Wix Corporation Limited v. Minister of National Revenue, [1983] CTC 2158, 83 DTC 153

The Chairman:—The appeal of Wix Corporation Limited is from an assessment with respect to the appellant’s 1977 taxation year. The issue is the value of the land and building of a property situated at 25 Curity Avenue in the City of Toronto, Ontario as at the 31st of December 1971.

The property was sold on June 28, 1977 for $1,800,000 and, on the basis that the V-Day value of the property was $1,600,000, the appellant reported a taxable capital gain of $67,436. The Minister of National Revenue estimated the V-Day value of the property to be $1,400,000 and reassessed the appel lant by increasing the appellant’s taxable capital gain to $167,436.

The evidence of Mr Simmons, the President of the appellant corporation, and Mr Lloyd W Nourse, the Chairman of the Board, established that the corporation became a public company in 1972 and that its business was the manufacturing and assembling of automotive parts (oil and air filters). The appellant’s building, situated on land with four accesses to roads, was a composite of four sections built in 1951, 1954, 1959 and 1968 respectively. The last addition was the construction of a second story on one part of the building.

In 1975, at the appellant’s request, an independent appraisal was sought from the Montreal Trust Company in order to determine the property’s 1971 value and its value in 1974 for purposes of insurance and/or the possibility of sale. The appraisal was carried out by Mr John McGough, who at thai time occupied the position of Broker Manager, Special Services, for the Montreal Trust. Mr McGough’s appraisal (Exhibit A-1) concludes that the estimated market value of the property as of December 31, 1971 was $1.6 million.

It was alleged that the building was unique, not only in construction but also owing to the fact that because of the nature of its operations, the plant could not, without substantial loss, be shut down temporarily and subsequently reactivated. As a result, the sale of the property became more difficult in that it had to be subjected to a five-year lease which, according to the witnesses, tended to lower the sale price below the market value. The property was sold in 1977 for $1,800,000 with a leaseback of $215,000 a year (Exhibit R-1). On the basis of Mr McGough’s appraisal report, the appellant used the V-Day value of the property of $1.6 million in its tax return.

In August of 1979 Revenue Canada requested further information with respect to the disposition of the property and more details on the adjusted cost base used in determining the taxable capital gain (Exhibits R-4 and R-5). In response, three pages of the Montreal Trust appraisal prepared by Mr McGough in 1975 were forwarded to National Revenue (Exhibit R-6) but National Revenue did not accept the conclusion of Mr McGough’s 1975 ap- praisal. The appellant was dissatisfied with National Revenue’s V-Day evaluation and informed National Revenue (Exhibit A-3).

In January 1980 Mr McGough, then operating an independent real estate professional appraisal business under the name of John McGough Real Estate Limited, prepared, at the request of the appellant, a review and analysis of the previous appraisal prepared by himself for Montreal Trust in 1975. His estimated market value of the property as at December 31, 1971 was $1,625,000 (Exhibit A-2).

Mr Michael Brock, the appraisal supervisor with Revenue Canada, was asked, subsequent to a preliminary appraisal, to have a formal appraisal made of the subject and assigned the task to Mr Andrew Tan, a real estate appraiser with Revenue Canada. The V-Day value of the property was estimated by Mr Tan at $1.4 million (Exhibit R-7).

Counsel, in cross-examination and in argument, pointed out as many errors and inconsistencies as they could find in their opponent’s appraisal. Indeed, there were admissions by both parties that weaknesses were apparent in both appraisal reports. The problem for the Board in determining the V-Day value of the property stems not so much from minor numerical errors that may exist but from the fact that two accredited appraisers, presumably using the same evaluating principles and methodology arrived at, on the basis of their respective expert opinions and personal judgment, a V-Day value of the property which differs by as much as $200,000.

It is the appellant’s contention that the respondent’s appraiser, Mr Tan, used the wrong ceiling height in his cost approach to value. The error was admitted by Mr Tan and the amount of $26,500, suggested by the appellant as being the additional cost of the ceiling, could conceivably be added to the respondent’s evaluation on a cost basis.

However, the fact that the respondent did not include the income approach to value in his appraisal is not one of three errors the appellant submitted had been committed by Mr Tan in his appraisal report.

At page 54 of the book “Real Estate Appraisal in Canada”, used by the appellant’s appraiser in his report, it is stated:

While these three approaches or tests of value have over the years been basic in the teaching of real estate appraisal, it must be stated that in actual practice appraisers generally are not restrained by the curbs imposed in attempting to apply all three to every appraisal of improved property. It is self-evident that with their limitations outlined later in this section, all three approaches cannot possibly lend themselves to every assignment.

While Mr McGough did use the income approach, the evidence was that the property had never been leased; leasing was not considered by Mr McGough as the highest and best use of the property; there was no leasing potential of the subject until 1982 when leasing was made possible by advertising that the property could be divided (Exhibit R-2). While Mr Gough claims that the income approach merely served as a test of the value he arrived at by using other appraisal methods, the accuracy of results of the income approach is questionable and not a reliable test for Mr McGough’s other evaluation figures.

The appellant also contends that Mr Tan, by adding to the amount of $725,000 (the value of the first storey of the building arrived at by the application of the market data approach) the amount of $640,000 (the depreciated cost of the second storey), was not properly applying the market data approach and concluded that the resulting figure was not a true market value.

It appears clear from Mr Tan’s report that in applying the market data approach, adjustments had to be made to compensate for differing factors in the 13 comparables used, particularly to those which were considered by him as being the best comparables. Mr Tan’s adjustments included con- structural differences which he compensated for by applying the cost approach in evaluating the second storey. Both the market data and the cost approach are accepted methods of evaluation. The fact that Mr Tan used the cost approach to determine the value of the second floor of the building which he was evaluating on the basis of the market data approach does not, as the appellant suggests, invalidate the methods used or the resulting figure of value.

In the text “Real Estate Appraisal in Canada”, further on page 54, the author states:

The three approaches are to a degree intermarried, each embodying factors found in the market. What they do offer the appraiser, however, are tools to work with, “tools with which to test the value of the property”.

In his cost approach to value, while using the Boeckh’s table of depreciation for normal physical deterioration, Mr Tan also took into account the functional obsolescence of the property which was constructed in several sections over a lengthy period of time, which had varying ceiling heights, inadequate parking, loading and unloading facilities, etc. As a result, Mr Tan’s depreciation factors were greater than those of Mr McGough’s who applied only the physical depreciation factor set out in the Boeckh’s Manual and did not adjust for functional obsolescence.

In my opinion, the functional and the economic obsolescence of a building must be taken into account in estimating its fair market value and the circumstances giving rise to that type of obsolescence are so varied and great that they cannot be compiled or even reflected in the Boeckh’s table of depreciation and must be added to the depreciation from the normal deterioration of the building. I do not believe that Mr Tan, in so doing, overdepreciated the value of the property, as suggested by the appellant.

While Mr McGough did not determine in either of his appraisal reports the highest and best use of the property, the evidence supports Mr Tan’s finding that its highest and best use “was the continuation of its existing use as an industrial concern”.

While appraisers must have some latitude in arriving at their estimate of value, there are some basic principles in evaluation which cannot be ignored. One of these is that the value to an owner does not represent what is meant by a ‘fair market value” within the meaning of the Income Tax Act, SC 1970-71-72, c 63, as amended. In Mr McGough’s report and in his evidence, there appears to be considerable confusion as to this distinction. At page 7 of Mr McGough’s appraisal report dated January 24, 1980 (Exhibit A-2) he states:

This appraiser assumed: that the Dept of National Revenue’s Reviewing Officer would be aware that the subject property had not been placed in the Marketplace for sale and at the Date of Valuation-Day, December 31st, 1971, was owned and operated as a place of manufacturing, for the use of Wix Corporation.

That the Owner: had the right under the Capital Gains Taxation Section to submit his Estimate of Valuation of his property, namely 25 Curity Avenue, East York, Ontario, as on December 31st, 1971, within good judgement, and within a reasonable Estimate of Value Worth to Ownership in Use.

On page 42 of the report, as part of the certification, Mr McGough states:

Market Value is the highest price estimated in terms of money which a property will bring if exposed for sale in the open market allowing a reasonable time to find a purchaser who buys with full knowledge of all the uses to which it is adapted and for which it is capable of being used. With the advice that the subject property is not for sale at this date of the Declaration of Value Estimate, and it is the opinion of this Appraiser some “In Use Value” must accrue to the benefit of the Owner. This fact has been given consideration in this Final Estimate of Value.

For tax purposes, the in-use value to the owner, which apparently is reflected in Mr McGough’s appraisal, is not an acceptable consideration of what constitutes fair market value.

In my opinion, the most evident weakness however in Mr McGough’s appraisal is in the market data approach to value on which he relied very heavily. Only two comparables were used and in his testimony Mr McGough admitted that he had not examined the deeds nor inspected the two properties he used as comparables in arriving at a value for the subject. Moreover, he stated that the two properties chosen were not good comparables with respect to size and other factors.

In adjusting for the smaller size of the comparables which command a higher unit price than the subject, he discounted the price per square foot of the comparables by 35% in one instance and by 50% in another. No explanation was given as to why those arbitrary discounts were chosen.

Another error which, in my opinion, was correctly raised by counsel for the respondent is the application by Mr McGough of the price per square foot of his one-storey comparables to the entire square footage of the subject, 32,000 square feet of which were the second storey to the building which, in a manufacturing plant, does not command the same unit price as the main or ground floor.

While Mr McGough may have utilized all three methods: the income approach, the cost approach and the market data approach, in arriving at his V-Day value, there are serious discrepancies and errors in the application of all three methods. The appellant, in his appraisal reports, has not succeeded in establishing that the respondent’s V-Day value of the property was substantially wrong and arrived at on the basis of wrong evaluation principles.

The respondent’s appraiser having admitted the error made in the ceiling height of a section of the subject, his estimate of cost should be corrected by adding the additional amount of $26,500.

For these reasons, judgment will go allowing the appeal and referring the matter back to the Minister for reassessment by taking into account the said correction. In all other respects, the appeal is dismissed.

Appeal allowed in part.