Gerard Brunet v. Minister of National Revenue, [1982] CTC 2338, 82 DTC 1308

Guy Tremblay [TRANSLATION]:—The hearing of the evidence in this case at Montreal, Quebec began on September 18, 1979 and concluded on January 24 and 25, 1980. Following written pleadings, the case was taken under advisement on August 21, 1980.

1. Point at Issue

The question is whether the appellant is justified in treating the sum of $80,000, the price received for a piece of land sold to Taxis La Salle (1964) Inc, a company in which he is a shareholder, as the fair market value at December 27, 1973, the date on which the land was sold.

The respondent submitted that the fair value of the land is $21,500 at most. The difference of $58,500 was included in the appellant’s income for 1973 as a benefit conferred on a shareholder by the corporation.

The land in question is located in the parish of Ste-Anne-de-Sabrevois, county of Iberville, Quebec. Four hundred feet of the said land is bordered by the Richelieu River.

2. Burden of Proof

2.01 The appellant has the burden of showing that the assessment of the repondent is incorrect. This burden of proof results not from any single section of the Income Tax Act, but from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

2.02 The facts presumed by the respondent are described in paragraph 2 of the reply to the notice of appeal. They read as follows:

2. In assessing the appellant for the 1973 taxation year, the respondent relied, inter alia, on the following presumptions of fact:

(a) the appellant was a shareholder of Taxis La Salle (1964) Inc during the 1973 taxation year;

(b) the land purchased from the appellant by Taxis La Salle (1964) Inc on December 27, 1973 had a fair market value of $21,500 on that date;

(c) Taxis La Salle (1964) Inc thus conferred a benefit of $58,500 on its shareholder during the 1973 taxation year.

3. Facts

A. Preliminary Facts

3.01 The appellant, who was born in 1926, was at the time the case was heard president of Brunet, LaSalle Corporation, a holding company with about ten subsidiaries (Cie d’assurances la Concorde, les Plastiques Rockland, Taxis La Salle (1964) Inc, and others).

3.02 In 1964 he purchased the shares of the Association des Taxis La Salle for $1,156,000 and formed the company known as “Taxis La Salle (1964) Inc’. At that time the Association consisted of over 1,100 cars.

3.03 He worked as a waiter between 1952 and 1957, dealing in real estate part time. In 1957 he went into real estate full time, especially the purchase and development of land.

3.04 In the fall of 1962, the appellant bought the land the valuation of which is the subject of this proceeding for $15,000 ($5,000 cash and the balance at $1,000 per annum, at 6% interest — stated in a notarized contract on May 15, 1963, Exhibit A-1). This land is located along the Richelieu River (400 feet of frontage) in the parish of Ste-Anne-de-Sabrevois, county of Iberville, Quebec. Its area is 36.7 arpents, that is 1,349,467 square feet. It was lot 95 of the cadastral parish of Ste-Athanase. The land was subsequently subdivided by the appellant into building lots, including streets and a park, namely lots 95-1 to 95-136. The plan dates from November 1, 1962 and bears the signature of the surveyor Laurent Véronneau (Exhibit A-2). In August 1963, the appellant bought from Mr René Normandeau a right of way over the adjoining lot, namely lot 94-2 (Exhibit A-3), and a piece of land, lot 94-3. The latter piece of land, with 160 feet of frontage, was bounded on the west by the Richelieu River and on the south by lot 95-136.

3.05 The appellant stated that the purpose of buying the subject land was to develop it, that is to divide it into lots for residences and to sell it to taxi drivers so members of the Association could live near each other. In cross- examination, the appellant testified that from 1963 to 1973 51 of the total of 136 lots were sold. Of the 51 lots sold, only 11 have been built on (Trans Vol 1, pp 64 to 66). These sales make up a total area of 72,452 square feet, and in December 1973 a residue of 1,293,349.4 square feet remained.

In early 1962, the appellant bought another piece of land seven miles from the subject land (at Ste-Thérèse). He sold the 62 lots it contained in the space of one month.

Mr Brunet explained that though he did not sell all the subject land, this was because he only sold when someone came to him with an offer. In fact, he devoted no special effort to promoting the sale of his land. It was a period in which there were many other matters occupying his time.

3.06 The chief problem with this land is that every spring the Richelieu River floods half the purchased land for a period from one week (for the flooded area farthest away) to six weeks (for the part of the land closest to the Richelieu).

3.07 According to the appellant, in addition to the purchase price of $15,000 it cost him about $20,000 for various improvements and miscellaneous expenses, including surveying, the road built to the Richelieu with sand dust, improvements to the beach, which included the carriage of sand, deepening the Richelieu, the construction of a bridge, and demolition of a barn and a hen house.

Expert Reports

3.08 The expert reports by either party were prepared by chartered appraisers: that of the appellant, by Mr Roger Chouinard (24 years’ experience as an appraiser), was prepared to determine the value of the land at December 31, 1971 and not in connection with the assessment of the respondent. This report (Exhibit A-5) is accordingly dated November 18, 1974, over three years before the notice of reassessment appealed from was issued. The notice was in fact issued on December 15, 1977. The report concluded that the land was worth $87,500 on December 31, 1971.

3.09 The report of the respondent (Exhibit 1-3) was signed by Mr Pierre Ouellette and dated June 8, 1979. Mr Oullette at that time had four years’ experience as a chartered appraiser. His report concluded that the land was worth $21,500 at December 31, 1973. According to Mrs Liliane Hennessey, an appeals officer of the respondent, this report is the third prepared by employees of the Department of National Revenue. Mr Ouellette confirmed this statement. The first report concluded that the land was worth $31,000. Mr Ouellette even admitted that he consulted earlier reports, and in fact copied about ten pages of the second report where he agreed with its author, Mr Gilles Boilard. This report was done in January 1977. Mr Boilard also came to the conclusion that the subject land was worth $21,500 in December 1973. Mr Ouellette further admitted that he did not check Mr Boi- lard’s information regarding the level of the Richelieu River and accepted his data.

3.10 The fundamental difference between the two expert reports is that the appellant’s report considers the subject land as for sale in lots, that is by the square foot, whereas that of the respondent considers the subject land as for sale in bulk or by the arpent.

The two appraisers obviously chose transactions for comparison in accordance with this fundamental principle. As land is sold in bulk more cheaply than in lots, it is apparent that the two appraisers could not arrive at the same conclusions.

3.11 The reasons given by Mr Chouinard and Mr Ouellette to explain their positions in this regard are as follows:

— According to Mr Chouinard (for the appellant), for appraisal purposes the physical reality of the land must be taken into consideration:

At the present time, we must conclude, indeed we must accept the fact that it is a subdivided piece of land, that some lots have been sold, that land has been set aside for streets, that even fill work has been done in several places and gravel laid: at this stage we are no longer able to speak in terms of a hypothesis, it is now a reality. (Trans 1, p 140)

— Mr Chouinard further testified as follows to explain his position:

And we proceeded by examining comparable transactions, that is drawing comparisons with sales of land in the sector which we felt were comparable. What we regarded as comparable was in fact small lots, there were no large pieces of land of thirty or forty or fifty arpents to consider or even to use for comparison — absolutely none. We assumed that it was a subdivided piece of land and valued it as such.

Q Mr Chouinard, are you familiar with the theory of the “highest and best use”, in French “celui de la meilleure utilisation” ?

A Yes.

Q Is that the method you used?

A Of necessity, that is, in the sector, the sales we found and used for analysis are sales of land, or lots at least, which compare with the potential of the land under consideration, that is a subdivision; there is very little agricultural use on the land we are now considering; and in addition it is wooded, with some adult trees, the age of which is undoubtedly . . . at least thirty to forty years old, and to my knowledge it has not been cleared. The remainder of the land, that is the part located near highway, 7 may once have been farmed but I personally have never seen it under cultivation. I also took into account the fact that the right of way which Mr Brunet obtained for use as a future street, a boundary street, was a special advantage, because it made a larger number of lots salable. At that time it was the practice to say that, usually,half your land is given up in order to open a street, and the adjoining land does likewise, that is thirty-three feet on each side: in the present case, Mr Brunet gave up nothing at all, he negotiated for certain construction work and all that, but he gave up none of his usable land; he therefore kept or retained all his usable land and the portion which he had to give up for streets, for internal streets, is minute compared with current accepted practice. (Trans 1, pp 103, 104 and 105).

3.12 Mr Chouinard in his appraisal then considered various uses for three areas of land: lots along the river; the area in between these lots and those along the highway; and lots along the highway.

3.13 The comparable transactions chosen by Mr Chouinard are small lots generally located near the subject land.

3.14 Mr Ouellette (for the respondent) considered, however, that the subject land, though already subdivided, cannot be considered as land to which the Subdivision method should apply.

The subject land was divided into part A (unflooded area) and part B (flooded area).

On page 21 of his report, he stated:

The second part, B (50%), has no potential for subdivision unless the land is raised three to four feet. As this assumption is unworkable, there is no need for further discussion.

In theory, the best use of the site is residential, but the floods and the widely dispersed market require us to take a more limiting view, treating one-fourth of the area as usable, possibly in the long term one-half (part A).

3.15 The secretary of the municipality of Ste-Anne-de-Sabrevois for sixteen years explained that a retaining wall could be built along the Richelieu River, but water could still rise through ditches and could cover the lots unless the road and the land were raised.

3.16 Mr Gabriel Ménard, a witness for the respondent, testified that a Mr Laberge had raised the level of land not far from the subject land and sold it in lots.

4. Act — Case Law — Analysis

4.01 Act

Because of the assessment which has been issued, the sections of the Income Tax Act involved in the case at bar are subsections 15(1) and 245(2). They read as follows:

15. (1) Where in a taxation year

(a) a payment has been made by a corporation to a shareholder otherwise than pursuant to a bona fide business transaction,

(b) funds or property of a corporation have been appropriated in any manner whatever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation

otherwise than

(d) on the reduction of capital, the redemption of shares or the winding-up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 84, 88 or Part II applies,

(e) by the payment of a dividend, or

(f) by conferring on all holders of common shares of the capital stock of the corporation a right to buy additional common shares thereof,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

245. (1) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer’s income for the purpose of Part I,

(b) deemed to be a payment to a non-resident person to whcih Part XIII applies, or

(c) deemed to be a disposition by way of gift.

4.02 Case Law

The parties referred to the following theory and precedent in support of their respective arguments:

1. La Ville de Montréal v Le Parisien Théâtre, [1976] RL 257;

2. William Yurkiw v MNR, [1978] CTC 3054; 78 DTC 1768;

3. Gouin v Cité de St-Lambert, [1929] 67 CS 216;

4. The City of Saint John v Irving Oil Company Limited, [1966] SCR 581;

5. Kenneth A Brown v MNR, [1978] CTC 2447; 78 DTC 1333;

6. Canadian Pacific Railway Co v La Ville de Montréal, [1975] CA 121;

7. R W Johnston v MNR, [1947] CTC 258; 3 DTC 1182;

8. William Earl Laycock v HMQ, [1978] CTC 471; 78 DTC 6349;

9. Sun Life Assurance Co of Canada v The City of Montreal, [1950] SCR 220;

10. City of Saint-Laurent v Canadair Limited, [1978] 2 SCR 79;

11. Keith Wilson v MNR, [1978] CTC 2829; 78 DTC 1589;

12. Bourval Immeuble Ltée v Hydro-Québec, [1978] TE 100;

13. Estate of A M Collings Henderson v MNR; The Bank of New York v MNR, [1973] CTC 636; 73 DTC 5471;

14. National Capital Commission v Benjamin Marcus, [1969] 1 Ex CR 327;

Legal Theory

15. James H Boykin: “Developmental Method of Land Appraisal” — The Appraisal Journal, April 1976;

16. Evaluation de (’Emplacement et La Technique de Parité — Principes et Concepts généraux en évaluation foncière — Min des Aff municipales, Dir Générale de l’évaluation, Sept 1974;

17. Real Estate Appraising in Canada — 2nd edition 1972 (Appraisal Institute of Canada) — “Plan of the Appraisal”, p 52 and “Appraising Subdivisions”, p 87.

4.03 Analysis

4.03.1 The burden of proof rests with the appellant. Let us first consider the evidence presented by the appellant, without taking into account the evidence presented by the respondent. In view of the proven facts and the principles put forward in support of the expert report (paras 3.08, 3.11, 3.12 and 3.13), the Board must conclude that the appellant has shifted the burden of proof.

4.03.2 With regard to the respondent’s report, in view of the facts set forth in para 3.09 the Board must conclude that the objectivity of the said report is very seriously impaired.

The objectivity of an expert appraisal report of a Department of National Revenue employee is inherently difficult to assess. The expert witness is an employee of the Department and the report is generally made after the assessment has been issued.

In William Earl Laycock v HMQ, (supra), Smith, DJ of the Federal Court summarized at 475 the testimony of the appraiser on the matter of his objectivity:

Counsel for the Plaintiff objected to his expert evidence being admitted on the ground that he was an employee of the Government and of the Department of Government directly concerned with collecting income tax, and that consequently his report might be biased. On this issue the court was informed that departmental appraisers frequently made inspections and reports and gave evidence in court in support of the findings in their reports. Mr Caron outlined the procedure followed by the Department in cases of this kind. He stated that the normal practice, which was followed in this instance, was for a junior appraiser to make an inspection and report to the Department. If a further report was thought necessary a senior appraiser (in this instance himself) was directed, by means of a government form, to inspect the land and make a report with his estimate of its value. The senior appraiser was given no further instructions about the appraisal. He was not allowed to see the junior appraiser’s report or to talk to him. He said the purpose of the inspection was for him, as a professional appraiser, to arrive at an independent evaluation of the property.

The Board concurs with the comments made by counsel for the appellant in his argument following quotation of the above passage:

It was therefore admitted in this case, by a representative of the Department of National Revenue, that an appraiser who makes a second appraisal of the same land is not entitled to see or speak with the first appraiser. The purpose of this prohibition is clearly to ensure that the second appraiser will arrive at a completely independent conclusion, not influenced by another report on the same land. It was therefore admitted that the reading of a first report could influence the objectivity of an appraiser preparing a second.

At 476, Smith, DJ gives his decision on the point:

I decided that Mr Caron’s expert evidence should be admitted, but that careful consideration would be given to the question of possible bias, either conscious or unconscious. As his testimony proceeded, I was completely convinced that there was no conscious bias on his part. His statements and answers to questions, as also his attitude and the manner in which he gave evidence, left me with no doubt whatever about his integrity. His answers not only indicated thorough knowledge of what was involved, but impressed me as being completely frank, honest, objective and fair. The question of unconscious bias is naturally more difficult. I can say only that in nothing that he said or did and in nothing in his attitude did I find any indication that it might exist.

In the case at bar, it seems clear that the expert witness was influenced by the earlier reports.

Further, as regards the fundamental difference between the two expert reports (sale by subdivision or by arpent, para 3.10), the respondent’s report admitted that in theory “the best use of the site is residential, but the floods and the widely dispersed market require us to take a more limiting view, treating one-fourth of the area as usable, possibly in the long term one-half (part A)”, that is the unflooded portion.

With regard to part B (the unflooded portion), the expert witness Ouellette maintained that it “has no potential for subdivision unless the land is raised three to four feet. As this assumption is unworkable, there is no need for further discussion’’ (expert report I-3, p 21 — para 3.14).

However, Mr Ouellette testified that he had not ascertained the cost of raising the land. It was established that the lots owned by Mr Laberge not far from the subject land were raised successfully (para 3.16). Although certain arguments could be raised against the appellant’s hypothesis, the Board is of the opinion that it cannot regard the report of the respondent’s expert witness as rebutting that hypothesis, which is supported by the weight of the evidence.

5. Conclusion

The appeal is allowed and the matter referred back to the respondent for reassessment in accordance with the foregoing reasons for judgment.

Appeal allowed.