold included vacant land acquired in August 1972 at $3.95 per square foot. The vacant land in Mr Strung’s view would not have generated the same non-conforming use premium as the improved subject property. He attempted then to “filter the contribution of this site (ie the improved site) out of the $775,000 paid by the City”, then adjusting for time the residue to December 1971. His calculation is as follows:

The indicated value, using this analysis, was rounded off by Mr Strung to $444,000, an amount corresponding to that determined using comparable sales in the previous determination of value.

Mr Strung concluded from the properties acquired by the City to rid itself of non-conforming use and then resold by the City that a premium was paid by the City for the non-conforming use. As previously indicated the premiums were 41.3 per cent and 44.4 per cent, based on a time adjusted price. He acknowledged there is no firm guideline as to what is, or ought to be, normal premium that is applicable to non-conforming uses. He assumed that about 40 per cent is the appropriate bonus applicable for the subject property. The indicated land value excluding any bonus (and improvements included in the bonus) was calculated by Mr Strung, using the $444,000 as the value of the subject property including a bonus, as follows:

The $266,400 should be compared to the $253,000 value estimated for the subject property as residential property as at December 31, 1971 by Mr M S McGee, who testified as the respondent’s expert witness as to value.

Mr Strung concluded the value of the subject property on December 31, 1971 was $445,000.

Mr McGee is an accredited member of the Appraisal Institute of Canada and the Real Estate Institute of Canada. He has worked as a senior appraiser for the Ontario Government, the Municipality of Metropolitan Toronto, Crown Trust and General Real Estate Brokerage (sic). He has prepared appraisal reports for his employers as well as the Bank of Montreal, Dominion Stores Limited, Royal Trust Company and various law firms and individuals. He is now employed by Revenue Canada, Taxation.

As indicated previously Mr McGee appraised the subject property as residential property.

Mr McGee testified that until the day of the trial he had not heard of a municipality acquiring land in order to get rid of a non-conforming use. He was present during the evidence of Mr Jaffary but he indicated his experience with the Municipality of Metropolitan Toronto was that if there were problems in negotiating a price between the Municipality and a land owner the dispute would find its way to the Land Compensation Board of Ontario. Mr McGee could therefore not understand why the City did not expropriate the subject property, notwithstanding Mr Jaffary’s evidence. As previously stated, Mr McGee's valuation did not consider a value for the nonconforming use.

It is clear from the evidence that on December 31, 1971 the City of Toronto was in the market to purchase the subject property to rid it of an obnoxious non-conforming use. Counsel for the respondent does not dispute that the legal non-conforming dairy use of the subject property may be considered in determining the fair market value of the property and he says that the City of Toronto as a “special purchaser" may have been willing to pay a higher price for the property than were other purchasers, but if only one person had a special interest, he would pay only a nominal amount more than ordinary purchasers. This submission flies in the face of the evidence. Mr Jaffary testified that the City of Toronto was prepared to pay a price for properties having obnoxious legal non-conforming uses in excess of what the property would fetch without the obnoxious nonconforming use. Mr Jaffary stated that in acquisitions of this type the City at the time considered paying a price between what it could resell the property for (ie the value of the property without the legal non-conforming use) and what the property would cost on an expropriation. Mr Jaffary indicated that the City would have had to pay in excess of $775,000 for the subject property on expropriation. There was no evidence that on December 31, 1971 the City had a different policy and I conclude from Mr Jaffary’s evidence it did not. Mr Strung's evidence was that the City’s practice, when purchasing property having a legal non-conforming use the City desired to get rid of, was to pay a premium for the property; he suggested that based on his research the premium was approximately 40 per cent.

The presence of the City of Toronto as a special purchaser in my view enhanced the value of the subject property as at December 31, 1971: Laycock v The Queen, [1978] CTC 471; 78 DTC 6349. The fair market value of property is the highest price available estimated in terms of money which a willing seller may obtain for the property in an open and unrestricted market from a willing, knowledgeable purchaser acting at arm's length: Minister of Finance v Mann Estate, [1972] 5 W.W.R. 23 per McIntyre, J (BCSC); affirmed [1973] CTC 561 (BCCA); affirmed [1974] CTC 222 (SCC). The word “open" in reference to an open market simply means a market from which no potential purchaser is excluded even if the property is so situate that to one or more persons it presents greater attractions than to anybody else: IRC v Clay, [1918] 3 KB 466, 472-73, per Cozens-Hardy, MR. The word “unrestricted", in my view means there shall be no limit on who may be a potential purchaser of the property. That the City of Toronto was the only potential purchaser in fact of the property does not mean the hypothetical sale of the subject property on December 31, 1971 was not made on an open and unrestricted market.

The test of value for land at a particular time is to be determined by inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?" To some extent the answer is conjectural: Spencer v The Commonwealth of Australia, 5 CLR 418 at 432, per Griffith, CJ (High Court of Australia). In my view on December 31, 1971 the City desired to acquire the subject property and there is no evidence the appellant would have refused to sell the property at a fair price.

The respondent's assessment was based on the assumption the highest and best use of the subject property was residential property. I cannot agree. The subject property had a legal non-conforming use on December 31, 1971. I agree with Mr Strung that the highest and best use of the subject property on December 31, 1971 was the continuation of the dairy. This use increased the value of the subject property to the appellant and a fair price for the subject property would take into account the value of nonconforming use. Therefore the appraisal of the subject property by the respondent's appraiser has little value. I am left with the appraisal report of Mr Strung. Notwithstanding cross-examination of Mr Strung by counsel for the respondent, the basis and conclusion of Mr Strung’s appraisal of the subject property remains convincing.

The appeal will be allowed and the assessment will be referred back to the respondent for reconsideration and reassessment on the basis the value of the subject property on December 31, 1971 was $445,000. The appellant shall be entitled to its party and party costs.

Appeal allowed.