Saskatoon Motordrome LTD v. Minister of National Revenue, [1984] CTC 2915, 84 DTC 1754

Taylor, TCJ:—This is an appeal heard in Saskatoon, Saskatchewan on July 31 and August 1, 1984 against income tax assessments for the years 1975, 1976 and 1977, in which the Minister of National Revenue made certain changes to the reported income of the corporation. During the times material the corporation was, to all intents and purposes, owned and controlled by one Andrew Hawrish, a solicitor in the city of Saskatoon. Certain agreements on some of the minor items in the assessments were reached between counsel and reported to the Court. Counsel for the respondent took on the responsibility of ensuring that reassessments to effect these changes would be issued in any event, and that left only one matter to be determined by the hearing — the V-Day value of a 42.5 acre parcel of property owned by the corporation before 1971 and sold in 1975 for $600,000. The appellant took the position in the notice of appeal that the V-Day value was $500,000, but reduced this figure for purposes of the hearing to $400,000. For the respondent, the position was that the fair market value of the property on V-Day was $109,000, which amount was in excess of the actual cost of the property to the appellant.

Mr Andrew Hawrish, president of the appellant corporation, testified regarding the history of the property, its use over the years, the changes, expansion and development of the city in the area surrounding the subject over the years, and the circumstances surrounding its final disposition. There were three valuation reports presented, one for the appellant and two for the respondent; and in addition the Court was materially assisted by the information presented from Mr Carl McLeod, now retired, but during the times material a senior officer of the Planning Department of the city of Saskatoon. A total of twenty-nine physical exhibits were filed through the various witnesses.

Without reviewing in detail the evidence and testimony, there are a few salient factors which must be kept in mind in dealing with this valuation which arose out of that evidence and testimony. There are also certain propositions I would put forward:

First, as a policy, the city of Saskatoon during the years relevant not only controlled development through the formal use of approvals, regulations and by-laws, but through the actual process of owning subdivision and development land in very large quantities all about the city;

Second, in the general south-eastern quadrant of the city during the years relevant, there were, to my knowledge only two privately-owned parcels of property prospectively zoned and considered for residential development by the city — one of about 12 acres (referenced later as “Mr Cooney’s comparable #2”) and the subject property. The balance of the land surrounding these two (several hundreds of acres) was already developed, or owned and held for development by the city;

Third, there was a land-development plan in existence, approved by the city, available to all interested parties, which put a phasing priority on several of these land tracts held by the city — but also placed privately-owned land (including the subject property) under restrictions consistent with and coordinated with adjacent city land, including the phasing of any private development. At the critical date, December 31, 1971, it is my best assessment of the testimony of the various witnesses that “Phase I” may have just been completed, and “Phase II” not yet started. The subject property was in “Phase IIP;

Fourth, while there had been a general “booming” economy for several years up until about mid-1968, a recession set in lasting until about the end of 1971, or early 1972. It was generally agreed by the witnesses that the recession “bottomed out” in late 1970 or early 1971, and that recovery was clearly evident by 1973. There was some disagreement about the precise state of the economy on V-Day but it is my assessment of that part of the testimony that at least reasonable signs of an upturn were noticeable to interested and knowledgeable parties by that time;

Fifth, during the recession (roughly 1968, 1969, 1970 and 1971) the demand for housing and accordingly new development dropped sharply. My best assessment of the testimony is that real estate development remained in a kind of “holding pattern” for that period. I believe that it would be overly generous to attribute to raw land very much in the way of an increase in value during this period;

Sixth, the two major factors above — the “land banking” system in operation in Saskatoon and the down turn in the economy over a period very critical to this appeal, left very little in the way of truly valid comparables that the appraisers could examine and assess. I note with commendation the separate efforts of all three to do the best they could under the circumstances to aid the Court.

Mr Chyz, of Chyz Appraisals Ltd, Saskatoon, Saskatchewan, listed a total of twelve properties which he described as constituting “the relevant sales data compiled for purposes of developing an estimate of the subject property market value”. In my opinion that is only a moderation and diffusion of the normal term “comparable”, but in his opinion eleven of them were not comparable at all. He selected his property #9, and put it forward as that which should be regarded as the most useful. The following is his description of #9, (hereinafter referred to as “Zellers”) and the utilization he made of it in reaching his conclusions:

(9) Certificate of Title Registration Dated — September 12, 1969;

Certificate of Title Number — 69-S-19198;

Legal Description — Parcel B, Plan 69-S-19197 (part of NE 23-36-5-W3);

Civic Address — 3310 - 8th Street East, Saskatoon;

Site Dimensions — Irregular;

Site Area — 503,630 sq ft :l: (11.561763 acres);

Zoning — Proposed Commercial;

Vendor — Robert A Hosie;

Purchaser — Zellers (Western) Ltd;

Sale Price/Sworn Value — $200,000.00, $.39712/sq ft ($17,298.00 per acre).

Sale 9 was a sale qualifying for use as a comparable. Comparable Item 9 is located 1,840 feet west of the western extremity of the subject property. The comparable had service connections available at the 8th street frontage. The property was, prior to purchase, used for agricultural pursuits, was within city limits and presumably was designated for eventual commercial use. The site has, in the subsequent period, been developed with a major retail shopping enclosed mall complex.

On the basis of sales data and preceeding analysis thereof, it is concluded the comparable Sale 9 constitutes the most valid value indicator. It is considered reasonable to assume that an effective date owner of the subject property rationally and justifiably could have initiated action for preparation of subdivision plans, service installations and development procedures which would have placed the individual sites on the retail market early in 1973. History indicates that introduction of house development subsidies in 1973 resulted in a total absorption of serviced sites. There were occasions where house construction was commenced prior to installation of sewer and water pipeline networks, or was delayed awaiting servicing. Land use could have included residential development of varied density, corresponding in character to development on the adjacent College Park subdivision. Examination of civic maps indicates the registration of plans of survey for apartment block construction in close proximity to the subject property in 1969.

The value indicator, as provided by comparable Sale 9 requires application of adjustments for use potential and location. On the basis of economic trends at the effective date of Sale 9, and at the effective date of the subject property appraisal, an adjustment for time lapse is not indicated. An adjustment for time lapse — between the effective date and the date of potential sale for development is implemented.

1. The comparable site, devoid of improvements was marketed at $.39712 per square foot of land area. Informational data published by civic authorities indicates that residential use land in the College Park subdivision, at or about the same time period was being marketed — fully serviced — at a price of $65.00 to $70.00 per front foot with the cost of service installations at $35.00 to $40.00 per front foot. The predominant site depth was 110 feet, thereby yielding a square foot value indicator of $.2727, or $11,879.00 per acre.

2. On the basis of comparable data, and subjective conclusion, the subject, due to its more removed location from transpiring developmental projects was 10% inferior to the comparable, thereby yielding a reduced indicated value of ($11,879.00 + 1.10) $10,799.00 per acre.

3. As previously estimated, it is considered reasonable the retail sales of the subject property in a serviced/subdivided state could have commenced during the mid point of 1973, approximately 1.5 years subsequent to the effective date. An annually compounding discount factor of .085 (8.5%) applied for the time period yields a reduced residual acre value of $9,547.00 rounded to $9,500.00 per acre.

Final Estimate of Value

The subject property market value at the effective date, is estimated, at: (42.424 acres at $9,500.00 each $403,028.00) rounded at Four Hundred Thousand Dollars ($400,000.00).

In my view there is little if anything about #9 (Zellers property) which can be transposed usefully with regard to the subject property. Mr Cooney, a later appraiser for the Minister in describing to counsel for the Minister his reasons for not using the Zellers property in his report, also gave one of the best, if not the very best, basis for using any particular property as comparable to another I have ever heard. He stated, in effect, that to compare “Zellers” to the subject one would by necessity be required to assert that the purpose and development by Zellers, on the #9 property could have gone equally well (with possibly some reasonable technical adjustments) onto the subject property at the critical point in time. Counsel for the Minister later on in argument termed this “reciprocity of properties”. I agree completely, and commend Mr Cooney for such a succinct analysis. Although I recognize that it could not be carried to extremes, in general terms as a definition of “comparability” it should have visible and viable application particularly where use or potential use of a particular property is at stake, and that factor is a major element in the dispute between the parties. In this instance the B-4 (business) basic zoning of Zellers was entirely different than the “agricultural” zoning of the subject. In addition Zellers was a corner property, at the cross-roads (in fact a complete traffic circle) of two of the main highways arteries in the Saskatoon area. The subject was 42 acres, while Zellers was less than 12 acres. I do point out that it appeared from all the testimony and particularly from the cross-examination of Mr Chyz that the total “commercial” parcel at the traffic circle whereon Zellers store was located probably consisted of about 33 acres, but the balance of the total “commercial” parcel (some 21 acres

— Mr Chyz comparable #8) may have been at a price considerably less than that paid for Zellers’ 12 acres alone. From that perspective the use of a combination of comparables #8 and #9 by Mr Chyz would not have worked to the advantage of the appellant. In my view, going back to the “reciprocity of properties” theory advanced by counsel for the respondent, these two parcels (Zellers and the subject) had no such common basis, and I would suggest it would have been completely unlikely that as an alternative, Zellers would have given the slightest thought to the use of the subject. Mr Chyz’ report therefore serves only a limited purpose for the appellant, but I note that he also listed as properties #10, #11 and #12 respectively three agriculturally zoned properties of 160 acres, 160 acres and 130 acres near the subject property, two of which were also listed and used by Mr Cooney in his report. These three however were completely rejected by Mr Chyz. They are all by any standards, in my view, far more comparable to the subject than the Zellers property, and I shall return to them and Mr Cooney’s report later. Before doing so, however, I note the second appraisal report provided by the respondent, prepared by a Mr Perry of Perry Appraisals Ltd, Saskatoon, Saskatchewan.

While Mr Chyz had used a convoluted term, (supra), in substitution for the word “comparable”, Mr Perry had another euphemism “Indicators of Land Value” apparently to serve the same purpose. He also presented certain parameters for listing of property in such “indicators” — in excess of 20 acres, but under 160 acres. After listing and describing his seven “indicators”, Mr Perry reached the following conclusion:

After carefully considering the market indicators listed it is concluded that through the process of reasoning the sales and keeping in mind at all times an unbiased and impartial point of view, there should be no dispute with $2,000.00 per acre, and this appears reasonable.

Therefore:

Estimated Value of the Land;

42.42 acres @ $2,000.00 per acre = $84,840.00

Rounded $85,000.00

Mr Perry’s #4 property was the same as Mr Chyz’s #10 property; and Mr Perry’s #6 property was the same as Mr Chyz’s #12 property. While it was noted earlier that Mr Chyz did not see fit to use either of these, Mr Perry, to his credit, left them in his listing, and since his #4 sold in 1970 for $1,780 per acre, and his #6 sold in 1968 for $1,724 per acre it may be assumed that he based his own calculation of $2,000 per acre, (supra), for the subject property in 1971 to some substantial degree on that information. To that extent the report of Mr Perry serves some purpose for this Court. It should be noted for the record that Mr Perry testified that he had no knowledge of the other two reports — that of Mr Chyz and that of Mr Cooney — and that there had been no contact or consultation by him with either of these two gentlemen.

Now we turn to the report of Mr Cooney, and he uses, and uses the term “Direct Sales Comparison Approach”, a nice and refreshing change. He consid- ered his sale #1 (Mr Chyz’s #12 and Mr Perry’s #6) as the most viable comparable. It is interesting to note the details of Mr Cooney’s #1 property and the brief reference points he associates with the subject property:

SALE NO 1

LEGAL DESCRIPTION: Portion of the South Half (S /2) of Section Thirty (30), in

Township Thirty-six (36), in Range Four (4), West of the Third Meridian, in the Province of Saskatchewan, which lies to the South West of the South West limit of the Canadian Pacific Right-of-way as shown on a Plan of Record in the land Titles Office for the Saskatoon Land Registration District.

VENDOR:	Canada Permanent Trust Company; as administrator of
	the estate of Elmer Hilliard Running.
PURCHASER:	City of Saskatoon.
SALE PRICE:	$225,000.00
TERMS:	Cash
DATE:	August, 1968
INSTRUMENT NO:	68-S-18242
ZONING:	R.2
AREA:	130.5 + acres
TOPOGRAPHY:	Level
LOCATION:	Approximately one-half mile to the east of subject.
PRICE PER ACRE:	$1,724.00

Sale No 1 considered the best comparable sale, despite the fact it sold approximately 3/2 years before the date of appraisal. The increase in land prices for residential lots in Saskatoon over the last ten years indicates a compounded increase of 7(%) percent per annum. This increase will then be considered in the price of residential raw land and will be calculated when comparing to the subject land. This sale possesses the same type of development potential as the subject, and will be required prior to the development of the subject land.

The variance in size of this sale to the subject is not considered a major factor, in that the subject land can only be developed as part of, and together with, the entire quarter section development. This development is controlled by the community planning commission, under authority of the community planning act. The ultimate sale of this land is governed by planning and zoning, and there is no available evidence that as an investment it would yield any more of a return per acre as part of the whole subdivision.

He is not attempting an esoteric reconstruction, which I suggest was the exercise prepared by Mr Chyz, nor is he providing a vague set of guidelines out of which a number appears to arise, which is the way I read the report of Mr Perry. I am fully aware of the difficulties faced by appraisers in providing information useful to the Court, but it is at least reasonable for the Court to be able to identify a major thrust or factor in an appraisal report which can be linked directly to the conclusion contained. Making some allowance for a possibly more productive portion of the subject land directly fronting on a main road, Mr Cooney comes to the following conclusion:

Based on this analysis and data the estimated value per acre is $2,200.00 applied to 35.5 acres and $4,400.00 for 7 acres.

Based on the investigation, it is my opinion that the market value of the subject land 1S:

ONE HUNDRED NINE THOUSAND DOLLARS

($109,000.00)

The fact that I arrive at a somewhat different result than Mr Cooney, (see below), is no reflection on his efforts.

At this juncture I want to refer specifically to one other property, sold (to the city of Saskatoon) in March 1968 at $1,780 per acre, for a full quarter-section (160 acres). It is referenced in all three reports as follows:

Chyz #10

Cooney #3

Perry #4

As noted earlier Mr Chyz rejected its use entirely; Mr Cooney did not regard it as highly (as a comparable) as he did his own #1, (supra); and Mr Perry indicated it did not have the “development potential” of the subject property. Both Mr Perry and Mr Cooney noted that they had the impression (from external conversations) that the city may have paid too high a price for this property in 1968.

I am impressed by three other points — it was zoned approximately the same as the subject property, it abutted the subject property (NW corner of this property to SE corner of subject property), and it is now developed with housing in generally the same manner as the subject property. I do not believe it can be entirely disregarded as a comparable, and its discard by Mr Chyz only serves to further weaken his report. Its inclusion (even if only as a secondary comparable) adds further weight to the reports of Mr Cooney and assists Mr Perry to some degree.

Next, I want to note Mr Cooney’s #2 property, described by him as follows:

SALE NO 2

LEGAL DESCRIPTION: Parcel “H”, in the City of Saskatoon, Plan No 72-812592

VENDOR:	Broadcast Leaseholds Ltd
PURCHASER:	Prefabricated Buildings Company Limited.
SALE PRICE:	$55,000.00
TERMS:	Cash
DATE:	October, 1972
INSTRUMENT NO:	72-S-25177
ZONING:	R.2
AREA:	11.44 :l: acres
TOPOGRAPHY:	Level
LOCATION:	Approximately three-quarters of a mile west and one-
	eighth of a mile north on Acadia Drive.
PRICE PER ACRE:	$4,807.00

Sale No 2, is given the least weight in the process of analyzing the sales data. This sale indicates a value for a small development site, which can be developed by itself and is surrounded by built-up residential land. The purchaser indicated the land development project was financially assisted by the government and ready for immediate development. The site will be improved with high density, low-cost single family housing.

Neither Mr Chyz nor Mr Perry listed the above property or apparently gave it any consideration. However, I am struck by it for two reasons, first, it is close to (just past the opposite corner) Zellers, (supra), so heavily relied upon by Mr Chyz, but, second, this property was privately purchased for residential development and shortly after 1972 was so developed. I believe it has some value in this matter notwithstanding its several deficiencies noted in both Mr Cooney’s report and in his testimony.

Finally, I want to note that I am satisfied the subject property had a sale value greater than the straight agricultural land referenced by the respondent (Mr Cooney’s #1 and #3). The major reason for that view is that, in addition to its manageable size and good location, it was privately owned. Even considering that its development was closely governed by the Municipality, I hold the view it would have been attractive to a possible developer — indeed it was just so regarded when acquired.

There is no clear empirical process by which to determine the question posed to the Court — the value of the subject property on V-Day — and accordingly I must look at what is the best approximation that can be made from all the evidence. I have rejected the basis of Mr Chyz’ report, and his calculations which rested on his property #9, (supra). However, much of his reasoning might have had validity, in my view, if he had used Mr Cooney’s Comparable #2 and applied his calculations and adjustments to it. To that degree therefore the report of Mr Chyz has served a purpose for the Court.

In summary, the appellant has fallen far short of establishing that its own asserted valuation of $400,000 is viable or acceptable. However, I am of the opinion that the appellant has shown that the value of $109,000 used by the Minister in striking the assessment at issue is suspect. In this instance, the appellant, therefore, deserves some relief. I have reached the conclusion after the detailed review given above, that the matter must be decided somewhat arbitrarily. The “comparables” I have selected are Mr Cooney’s #2, (supra), and Mr Cooney’s #3, (supra) — one much larger than the subject, the other much smaller; one agricultural, the other residential; one abutting the subject, the other almost as near to the subject as the property (#9), so vigorously proposed by Mr Chyz; one sold in 1968, the other in 1972. All in all I can think of no better way to deal with this issue than to determine the per acre value of the subject property as the average of these two ($4,807.00 $1,780.00 + 2) $3,293.50. Considering the subject property as 42.5 acres, that would produce a V-Day value of $139,973.75, which I shall call for purposes of this decision $140,000.

The entire matter is therefore referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons for judgment.

Appeal allowed in part.