Northern Garage and Holdings LTD v. Minister of National Revenue, [1982] CTC 2403, 82 DTC 1419

The Assistant Chairman:—In 1975 Northern Garage and Holdings Ltd (the appellant) sold a parcel of land situate in the City of Ottawa which it had owned for many years. The parcel was described municipally as #1025 Richmond Road and was located at the corner of Richmond Road and New Orchard Street. All parties agree that the selling price of the property was $1,000,000 and they also inferentially agree that, to determine the capital gain (there was no question that there was a capital loss on the sale or a trading profit) made by the appellant, the historical cost of the property is irrelevant. Both parties agree that, to determine the capital gain of the appellant, the V-Day value on December 31, 1971, must be ascertained but, unfortunately, the parties do not agree what that value is. As to the cost of disposition of the property, the respondent set the figure at an amount higher than that claimed by the appellant, with the result that there was no dispute as to cost of disposition.

The appellant, on its income tax return, showed the adjusted cost base of the property as $803,542, with outlays on disposition of $2,700, and a resultant gain of $193,758, of which $96,879 was taxable. The respondent was of the view that the fair market value on December 31, 1971, was not more than $363,000 which, after allowance for disposal costs of $6,242, produced a capital gain of $630,758. As to the market value approach, the appellant endeavoured to establish that that value would be $680,000 but its counsel also took the position that additional matters should also be considered which, when combined with the market value approach, would put the value at about the selling price. In the result, the issue was to ascertain the V-Day value of the property in question and then determine the quantum, if any, of the capital gain to the appellant.

To establish that value, counsel for the appellant called as witnesses Messrs R E Foster, John Fraser, D S King and C L Connelly. Mr Foster, at the time of the hearing, was retired but he had been a business and tax consultant in the City of Ottawa in the period 1944 to 1969 and had apparently done some work around 1962 for the appellant and its president, Cecil Connelly. Mr Fraser, when he gave his evidence, was the Sales Manager of the Carling Avenue branch of Canada Permanent Trust Company, had lived in Ottawa all his life (about 62 years) and had been engaged in buying and selling real estate since 1946, having received his real estate salesman’s licence about 1947. He later became a real estate broker. Mr King was a real estate appraiser and salesman with Canada Permanent Trust Company. He was a graduate of Bishop College and has had appraisal experience in Ontario and Quebec. Mr Connelly, as stated, was president of the appellant and he acquired the property about 1957. He and his wife were the sole shareholders of the appellant. Mr Connelly had personally lived in Ottawa since 1954.

The respondent’s evidence as to value was given by Mr P M Murphy. Mr Murphy was originally from Scotland and graduated in accounting in 1956 from a college in Glasgow. Form 1958 to 1960 he was a property assessor for the Department of Highways of the Province of Ontario and then from 1961 to 1974 he was an auditor and systems analyst with the Department of National Revenue, Taxation. In 1974 he became involved in real estate with the Department of National Revenue, Taxation and, while in that position and after having followed a course, he became a member of the Accredited Appraisers for the Canadian Institute. He was still in that work at the time he gave his evidence and his work was, broadly speaking, in the Ottawa area.

Prior to March 1962, Mr Foster made a study of the property of the appellant at the said corner of New Orchard Street and Richmond Road to decide, in his opinion, what would be the most profitable or satisfactory social use for it. In that consideration, surveys were made as to a nursing home as an adjunct to a large apartment building which would be designed to cater to senior citizens. A plan was developed for a nursing home and a proposed apartment building, which was not at that time permitted by the City of Ottawa by-laws. A second plan was later prepared changing the location of the apartment building. In the final result, an area at the corner of Richmond Road and New Orchard Street was sold to a third party prior to V-Day and is not an issue in this appeal. The nursing home was built on the property abutting the east side of New Orchard Street. Later, an apartment building was built on the property, the value of which is the subject matter of this appeal, by a person other than the vendor. In so far as Mr Foster was concerned the subject property had no improvements.

It should be noted that Mr Fraser lived not only in the general area of the west-end of Ottawa which encompassed the land in question, but as a matter of fact lived in one of the buildings which was used as a comparable. Mr Fraser was accepted as an expert in so far as making an appraisal of the property in question was concerned and was properly so accepted. It was his opinion that the value of the property as of December 31, 1971, was $680,000 and the highest and best use of the property would be for a high- rise apartment, with a ground floor commercial. It should be pointed out that both Mr Fraser and Mr Murphy considered the property to have a fine location. It was only when they came to value it that they differed substantially.

Generalizing I believe it is correct to say that both valuators, with one exception, considered this property to be at least equal in so far as location was concerned if not superior to all the comparables. Mr Murphy was of the view that one parcel, 29-35 McEwan Avenue, was in a better location. It was just south of what is known as the Parkway, a primarily scenic road covering the northwest side of Ottawa, and had to the north an unobstructed view of the Ottawa River. It was just north of Richmond Road, which provided good access to the centre of the City of Ottawa, and was close to an access to the Parkway as well as only a relatively short distance from the Queensway — a high speed highway through Ottawa, being a portion of Highway 417.

To reach his conclusion as to value, Mr Fraser considered sales relating to five parcels. With respect to one parcel, there were two purchases to acquire the parcel and one parcel was sold twice. Mr Murphy considered nine sales in total, but several were rejected by him for various reasons. Between the two valuators there were only three common parcels. A feature of the property which was stressed by Mr Fraser was the fact that no private building could be built in front of the property to block its river view and with a low-rise nursing home to the west, there would be an unobstructed view to the northwest. As to the McEwen Avenue property which Mr Murphy considered as being in a better location, Mr Fraser stated that the view easterly from the lower floors of the apartment later built on the site was obstructed by another apartment across the street. Mr Fraser, after considering all of his comparables, was of the view that the subject property had a value in excess of the price paid for any of the comparables. The comparables ranged from $3.06 to $10.17 per square foot and he estimated the market value of the subject property to be $6.75 per square foot.

The sale price at $10.17 per square foot in 1975 was the second sale of the same property. The first sale two years earlier was at $5.45 per square foot. In the opinion of Mr Fraser, the reason for the increase in price, at least in part if not substantially, was the fact that when the property was sold the second time there was a building permit issued for it which had been issued under the old building code which did not have the more stringent requirements which would have been called for if the building permit were issued after the second sale. Especially because of its proximity to the river frontage and its view, Mr Fraser was of the opinion that all his comparables were inferior to the subject property. Excluding the second sale of one lot, the highest price per square foot was $6.46 per square foot. While the sales which Mr Fraser considered extended over the period 1969 to 1975, he was of the view there was not much of a time factor involved as escalating values did not start until about the end of that period. this observation applied to apartment sites only, not residential development. While he was of the view that in 1971 the property had a value of $1,000,000, the selling price in 1975, Mr Fraser stated that he could not justify a higher figure than what he used based on the evidence from the other sales. One of Mr Fraser’s comparables (31 McEwen) sold in February 1972 for $4.29 per square foot and resold in October the same year for $6.46 per square foot. He was of the view that they both are indications of value but the later sale shows that the property was worth more than that reflected in the first sale. In connection with another lot, one sale in July of 1973 was at $5.45 a square foot while the second sale in February 1975 was at $10.17 per square foot. A large portion, if not all, of the increase was due to the fact that in the second transaction the purchaser bought a package, that is, there was a building permit already issued under the old by-laws and fire regulations which was a marked saving to the purchaser.

While Mr King was a real estate appraiser with the Canada Permanent Trust and while he stated that he had given expert opinions in the Supreme* Court of Ontario, he was not asked to give an expert opinion as to the value of the land on V-Day. The purpose of his evidence was to endeavour to differentiate between the value of land with an uninterrupted and protected view of the waterway and land with an interrupted view or no view. To this end Mr King made reference to a condominium townhouse development known as the Cantus development basically because of the similarity of units and the view. This development is about three quarters of a mile east of the subject property on Richmond Road. The land fronts on both Richmond Road and the Parkway. The condominium plan provided for 53 units, about 25 of which were along the Parkway and had an unobstructed view of the Ottawa River. In the main the other units faced Richmond Road and had no view of the river, or very little. From information gathered at the Ottawa Registry Office, Mr King gave the selling price of about thirteen units with the view of the river. Likewise he gave the selling price of about fifteen units which did not have a waterfront view. Generalizing, all sales took place in 1978 or 1979. In all cases, the units facing the waterfront sold at a greater price than those not so facing and the median difference was $15,000 per unit or between 20% and 24%. The selling price of the units facing the river ranged from about $77,000 to $85,000, while the selling price of the other units ranged from about $77,000 to $85,000, while the selling price of the other units ranged from about $59,000 to $66,000, with one at $69,000. He then continued that, assuming the increase in value of a unit was $10,000, since the costs to build are constant, the selling price of the unit would be say $60,000 rather than $50,000 which it would be if the unit did not have the view.

Mr Connelly, the president of the appellant, was a man of about 70 years of age at the time of the hearing. In Cobalt, Ontario, from 1924 to 1930 he, with his father, ran a dairy and also bought and sold real estate. From 1930 to 1935, while living in New Liskeard, Ontario, he sold medicine and extracts to farmers. From 1935 to 1940 he was in the wholesale petroleum business. From 1940 to 1961 he was in the automobile business and bought the land on which he operated the car business. At one time in this period he and his two brothers had General Motors dealerships in New Liskeard, Haileybury and Ottawa. He bought the land for the Ottawa dealership when he first came to Ottawa and sold it in 1961 at a price of $4.50 per square foot. That property, before it was sold, was owned by the appellant. At all times he or he and his wife owned all the shares of the appellant. The subject property was what he had left after he sold his dealership. He thought of building a dealership there but General Motors said no. So, in 1959 he sold part of the property to Chrysler and had Mr Foster prepare a study of the balance. A nursing home was recommended for a portion of the property and he sold a portion of the property to his son who built it. It was built north of the remaining subject property and low so that the remaining property facing the river would have a good view. The nursing home was such that it did not block the view. The negotiations concerning the sale of the subject property commenced in the summer of 1974, with the agreement being signed in January 1975. Like all others who gave evidence, Mr Connelly stressed the importance of the view north from the subject property, the access to the Ottawa River and the proximity to the landscaped property of the National Capital Commission. He stated that the Parkway had been established in 1971 — the sewers, the zoning for the area, etc. Things of concern between 1971 and 1975 were capital gains tax, rent control and the talk of a land speculation tax in Ontario. Many pictures taken of the area around the present building were filed as exhibits. However, as Mr Connelly stated, when he sold the property in question there was no building on the property. The area was considerably different at the time of hearing (with its high-rise apartments) from the area in 1971.

Mr Murphy, the appraiser for the respondent, concluded that the fair market value of the property on December 31, 1971, was $363,000. To reach this conclusion he used the market value approach. He looked at as many properties as he could find in the neighbourhood to reach his conclusion. In considering the date of sale, Mr Murphy did not ascertain the date of the Agreement for Sale behind the Deed to fix the real date of an enforceable agreement, nor did he ascertain the particulars of the mortgage on a comparable sale to decide what effect, if any, this would have on the consideration. Considerable time was spent on cross-examining Mr Murphy and, while some points were made, I do think that the decision must be made on salient features.

Counsel for the appellant took the position that, as he saw it, the fair market value of the property was, at the least, the figure used by Mr Fraser, namely, $680,000, but in reality he submitted that the fair market value was that submitted by Mr Connelly, $1,000,000. Mr King, although he gave evidence as to how one could compute the selling price of certain property in certain conditions, did not endeavour to value the property in question. As to Mr Connelly, his evidence was that in 1971 he would not sell the property for $1,000,000. However, he did sell it for that price in 1975. He continued that when he did sell, rather than the price having gone up from 1971, because of market conditions the price was depressed. The change in market conditions resulted from the threat of rent controls, capital gains tax, decentralization of government from the Ottawa area, and the increase in interest rates, etc. For many years Mr Connelly had been a successful businessman and had lived in Ottawa since 1954. However I do believe that, even though he is also astute enough to have competent advisers when buying or selling real estate and would not rely solely on his own judgment. I respect Mr Connelly’s opinion but, one must realize that, in the circumstances, it would appear that no one would be less objective in considering the fair market value than Mr Connelly.

In the result, my consideration comes down to a decision as to which of the two valuators’ opinions I prefer or, if I do not prefer either one over the other, what figure I find to be the fair market value.

Reference by counsel for the respondent was made as to the onus on the appellant to destroy the Minister’s assessment. I have no hesitation in saying that, in this appeal, I have clear evidence on behalf of the appellant which, if accepted, would satisfy the onus resting on the appellant and permit me to allow the appeal and return it to the Minister for the appropriate variation. As I view the appeal at this stage, there is no onus to be met unless I reject in its entirety the evidence of Mr Fraser. Of course, should I do that I would have, in effect, no evidence before me on behalf of the appellant.

Counsel for the appellant in effect centred his whole argument on the qualifications and experience of the two valuators. In so doing he made reference to cases in the Supreme Court, Federal Court and this Board. His first reference was to the Reasons for Judgment of Mr Justice Cattanach in the case of James et al v CNR Co, [1965] Ex CR 71 at 76:

I must also make some general comment with reference to the real estate experts. My understanding is that a person qualifies to express an opinion as an expert on land values by having had experience operating in the market as a broker or dealer. By reason of that experience, he is in a position to express an opinion as an “expert” as to what buyers would have paid for the expropriated property at the time of expropriation and as to what sellers would have sold the expropriated property for at that time. Without that experience, I should not have thought that a witness has any status to be expressing such opinions as an expert or otherwise. In this case, the evidence as to the qualifications of the experts has emphasized the academic training and the experience of the witness as a valuator or appraiser and has minimized his practical experience in the market. Indeed, in one instance, the witness did not claim any such experience.

He also quoted from the case of William Yurkiw v MNR, [1978] CTC 3054; 78 DTC 1768, a decision of my colleague Mr Bonner, as follows:

On the other hand the determination of the price which would have been paid had a hypothetical sale taken place is something which is not capable of absolutely precise determination. I am therefore inclined to rely on the conclusion reached by Mr Farstad. He gave his evidence in an objective manner and did not show the tedency sometimes found in expert witesses to overstate the case of the party calling him. Without giving unnecessary details, Mr Farstad could fairly be described as a person with extensive experience as an advisor in the day-to-day dealings of land developers, and thus as a person whose conclusions are likely to be reliable.

Who was the appellant’s valuator? He was a man who had been in the real estate business both as a salesman and as a broker for some 34 years in the City of Ottawa. He had lived in Ottawa all his life. He was knowledgeable and his experience had been in the market, which is the type of experience which Mr Justice Cattanach stated is needed “to express an opinion as an expert on land values”. Counsel did not say that I should compare Mr Murphy’s qualifications with Mr Fraser’s, but rather he said — contrast them. He continued that certainly Mr Murphy had the academic qualifications to be a valuator, but queried what other qualifications he had. Mr Murphy had been a property assessor for the Ontario Department of Highways for the years 1958 to 1960 and then in 1961 he came to the Department of National Revenue, Taxation, as an auditor and systems analyst until 1974, and around 1974 became a qualified appraiser with the Department. He had no experience in the market place. Counsel continued that he was not even a valuator in 1971 — the year for which he was valuing the property.

I cannot see this as any obstacle to Mr Murphy being qualified. No case to which I have been referred has stated that to be a qualified valuator you must have been one at the time for which the valuation is being made. In this respect, and purely as an observation, if a V-Day valuation case came up let us say in 2020 to 2050 (and I presume it is possible), if there were such a requirement, I wonder who would be alive to satisfy that requirement.

Counsel did not say that I should reject the evidence of Mr Murphy as he was not qualified, but rather that I consider the weight to be given to his evidence.

I agree with this approach, however, I must say that the fact that one valuator has 34 years’ experience while the other valuator has, let us say, only two certainly does not mean that the one with the greater experience is correct.

Counsel for the respondent, after saying that Mr Connelly’s opinion should be rejected (which I have done), said each comparable should be considered. He stressed that the appellant’s witnesses on the whole emphasized the importance of the view of the river. Effectively now the view to the north is very good, but only half of the apartments face north and the other half face south. In effect, he suggested I should not be unduly impressed with the uniqueness and view, being that if there is a good side from a panoramic point of view then it is quite likely there will be a poor side. He submitted that Mr Murphy was a qualified expert as he admitted Mr Fraser was and in effect submitted there was nothing wrong with Mr Murphy’s valuation.

Both valuators used the comparison sales approach to ascertain the value of the property. In considering the comparables both valuators, in three instances, used the same properties, but after that there were differences. Mr Fraser did not explain the nearly 50% increase in value between 1971 to 1975, nor did Mr Murphy explain the nearly 300% increase in value.

One can only conclude that, if the experts are reasonably accurate and Mr Connelly’s observations are equally accurate (rent control, capital gains tax, etc), it could be that the purchaser in 1975 was not a “knowledgeable purchaser”.

Neither valuator considered the $1,000,000 selling price for the property as a basis for determining the value. Mr Fraser, in considering his compar- ables, first of all stated that, while he was of the view that in 1971 the property in question had the value of its selling price, he could not justify that figure when he considered his data and his comparables and, likewise when he considered the two sales of the one property (31 McEwen), one in February 1972 and the other in October 1972, which latter price per square foot was about 50% higher than the price in February. Mr Murphy did not consider the second sale at all, his explanation being that the first sale is closer to V-Day. Mr Fraser concluded from the second sale that to him it was clear evidence that the property was worth more than was paid for it in the first sale. When one considers that only about eight months elapsed between the two sales and that Mr Fraser stated that escalating values did not start with respect to apartment sites until about the end of 1975, it seems like a very reasonable conclusion.

I do believe Mr Murphy was a competent and qualified valuator. However, I am of the view that Mr Fraser’s evidence is more convincing. I cannot see, on reading the transcript of their evidence, where either one has been shown to have made a flagrant error in making his determination. However, I do feel the evidence of Mr Fraser, because of his experience as a salesman and a broker as well as a resident of that general area of Ottawa, convinces me that I should accept his valuation and I do.

The result is that judgment will go allowing the appeal and remitting the assessments to the Minister for variation to determine the taxable capital gain of the appellant on the basis that the fair market value of the property in question on V-Day was the sum of $680,000.

In passing I would like to make a comment with respect to the exchanging of valuation reports between counsel well in advance of the hearing. There is no requirement in the Tax Review Board Act or in the Rules of the Board compelling the parties to exchange reports, however, I do believe it is quite possible that, if they were exchanged, some appeals would never come to the Board. In any event, I am sure that, even if the cases were not settled before the hearing of the appeal, the hearing would be shortened and the cross-examination much more pointed and thereby more informative to the presiding member. As I have said, there is no requirement that valuation reports must be exchanged, but I suggest it would be to everyone’s advantage if they were.

Appeal allowed.