Jean Forest v. Minister of National Revenue, [1982] CTC 2524, 82 DTC 1561

D E Taylor [TRANSLATION]:—This appeal, heard in the city of Montreal, Quebec on November 19, 1980, was brought as a result of the Minister of National Revenue’s income tax assessments for 1973, 1974 and 1975, in which he relied on the fact that on December 31, 1971, the fair market value of the appellant’s land was three cents ($0.03) per square foot. The appellant stated in his tax returns that the fair market value was nine cents ($0.09) per square foot. The notice of appeal reads in part as follows:

— On December 31, 1971, during the years on appeal and even today, the appellant was and still is a farmer.

— On December 31, 1971, during the years on appeal and even today, the appellant was and still is the owner of a property located in the town of Mascouche, which he had acquired from his father on June 11, 1963.

— Long before December 31, 1971, the town of Mascouche had experienced, and was still experiencing during the years on appeal, a substantial amount of property development.

— On December 31, 1971, such development was occurring on land adjacent to the appellant’s land.

— During the years on appeal, various sales of parcels of land were made by the appellant.

— By notices of assessment issued on January 20, 1977, the respondent assessed a capital gain for the years on appeal, relying on the fact that the fair market value of the appellant’s land on December 31, 1971 was three cents ($0.03) per square foot.

— On June 23, 1977, the appellant filed notices of objection to the said assessments.

— To lend support to his notices of objection, the appellant asked Les Estimateurs Professionnels Leroux, Beaudry, Picard et Associés Inc to prepare an appraisal of his land, dated December 31, 1971.

— The said report established that the value of the said land was nine cents ($0.09) per square foot.

In his reply to the notice of appeal, the respondent states:

— Pursuant to agreements of sale between the purchaser and the appellant in 1973, the latter sold various parcels of land in 1973, 1974 and 1975;

— the sale price for the various properties had been agreed to between the parties in 1973 when the agreements of sale were signed;

— as a result of the sales of these properties, the appellant reported the following amounts as Capital gains:

Statement of sale of capital property 1973
Sale of 70,872 sq ft at 8¢ per sq ft	$ 5,669.76
Value on 31/12/71: .0772 per sq ft		5,315.40
Capital gain	$	354.36
Statement of sale of capital property 1974
Sale of 55,449 sq ft at 8¢ per sq ft	$44,279.92
Value on 31/12/71: .0772 per sq ft	41,512.42
Capital gain	$ 2,767.50
Statement of sale of capital property 1975
First sale
Sale of 321,685 sq ft at 80 per sq ft	$25,734.80
Value on 31/12/71: .0772 per sq ft	24,126.37
Capital gain	$ 1,608.43
Second sale
Sale of 30,165 sq ft	$ 3,000.00
Value on 31/12/71: .0772 per sq ft		2,262.00
Capital gain	$	738.00
Total Capital Gain	$ 2,346.43

— the respondent appraised the said properties in order to determine their value on December 31, 1971 and valued them at .02770 per sq ft;

— accordingly, by assessments dated July 7, 1978, the respondent established the following amounts as capital gains:

1973
Proceeds of disposition	$ 5,669.76
Adjusted cost basis (.02770 per sq ft)	1,963.15
Revised capital gain	$ 3,706.61
1974
Proceeds of disposition	$44,279.92
Adjusted cost basis (.02770 per sq ft)	15,330.54
Revised capital gain	$28,949.38
1975
Proceeds of disposition	$28,734.80
Adjusted cost basis (.02770 per sq ft)	9,746.24
Revised capital gain	$18,988.56

Contentions

For the appellant:

— The respondent’s appraisal is unacceptable, because it does not take into account the special location of the appellant’s property.

— The appraisal by Les Estimateurs Professionnels Leroux, Beaudry, Picard & Associés Inc, a copy of which is attached as an integral part hereof, is the only fair appraisal in the circumstances.

For the respondent:

— The burden of showing that the respondent’s appraisal is incorrect rests on the appellant.

The appellant was unable to show that the property should not be valued at .02770 per sq ft.

The respondent appraised the said properties correctly and in accordance with accepted appraisal procedures.

Evidence

The appellant himself submitted as Exhibit A-1 the following letter signed by Mr Jean N Picard and dated February 17, 1982:

Les Estimateurs Professionnels, Leroux, Beaudry, Picard & Associés Inc

Montreal

February 17, 1972

Mr Jean Forest

1,323 Avenue St-Jean

St-Henri de Mascouche

Comté Assomption, Quebec

Dear Sir:

Further to your request, we have appraised a portion of your property, known and designated as part of lot No 482 of the official Cadastral survey of the parish of St-Henri de Mascouche, registration division of Assomption.

A title search has indicated that this property was acquired from Mr Eugene Forest by a deed of sale concluded on June 11, 1963 in the presence of Mr Joseph Alphonse Duval, Notary, and registered as No 104,716.

This property is bounded in front, on the south-east, by rue St-Jean; in the rear, on the north-east, by Rivière St-Jean Baptiste; on the north-east side, by lot No 483; and on the other, the south-west side, by subdivisions of property No 481, by parts of lot No 481, by lot No 756, and by lot No 749-38.

This more or less rectangular piece of property has a width of approximately three arpents and a depth of approximately thirty-three arpents, giving an approximate area of 99 square arpents.

In determining the value of this property, we assumed that the usual municipal services would be installed and took note of the fact that it is located in an area which is likely to be developed in the near future, since development of the adjacent property is already quite advanced.

In calculating the value of the property, we assumed that the land could be used for a single-family, residential, “bungalow”-type development. The average area of a lot would be 6,500 sq ft. The average unit price of each lot would be $0.15 per square foot.

The period for sale is three years.

After taking into consideration outlays for taxes, subdivision costs, sales costs, promotion and administration, and after calculating the “In Wood” factor on the basis of an 8 per cent interest rate for a three-year period, we obtained a unit price of $2,760 per arpent.

Since the total area of the property appraised was 99 arpents, we arrived at a total figure of $273,250.

We certify that this amount represents the current, correct and reasonable value of the portion of property valued on December 15, 1971.

We have prepared this report to the best of our knowledge, and sign it in good faith, this seventeenth day of February, 1972.

Yours truly,

After speaking with his accountant early in 1972, Mr Forest asked Mr Picard for the opinion quoted above. Mr Forest provided some documentation concerning subdivision and sale contracts affecting his property. The two counsel laid stress on this fact, further details of which will be provided below.

Mr Jean Picard vouched for and explained his own appraisal report dated December 3, 1976, based on his previous letter, Exhibit A-1. His conclusion was that the land was worth $318,159 or nine cents ($0.09) per square foot. Mr Picard was knowledgeable and experienced in the appraisal and sale of real estate in the Mascouche area.

On behalf of the Minister, Mr Pierre Ouellette presented the chief evidence, consisting of an appraisal report as detailed and comprehensive as Mr Picard’s and dated December 28, 1977. It proposed a Valuation Day value of $80,000 or .0277¢ per square foot.

Argument

For the appellant:

As the applicant stated in his testimony, on the advice of his accountant, he asked Les Estimateurs Professionnels Leroux, Beaudry, Picard et Associés to appraise his property. The reasons which led the applicant to take this step were twofold. Some time ago, he had been approached by a Mr Gaudreau, who had interests in Constructions Québécoises Inc and in Gaudreau Constructions Inc. Mr Gaudreau was already trying to purchase the applicant’s property at that time. The latter was well aware that his land had acquired a potential non-farming use. Unsure of the value of his land for non-farming purposes and unwilling to trust his own judgment in this regard, he turned to experts, who valued the said land on December-15, 1971. Unlike the respondent’s appraisal report, this one was not made seven years after “V” Day. Needless to say, an appraisal made at the time is more likely to be accurate than one made after the fact. Who would be in a better position to know the value of property in 1981 than those who valued it in 1981? It is obvious that this principle is equally valid for 1971.

As the applicant explained, he did not need experts to appraise his property for farm use; this was no problem for him since he had farmed and lived on this land all his life. He needed an expert opinion because he had become convinced that his land was good for something besides agriculture. This conviction was based on the fact that the land immediately adjacent to his was being developed by the same people who wished to purchase his own land.

The second reason why the applicant called on the services of experts was that he had learned from his accountant that the new Income Tax Act would come into force on December 31, 1971 and would, when the property was disposed of, tax any capital gain arising from an increase in its value since December 31, 1971. By asking expert appraisers to establish the fair market value of his land on December 31, 1971, he did what all professionals involved in tax matters were recommending to their clients at the time. This was a wise and prudent action, a precaution unfortunately taken by too few taxpayers.

This appraisal was submitted by the applicant as Exhibit A-1. It indicates the fair market value as $2,700 per arpent or 7.5$ per square foot. When Mr Gaudreau approached the applicant, offering 5¢ per square foot, this offer was of course refused. It was refused for the simple reason that Mr Forest was a farmer, making a good living from land. For him to sell it, he would have to get a price that would enable him to improve his standard of living or at least maintain it.

After several meetings, the applicant and Mr Gaudreau made an agreement, a copy of which was filed as Exhibit A-2. This agreement is dated May 26, 1972, only a few months after “V” Day. It must also be remembered that negotiations for the sale of the said land began in 1971 and the prices agreed to in the May 26, 1972 agreement are the result of these negotiations. There is not the slightest reason to assume that Mr Forest would have accepted anything less on December 31, 1971 than what he did accept on May 26, 1972 and, in this sense, the prices stipulated in the agreement are rightfully and for all purposes those applicable at December 31, 1971.

This agreement is an accepted purchase offer; it includes several aspects which should not be overlooked. The first is that the purchaser making the offer was one of the companies of Mr Gaudreau, the same man who had been trying to negotiate this sale since July 1971. Constructions Québécoises Inc is also the company that with Gaudreau Constructions Inc built houses on the property adjacent to the applicant’s. While under construction, these houses were visible to the applicant every day, whenever he looked out the windows of his own home or was working in the fields. The houses on the land next door are real and visible; they are not imaginary or planned. They were in existence on December 31, 1971; the die had already been cast.

The appellant would like to persuade the Court that in 1971 he would never have sold his land for farm use. Today, the applicant is forty-nine years old; in December 1971, he was forty — in his prime, living in the same house where he had spent his childhood and farming the land that had belonged to his father. Why would he have wanted to sell that land for farm use? If the land was to be farmed, he and no one else would farm it. However, he would have agreed to sell this land to anyone who could pay him a good price for it. Such a price could not be offered by someone planning to farm on it, only by someone who wanted to build on it.

The purchase offer of May 26, 1972 shows that the applicant was offering for sale not one but three parcels of land, the first two of which were described in terms of lots to appear on an as yet unprepared subdivision plan.

The applicant was aware of the economic value and potential of his land. He knew that it had acquired a potential use other than farming. He even asked expert appraisers to estimate the value of his land. The applicant was not unaware therefore of the economic value and potential of his land. He called on professional assistance for guidance on this subject. To claim now that he would, of his own free will, have agreed to sell this property at 2.7¢ a square foot is to fail to take into consideration all the special factors in this case. Too much theorizing leads to loss of contact with reality. The applicant humbly submits that the respondent is in the process of committing this error.

The respondent’s appraisal report attaches considerable importance to the sale price of various properties located outside the zone of influence in which the appellant’s land is situated. On the basis of five sales, it is impossible to claim knowledge of the fair market value of the appellant’s land. The sample is too narrow to be a reliable indicator. Who can tell the Board whether, of the five sales considered by the respondent, the vendors had taken the trouble to have their property valued by expert appraisers? Who will tell us the age of the farmers who sold their property or the state of their health? Who will tell us if they had sons to take over from them? Who will describe their financial situation for us? Who will tell us if their land was fertile and well irrigated? — and so on. The sample was limited to five sales and each of them could have been influenced by one or other of the factors mentioned above. If the respondent had based his appraisal on ten, fifteen or twenty sales, the chances that each of them might have been influenced or determined by factors limiting the vendor’s free will would have been greatly reduced.

The respondent’s counsel tried to discredit the appellant’s appraisal report. However, Mr Picard gave good reasons for rejecting the “market data” method in favour of the “anticipated subdivision” method. The lack of sales comparable to the subject land convinced Mr Picard that he had to choose the anticipated subdivision method. No land in the Mascouche area was adjacent to land being developed; no land was adjacent to streets which were going to be extended over it. The appellant’s land was a unique case, and Mr Picard chose to treat it as such.

We would like to remind the Board that the respondent’s expert used the “anticipated subdivision” method in his report “for purposes of corroboration”.

The following precedents were cited:

Brome Land and Housing Corporation v The Honourable Attorney-General of the Province of Québec and the Honourable Minister of Roads of the Province of Québec, (a decision of the Régie des Services Publics of the province of Quebec, handed down on May 4, 1973);

La Commission Scolaire Régionale des Deux-Montagnes et Léo Dorion, (a decision of the Régie des Services Publics of the province of Quebec, handed down on July 19, 1973).

For the respondent:

in light of his report and his testimony before this Board, it appears that Mr Picard appraised the subject property as a whole. Mr Picard assumed that the highest and best use of the subject property is as a single-family residential development for the property as a whole and commercial development for the lots facing on rue St-Jean. The respondent respectfully submits that the evidence showed that the subject property did not lend itself to an overall appraisal because of its physical characteristics and its short- and medium-term development potential.

At that time, it was not the town of Mascouche’s intention to extend municipal services in that direction; as a matter of fact, they intended to extend such services to the property opposite lot No 481, along the hydro lines. Mr Pierre Ouellette testified that he had been in touch with Mr Malouin, Mascouche town secretary, who he said had confirmed Mr Letendre’s statement. Moreover, it should be noted that, in 1981, at the present time, municipal services have been installed only along the cliff located on the subject property. Beyond the cliff, there are apparently some forty arpents not yet reached by the municipal services.

The respondent respectfully submits that in appraising the subject property, the market data should not be overlooked, since there is no apparent reason to reject it, and that the comparison technique has always been recognized as the best appraisal method and should only be departed from in exceptional circumstances. After rejecting the comparison method, Mr Picard used the so-called anticipated development method of appraisal.

The respondent respectfully submits that the value of $80,000 was established on the basis of approved appraisal techniques which were correctly applied in the circumstances, and that the said value appears quite reasonable given the facts presented in evidence, namely the heavy competition, the lack of municipal services in the short term on more than half the subject property, and the general state of the market both on Valuation Day and thereafter.

The precedents cited included:

Charles Garbutt v MNR, [1980] CTC 2762; 80 DTC 1646;

John J Neder v The Queen, [1980] CTC 511; 80 DTC 6348;

George H Bouthiette and Léon Tétrault et Fils Inc v MNR, [1979] CTC 2567; 79 DTC 452;

Stanley M Smith and Donald K Campbell v MNR, 80 DTC 1185;

Karam v National Capital Commission (1977), 16 NR, at pp 127 to 329.

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

Findings

From what I can see, the case in dispute is similar to Dr Lloyd Miller v MNR, [1978] CTC 2924; 78 DTC 1666. In this case, the Minister had rejected both the method used by the taxpayer and the results he obtained in trying to meet the requirements of section 26 of the Income Tax Application Rules, 1971, SC 1970-71-72, c 63 as amended. On Valuation Day, after meeting with his accountant, the appellant in the case at bar decided to obtain a written appraisal of the value of his property based on its potential for residential development and not on its long-term use as farmland. This opinion is indicated in Exhibit A-1. When his proposal was rejected by the Minister, he had to ask Mr Picard to prepare a complete and detailed report which he could use as the chief evidence at the hearing. Mr Picard personally testified in favour of his original proposal and his subsequent report. To a certain extent, Exhibit A-1 was supported by the subdivision and sales contracts, which were also entered in evidence.

I accept the comments by the respondent’s counsel that the appellant’s appraisal report has several weaknesses both in method and content. Given the price and the risk inherent in subdivisions and development, the estimated value of nine cents per square foot is overly optimistic, and the taxpayer’s claim that his property was “very exceptional” may be somewhat exaggerated. However, the taxpayer fulfilled his obligations, and there is no good reason for changing the 7.5 cents per square foot figure which he used to prepare his tax returns for the years on appeal. In this respect, the Minister’s appraisal report is too narrow and conservative in its approach, and cannot be used to supplant the procedure followed by Mr Forest.

Decision

The appeal ts allowed and the matter referred back to the respondent for re-examination and reassessment in accordance with the above Reasons for Judgment.

Appeal allowed.