Fambau LTD v. Minister of National Revenue, [1982] CTC 2228, 82 DTC 1239

D E Taylor:—Reference is made to the determination of a motion regarding the qualification of an expert witness in this matter. The adjourned hearing was completed on March 2, 1982. The property in question consists of two parcels in Kitchener, Ontario, municipally known as 215-237 King Street East (Parcel “A”), and 253 King Street East (Parcel “B”). The context of the appeal is evident from the pleadings filed by the appellant:

— In 1977 Fambeau Limited sold the properties for a total consideration of $622,750.

— The company estimated that the aggregate value of these properties as at December 31, 1971 was $650,000. This value was based on an appraisal report prepared by Mr William F Hess dated February 17, 1972. This figure was also used by the company as the adjusted cost value of the property for its tax return in the year of the disposition.

— The T2 Corporate Income Tax Return for the 1977 taxation year included a capital loss of $967 with respect to the disposition of the King Street East properties. The calculation of the capital loss incorporated the Valuation Day values of the properties based on Mr Hess’ report as noted above.

— In early March, 1979 Revenue Canada indicated that it was their opinion that the Valuation Day value of the properties was $284,500. After some discussion with them they forwarded to us a letter dated March 30, 1979 (copy attached) which sets out the comparisons used in arriving at their Valuation Day value of the properties.

— The company obtained an additional appraisal of the properties at December 31, 1970 prepared by Mr W H Reimer, AACI. The appraisal, dated May 14, 1979, includes a comprehensive study of similar properties and indicates a fair market value of the King Street East properties at December 31, 1971 of $499,500. A copy of this report has been forwarded to Revenue Canada.

— On July 7, 1980, Mr A B Tonin, AACI of the Kitchener District Taxation Office of Revenue Canada prepared a narrative appraisal of the properties at December 31, 1971 for the Appeal Division. This report indicates a fair market value of the properties as of December 31, 1971 of $275,500. A copy of this report has been provided to the taxpayer.

— On October 10, 1980 Revenue Canada issued form T2008A “Notice of Confirmation by the Minister” stating that the fair market value on Valuation Day of the properties was no greater than $284,500.

The valuation reports noted above were filed with the Board, the authors (Mr Reimer and Mr Tonin respectively) were examined by counsel, and their individual conclusions reviewed. Mr Abram Wiebe, retired president of Fambau, also gave testimony regarding his acquisition of the property, his efforts and listings to sell it, and about the events occurring on or about June 25, 1971, at which time a development hereinafter referred to as “Market Square” was announced by a consortium known as Oxlea-Eaton. Market Square was precisely that which its name implies, the commercial development of an entire downtown block in Kitchener, the head tenant of which was T Eaton Co. The “Market Square” development was announced publicly on June 25, 1971, and it was the evidence of both Mr Reimer and Mr Wiebe that the announcement came as a great shock not only to them, but to virtually the entire community. This was the situation, even though both of these witnesses had been long-time residents of the area, and active on a daily basis in the real estate field most of their adult lives. Mr Tonin had not been exposed to the Kitchener real estate market in detail, and therefore had nothing to contribute on the public as opposed to private knowledge of the Market Square development before June 25, 1971. In a nutshell, it was the contention of the appellant that property values in the area adjacent to Market Square virtually exploded immediately following the announcement and that, for Mr Wiebe in particular, he was quickly aware he was sitting on a hot property. To him and to Mr Reimer, that was an obvious conclusion because the south-west corner of Market Square was only some 500 feet north and east (across King Street) from the subject property.Mr Tonin could not reach the same dramatic conclusion as a result of this proximity

— indeed he suggested that the drawing into one enormous development (Market Square) of such a great part of the downtown Kitchener commercial activity could well have had a debilitating effect on the surrounding, similarly available, property.

Two particularly important facts arose out of the testimony and evidence. First, the record of the real estate listing of the subject property as follows:

LISTING — SUBJECT

LISTING — 253 King Street East

Kitchener, Ontario

Size 58.87 x 180

It was therefore agreed by both parties that, as of June 30, 1971, the property was still available on the market for a total of some $318,000. It was the testimony of Mr Wiebe that he would not have sold even if he had received an offer between June 25 and June 30, 1971, but rather would have paid the real estate commission as a penalty. In any event, he did not get an offer. The second point was that one of the first, if not the very first parcel of property in Market Square, known as 146 King St East, had been optioned by the developers Oxlea-Eaton late in the year 1970 at $14.52 per square foot, and later acquired as part of the development. Obviously, 146 King Street East is within a few hundred yards of the subject property although on the opposite side of the street, in the core development square area. In many physical respects it is not dissimilar to the subject property. Both appraisers relied heavily on this sale in the preparation of the comparables — Mr Reimer after appraisal adjustments used it to provide a basis for assigning a value of $15.83 per square foot to the subject property at V-Day — December 31, 1971; whereas Mr Tonin, in assessing the same facts for 146 King Street East, assigned a comparable value of $7.94 per square foot to the subject property at V-Day. In simple terms, it was the view of Mr Reimer that at V-Day, the subject property although outside of the immediate development square, was of greater value than Eaton had paid for a key piece of property right in the development square, optioned about a year earlier; whereas Mr Tonin could not attribute anything to the Market Square development which would so dramatically enhance the value of the subject prop- erty over that for which it had been offered immediately prior to the announcement of the Oxlea-Eaton development. While both appraisers attempted in a very professional way to bolster up their respective but conflicting conclusions with reference to other local property sales which occurred from 1969 through 1973, it is evident to me that there were no sales that could be considered comparable or had any relevance to the value of the subject property as at V-Day. For record purposes, 146 King Street East sometimes referred to as the “Good” property (the names of the previous owners), is comparable No 4 in the report of Mr Reimer, and comparable No 5 in the report of Mr Tonin.) Accordingly, for the purposes of this appeal, the issue is very simple — what effect, if any, can be attributed to the value of the property by virtue of the Oxlea-Eaton announcement on June 25, 1971, based solely upon the fact that the developer had optioned a not dissimilar parcel of property in the development square area about one year before V-Day.

The respective arguments of counsel on this point were:

For the appellant:

Certainly there’s no evidence that the value was diminished after the announcement was made and I think it’s only reasonable to assume, and I think the Board is entitled to take judicial notice of the fact that when we have a substantial development contemplated by the Eaton/Oxlea Development, there is naturally a ripple effect. There is a kind of a . . . I don’t know what the word in English would be; the only word I can think of is in French which is “épanouissement” as a result of this kind of redevelopment in the downtown core. I think it can only have a positive effect and I think Mr. Tonin’s position that it had absolutely no effect whatsoever is simply incredible and, therefore, I think it completely — that kind of position — completely undermines whatever other testimony that he had to give in this particular case.

I think, as well, that Mr Tonin’s 50 per cent adjustment factor for location alone with respect to Comparable No 4 conceding, as he did, that the 50 per cent adjustment reflected in fact the factor of the announcement while, at the same time, he says that the announcement had no impact is totally and inherently inconsistent. I don’t see how you can make anything meaningful out of Mr Tonin’s testimony.

I think therefore, on balance, if one looks at the evidence and reviews Mr Reimer’s testimony, his explanations of his appraisal, the conclusion that he has reached is, as I have said, not an unreasonable one at the very least and at best a very reasonable one.

With respect to Comparable No 5 of Mr Reimer, and Mr Tonin’s No 4, in theory at least, assuming the secret was a well kept secret, the price paid as a result of exercise of the option did not reflect at all anything for the announcement itself. However, to the extent that one considers the motivation of the purchaser or the optionee — and I think that motivation is the same thing as saying there is a development coming and that motivation, I think, reflects itself in the optionee being prepared to live with the higher exercised price. So I think to some extent that, too, reasonably indicates, through the use of Mr Tonin’s Comparable 4, Mr Reimer’s Comparable No 5, that the usefulness of that particular transaction as an indicator of value with respect to the subject property, taking into account the ripple effect or impact of the announcement.

For the respondent:

Now, he (Mr Tonin) relies most highly, it would appear, on Sale No 5. That’s on page 5. Mr Reimer says he relied mostly on that and with some consideration being given to Sale No 6. Now, this is the Good property sale, No 5, which is right in the middle of the redevelopment area, right in the middle of the land assembly; a situation which Mr Reimer himself admitted was significant.

Mr Reimer accepted the principle that smaller properties sell for higher price per square foot normally yet the Good property is 6300 square feet compared to the smaller of the other two (subject properties) which is only 10,000 (square feet).

He made no location adjustment with respect to the Good property but he makes a 5 per cent location adjustment for the property that's situated right next door.

Now, if you recall, Mr Chairman, I feel it’s fair to say that Mr Reimer’s evidence was totally unsatisfactory. When cross-examined, with respect to that location adjustment, he refused to admit that it would be proper to make a location adjustment as between the Good property and the subject property. He refused to admit that the Good property was in the superior location and yet he makes a 5 per cent adjustment for the property right next door, No 6. It’s inconsistent.

Now, in-chief, Mr Reimer presented a very rosy picture of the situation subsequent to this Oxlea/Eaton announcement but the picture was quite different, with

respect, Mr Chairman, by the time cross-examination was finished and Mr Reimer admitted that the situation was not nearly so certain that this development was going to be going ahead as at first it was led to believe. There was a hue and cry among the citizens in Kitchener/Waterloo. There were objections. It was still before the Board at the end of December.

Mr Tonin tried to find evidence of the effect of the announcement of the Oxlea/Eaton development in the market. As a layman walking down the street, one

would anticipate — as my friend has submitted to you you should, you should take judicial notice of it — that a big, booming, brand new development is going to have some impact on the surrounding area. And what impact will it have? Well.

Mr Tonin looked for it. It didn’t. It didn’t have any impact. As a matter of fact, what he’s seen happen in situations such as this is that it pulls things into the square.

I have already indicated that this is not a situation in which there are comparable sales of relevant and relative value. To attempt a reconciliation of the views of the two appraisers with respect to properties other than the Good property (146 King Street East) would not have any significant effect on the final result of the appraisals. In my view there is not even any relationship betweren the $14.52 option price for 146 King Street East in December 1970 and the value of the subject property in December 1971. It is clear that 146 King Street East was critical to the Oxlea/Eaton Development — the subject property had no interest to the developer at either date. Oxlea/Eaton was simply not optioning a single parcel of property in downtown Kitchener for a purpose which could be served equally well by either the Good property or the subject property.

I am prepared to accept the evidence of Mr Wiebe that, as at December 31, 1971, he would not have sold the subject property for less than the $650,000 for which he had it appraised, and that he firmly believed Market Square would go ahead, notwithstanding the local opposition at the time. Nevertheless, even giving full credit to the testimony of Mr Wiebe, the other and equally important side of the equation was not there — while there could have been a willing seller at $650,000 (Mr Wiebe), there was no willing buyer. In fact, there is no evidence from the viewpoint of actual consummated sales that there were any buyers at all for similar property in that general area. There are only three possible conclusions to reach on a total review of the Oxlea/Eaton announcement — it had dramatic and heightening effect; it had depressing effect, or it had no effect on the subject property.

The evidence was not presented to show that the effect of the announcement was to escalate the value of the property to prospective purchasers — at least on or before December 31, 1971. Equally, there is no evidence that the announcement in June had a markedly deteriorating effect on the value of the subject property for the succeeding few months. Therefore, it seems logical to conclude that since no one “snapped up” the subject property during the period June 25 to June 30, 1971, when the real estate listing expired, it was still overvalued, and remained overvalued, for some time at an amount of $318,000. The value of $284,500 assigned to it by the Minister reflects this view and is therefore more acceptable than the $499,500 amount reached by the appellant.

The Board commends Mr Wiebe for having commissioned the Hess valuation report on the property in 1972, and that action does reflect the views expressed by the Board in L Miller v MNR, [1978] CTC 2924; 78 DTC 1666. However, the Hess report did not form part of the evidence made available to the Board and its simple existence does not provide support for the appellant’s cause. On the basis of the information provided to the Board, there is no reason to disturb the assessment of the Minister.

Decision

The appeal is dismissed.

Appeal dismissed.