Harold Henschell v. Minister of National Revenue, [1983] CTC 2296, 83 DTC 263

Bonner M J:—On V-Day, December 31, 1971, the appellant owned a quarter section of land which abutted the easterly boundary of the City of Ed- monton. The southerly boundary of the quarter section was the easterly extension of the southerly boundary of the City. On V-Day the appellant’s property was used and was zoned for agricultural purposes.

On October 29, 1974, the City expropriated 31.26 acres of the appellant’s land. The parcel expropriated was roughly L-shaped, being a strip of land 300 feet wide along the southerly boundary of the quarter section and another strip about 200 feet wide running from north to south near the easterly boundary of the quarter section. Because the strip running from north to south was close to but did not abut the easterly boundary of the quarter section the expropriation had the effect of isolating 2.58 acres of land which lay between the easterly boundary of the land taken and the easterly boundary of the quarter section.

The sole question to be decided in this appeal is the value on V-Day of the land which was subsequently expropriated. The respondent assessed tax for the 1974 taxation year on the basis that the V-Day value of the expropriated land was $31,260, or $1,000 per acre. The appellant’s position is that the V-Day value of his land was $125,040, or $4,000 per acre.

Three appraisers were called to give evidence at the hearing. They were: (a) Robert Hurlburt, whose opinion was that V-Day value was $111,400; (b) Edward Shaske, whose opinion was that V-Day value was $69,000; and (c) Norris Bamber, whose opinion was that V-Day value was $34,500.

Although all three appraisers expressed themselves in different ways, all recognized that the highest and best use of the land on V-Day was agricultural use until such time as the land became ripe for urban development. Their divergent conclusions rested, in part, on differing views as to the immediacy or remoteness of the prospect of urban development as viewed at V-Day.

All three appraisers based their opinions on market data studies. The difference between the results arrived at by Messrs. Shaske and Bamber was caused, in part, by a rather erratic market which resulted from influences which I will explain. The divergence between the results arrived at by both of them on the one hand and those of Mr Hurlburt on the other results, at least in part, from an unsound approach taken by the latter.

The irregularity of the market was caused by two forces. Firstly, the City of Edmonton annexed lands in the area. Secondly, a government agency known as Alberta Housing was active in acquiring land in the same general area for the purpose of creating a land bank. The new City boundaries were announced in August of 1970. Before that announcement, knowledge that there would be an annexation coupled with uncertainty as to exactly what was to be annexed resulted in fairly intense speculation in the neighbourhood in which the appellant’s quarter section was located. The land banking activity, by which 5,000 acres were acquired in 1969 and 1970, obviously added fuel to speculative fires. According to Mr Shaske, much of the uncertainty in the neighbourhood had disappeared by V-Day, although land values continued to remain high because of a recognition in the market of the future urban potential of land in the area.

Messrs Shaske and Bamber approached the task of determining V-Day value of the land which was expropriated in 1974 by determining, on a market data basis, the per acre value of the quarter section and then applying that rate to the 31.26 acre parcel taken. Mr Hurlburt went through a similar process, but then made upward adjustments by which he attempted to arrive at the V-Day value of the L-shaped parcel as if that very parcel had existed on V-Day as a distinct entity. Somewhat surprisingly, the adjust- ments made by Mr. Hurlburt resulted in a substantial increase over value determined on a simple acreage basis. I say surprisingly because it would seem rather unlikely that any great demand would exist for a parcel having the configuration of the expropriated parcel. In any event, Mr. Hurlburt was, in my view, wrong in his approach. Because the land taken in 1974 was not on V-Day a separate parcel possessing the characteristics of size, shape and location which resulted from the 1974 expropriation, the adjustments which he made were inappropriate.

Furthermore, I cannot attribute much weight to the acreage rate which Mr. Hurlburt arrived at before making the adjustments in respect of the size, configuration and location. Messrs Shaske and Bamber recognized a generally rising market during the period running from eighteen months or so before V-Day to eighteen months or so after it. Mr Hurlburt did not. In determining his acreage rate he made no adjustment for time in respect of sales which preceded and followed V-Day and he relied on sales which took place as late as January and May of 1973. Mr. Hurlburt gave an explanation at pages 25 and 26 of his report as follows:

As can be seen in the section noted above on Fair Market Value the two factors of the introduction of potentially heavy new taxation and credit restrictions resulted in a dearth of sales transactions in the twelve month or so period bracketing the effective date herein.

Nevertheless, the south and southeast portions of the City and its periphery had some sales activity in addition to imputed decisions of many owners to “wait and see” what the effects would be of the new tax law and when and if the credit restrictions would be eased or lifted.

It is noteworthy that there was a resumption of sales activity across the country in June, 1972 following substantial easing of credit restrictions. Since part of the Market Value proposition includes an open and unrestricted market, as discussed in the above referenced section, it can be safely assumed that market activity following the easing of credit restrictions and absorption of the implications of the new tax by prospective vendors and purchasers alike would be reflected in activity in June, 1972 equally with the effective date without adjustment for time. It is important to understand the foregoing statement in that the conditions requisite to use of the term Fair Market Value are abided by and that it is that term which is mandatory to be used under Canada’s Income Tax Act.

I find the explanation unpersuasive. The credit restrictions and the capital gains tax to which reference was made did not eliminate a free and open market at V-Day. They might have depressed the market, but did not eliminate it and value must, of course, be determined by reference to the state of the market at the relevant time.

Finally, on the subject of Mr Hurlburt’s evidence I note that, in answer to a question why he had not relied on a sale used by another appraiser, Mr Hurlburt said, “This one is quite low and I certainly was not looking for low side sales”. I should have thought that a truly objective analysis would require that consideration be given initially to all sales, whether high or low, and that there would follow a sorting out process designed to reject from final consideration only those which, for some reason other than price paid, are found to be poor indicators of the market value of the subject.

Mr Bamber’s approach to the task of choosing comparables appeared, at first blush, to be logical. He divided sales into three groups:

(a) those which took place before the annexation announcement;

(b) those which took place after and were sales of land inside the new City boundaries; and

(c) those which took place after and were of land outside those boundaries.

He relied principally on the third group.

Mr Bamber’s approach was, as I see it, sound having regard to the onset and disappearance of major influences on the market for land during the period leading up to V-Day. However, Mr Bamber was unable to demonstrate that when adjustments were made for time to reflect the general rise in the market his three categories each showed a distinct price pattern. The explanation may be that historically in Edmonton developers control the path of development. In was Mr Shaske’s view that, due to such control, lands outside the City boundaries might conceivably have as great a value as lands inside those boundaries and that demand and serviceability count when the value of lands with development potential is in question. The explanation may also rest upon the unsoundness of the premise implicit in the time adjustments which were made that the general increase was consistent rather than irregular. There may be yet another explanation for Mr Bamber’s inability to establish a correlation between prices and categories. The confusion caused by the uncertainties as to annexation and the land banking activities may have disappeared by V-Day, but projections made forward to V-Day of values based on sales made during the period of confusion would still tend to reflect that confusion.

Mr Shaske relied on five sales. The first was of 147 acres lying three- quarters of a mile to the north and a short distance to the west of the appellant’s land. The sale took place two years before V-Day and six months before the boundary announcement. The sale price was $1,800 per acre. Mr Shaske made a forty-six per cent upward adjustment for time, a fifteen per cent downward adjustment for location and arrived at an adjusted price of $2,234. The very large adjustment for time may be warranted but, generally speaking, where adjustments of this magnitude must be made the directness of the comparison tends to be questionable. The adjustment for location appears to be insufficient. The property was so located in relation to then existing development that even before the boundary announcement the likelihood of its inclusion in the next round of expansion was substantial.

The other four sales upon which Mr Shaske relied were located in an industrial area about a mile and one-half to the north of the appellant’s land. I have reservations as to their comparability. They were located in an area which afforded, I think, a more immediate potential for non-agricultural use than the appellant’s land. One of them (Indicator #3) was conditional upon the vendor securing rezoning permitting industrial use. Another (Indicator #5) was a sale to a purchaser seeking to add to an adjoining parcel which that purchaser already owned and which had buildings and railway tracks located on it. Yet another sale which Mr Shaske described as a good indication of value (Indicator #4) had buildings to which the purchaser attributed value and for which Mr Shaske made no adjustment.

In summary, I must observe that:

(a) although Mr Shaske’s experience and knowledge generally command respect for his opinion, the conclusions reached by him in this case is not plainly supported by the sales on which he relied; and

(b) the nature of the differences between the last four comparables and the appellant’s land suggests that Mr Shaske overestimated the value of the appellant’s land.

Mr Bamber’s five comparables all fell in the category of sales made of land located outside the new City boundaries after the announcement of those boundaries. The first of those sales and the one upon which Mr Bamber placed most reliance was his Index #20.The appellant called the vendor in that sale to give evidence. That evidence established that the sale took place as a result of the exercise of an option entered into on September 26, 1969. Thus, the price paid was not, as Mr Bamber thought, indicative of value as established by a sale made on December 20, 1971. I might observe that Mr Bamber can have made no great effort to contact the vendor to learn the circumstances of the sale. At the time of his report the vendor could readily have been found by simple recourse to the telephone book.

Mr Bamber’s Indexes #21 and #22 were located one-quarter mile to the west and one-half mile to the south of the appellant’s land. The sales were made in April and August of 1971 for $700 and $750 per acre respectively. Mr Hurlburt testified that the lands in question were on the south side of Ellerslie Road and that Ellerslie Road was regarded as the south limit of what anyone would agree was the area of interest for possible annexation. In my mind the two sales are useful only in that they make it obvious that the value of the appellant’s land was greater than $750 per acre.

Were it not for two factors, Mr Bamber’s Index #23 would have considerable weight because it was a sale of the quarter section lying immediately to the north of the appellant’s land. The first differentiating factor is time. The sale took place two years after V-Day. The price per acre was $2,500 and a large ($1,250) downward adjustment for time was made by Mr Bamber. In this regard I reiterate the remark which I made previously with respect to Mr Shaske’s first comparable. Where an adjustment of that relative magnitude is required comparability is slight. The second factor was doubt whether, having regard to the vendor’s age and illness and to the experience of the purchaser (which was a real estate firm), the bargain could be said to have been one made between equals.

The remaining two sales on which Mr Bamber placed specific reliance were of industrial land located to the north of the appellant’s property. Values there and in the area of the appellant’s quarter section may have been similar, but there was no evidentiary basis laid down for a conclusion that such was the case. I have difficulty concluding that farmland which is seen to have potential for urban development at some quite possibly remote future time can readily be compared with land in an industrial area having more immediate potential for industrial use.

In summary, both Messrs Shaske and Bamber had difficulty in finding close comparables. On an overall view of the evidence it appears to me that Mr Shaske overestimated the addition to farmland value resulting from the potential which the appellant’s land had for inclusion in the next round of Municipal expansion. Mr Mamber, as I see it, erred to approximately the same extent in the opposite direction. Unscientific though the process may be, the best conclusion which I am able to reach on a review of all the evidence is that the fair market value of the appellant’s land lay midway between the two extremes. I will therefore allow the appeal from the assessment for 1974 and refer that assessment back to the respondent fo reconsideration and reassessment on the basis that the fair market value of the appellant’s land on V-Day was $51,750. No relief was sought in respect of the 1975 assessment from which an appeal was also brought. That appeal will therefore be dismissed.

Appeal allowed.