Hugh Wright Bevan v. Minister of National Revenue, [1982] CTC 2759, 82 DTC 1775

D E Taylor:—This is an appeal heard in Calgary, Alberta, on May 25 and 26, 1982, with regard to an income tax assessment for the year 1975 in which the Minsiter of National Revenue disagreed with the V-day value ascribed by the appellant to a certain 57.98-acre parcel of property. The appellant conducts his profession as a chartered accountant in the Town of Brooks, Alberta. Prior to January 1, 1972, he acquired the subject property for approximately $4,500, and in; 1975 he sold it for $391,635. For the year 1975 the appellant claimed a capital gain based on the following calculations, which show a V-day value of approximately $14,350 per acre:

In assessing, the respondent attributed to the property a value of not more than $58,000, or approximately $1,000 per acre. The respondent relied, inter alia, upon sections 3, 38, 39 and 40 of the Income Tax Act, S.C. 1970-71-72, c 63, as amended and section 26 of the Income Tax Application Rules, 1971, as amended.

Evidence

The appellant gave testimony regarding the transactions and indicated his own view as a local businessman with considerable knowledge through his clients in the real estate field, that his $4,350 valuation was sound. He simply rcognized the worth of the property, its unique characteristics and location (in his view), and stated that he would not have sold it in 1971 for less than that amount per acre. The appellant provided a copy of an appraisal report dated September 11, 1975 by “Pro Agencies Ltd.” (“Pro”) of Brooks, Alberta, which supported that opinion. No one representing Pro testified at the hearing. À Mr J L Zezulka, of Klassen, Eagleson Associates Ltd, presented his own report dated March 14, 1979, which gave an estimate of the value of the subject property at a total of $190,000 (or some $3,277 per acre), and gave testimony on behalf of the appellant.

For the Minister, there were two appraisal reports, each one presented and supported by its author — one by Mr L W Bechthold, an officer with Revenue Canada, which resulted in an estimate of $850 per acre (some $50,000 In total); and one from Mr Allen Braa of Allen Braa Appraisals Ltd, giving an estimate of $800 per acre, about $46,500.

In addition to the appraisal reports noted above, there was filed by counsel for the appellant (with agreement of counsel for the respondent), an extremely helpful complete Plan of the Town of Brooks dated in October 1968 (revised to June 1970), upon which the subject property, and the various parcels of property referenced in the above appraisal reports were indexed and noted. These were “colour” referenced on the plan but I have given each appraiser a number: (Blue for Zezulka , Red for Bechthold , Green for Pro , and Black for Braa . The following listing of them may not do justice to the excellent presentation but it will serve this purpose. I have identified each property with a letter, given a brief description of it and its general relative position with regard to the subject property, together with the numerical identification indicating which appraiser(s) used it:

— In or adjacent to built up areas of Brooks.

Argument

To avoid providing unnecessary detail in this decision, the following thrust of counsel’s arguments dealing with the appraisal reports and testimony brings out their essential characteristics, as they appear to me to be relevant to this issue.

For the appellant:

There was a big demand for housing at that particular time. I won’t go through the evidence again but the (newspaper) articles clearly indicate that the demand was there. That is demonstrated as well by the appraisal of Pro-Agencies, as well as the evidence of Mr. Zezulka, both in chief and in cross-examination. Indeed even Mr Braa has admited in cross-examination, and indeed in examination in chief, that there was, in his estimate, only a one-year supply of lots at December 31, 1971. So, at most — sorry — at best, we are dealing with an immediate need, no lots available, and of course there was a one-year supply of lots, if we believe Mr Braa’s testimony.

With respect to the appraisals prepared by the witnesses called by my learned friend, and not to be disparaging, Mr Chairman, but I suggest to you that both Mr Bechthold and Mr Braa admitted that the appraisals of the subject property were very, very difficult. Both indicated that they would have preferred to have [1] other parcels to look at. Mr Braa indicated that he was forced to go out of town* to supplement the universe from which he was selecting, on the basis that there wasn't sufficient evidence or sufficient details in the city. It is submitted that in light of that comment by both of these gentlemen, their reports were very, very short. I find that remarkable, especially when we are dealing with a residential subdivision. And, the highest and best use of which was alluded to by both Mr Zezulka and Mr Braa. while both the Bechthold and the Braa appraisals looked at size and location, I think it is remarkable that neither of the two reports spent any or little time referring to matters such as contour, (or) the lay of the land. Little time, if any, was spent on what the water table was like; how high was the water? Could a basement be put into a particular parcel of land? Little time, if any, was spent on soil conditions. Was it alkali? Was there a slough? Was a gray lake located on a particular parcel of property? Almost without exception, there was no reference in either of the two reports to the presence of services. For some strange reason that was not considered to be relevant in the determination of a comparable of a particular parcel. Only Mr Zezulka’s appraisal dealt directly with that.

Mr Zezulka admits in his report as well as in his examination-in-chief that the appraisal was difficult to do. Having regard to that, Mr Zezulka employed certain techniques with which issue has been taken here. He increased the scope of generally accepted appraisal techniques to include not only looking at comparables, but also the analyis of comparables of different communities, as well as certain generally accepted techniques relating to residential development and linear regression approaches, all of which I’m unfamiliar with. I believe, Mr Chairman, that Mr Braa at least admitted on cross-examination that the number of comparables approached some very small amount or zero, if that was the case, if there was nothing to look at, he admitted that he would go to other communities. He took exception to Lethbridge,* as illustrated, but he indicated that perhaps some other centres, perhaps smaller than Lethbridge, would be appropriate. He acknowledged that he would look at other factors as well, if circumstances presented it to him. Apparently he felt the circumstances were not present, notwithstanding that he had relied upon, as it turns out, some non-arm’s length transactions with which I will deal in a few moments. Some issue has been taken — my learned friend has taken exception to Mr Zezulka’s report on the basis that, to some extent, it dealt with some hindsight. Mr Chairman, it is respectfully submitted that the use of hindsight to corroborate other independent evidence is perfectly acceptable and admissible evidence before this Board.

It is respectfully submitted that both appraisals (Bechthold & Braa) ought to be materially discounted and no reliance or very little reliance ought to be placed upon them by this Board, and indeed the Minister appears not to have relied upon them in making his assessment.

With respect to the issue of — was the subject ripe for subdivision at December 31, 1971, I believe the evidence has shown (both by Mr Zezulka and Mr Bevan, and indeed that of Mr Braa) that, at December 31, 1971, there was a small suppy of developed lots available in the town of Brooks. Mr Zezulka said there was an immediate need, as did Mr Bevan. Mr Braa indicates that, at most, there was a one- year supply of lots as at December 31, 1971. Only Mr Bechthold is alone in estimating that there was a 20-year supply of lots.

. . . it is respectfully submitted that the reason why the town was involved in the residential subdivision at this time was because nobody else was at that particular time; nobody had demonstrated the wherewithal!. Local builders were building, as Mr Bevan has indicated, one or two houses a year, and that was all they were capable of doing. And the town had to come to the rescue, the Municipality had to come to the rescue of the town and assist in what was obviously a boom period of time. And it was forced, Mr Chairman, into that position.

I submit, Mr Chairman, that towns, with their notoriously small shoestring budgets, had better things to do than go into the real estate development game. That indeed, if other parties had the wherewithal! and the enthusiasm, that typically and generally such development is left to people with more competence in that regard and that it was the explanation for the rightness of this particular par-

*(A comparison between Brooks and Lethbridge provided in the report of Mr Zezulka.)

cel and the fact that the town got involved was simply as a last resort as the wherewithal! of local builders simply wasn’t there.

It was clearly ripe for development in 1974 when Mr Bevan elected to sell the particular parcel or negotiated for its sale. What we are dealing with then is that most of the three-year holding period in respect of this property, and if we accept that the sales price of some $6,750 which was the ultimate sales price per acre, was fair market value determination, at most we are looking at a discount of some amount — I’m not sure if it is 15% or some other amount — from that number, back to December 31, 1971, which was the technique used by Mr Bonner* [2] in his examination, at most we are looking at a discount of some percentage points from $6,750 down to the December 31 (1971) value.

. . . it is respectfully submitted that the appeal in this particular matter be allowed in full; that the true fair market value at V-Day was at least the amount reported by Mr Bevan in his income tax returns of $4,350 (per acre).

For the respondent:

. . . the property was worth no more than that amount ($1,000 per acre) as of December 31, 1971.

This document (Pro Agencies) introduced and filed, the person who wrote it was not available for cross-examination; there was no presentation or any support for any qualifications of the person who wrote it. There was no substantive evidence to show why this man was properly qualified or even capable of being present here for cross-examination on his qualifications, and to determine whether or not he was a person qualified to give expert, or at the worst, opinion evidence, even if his qualifications weren’t even too marvelous, to consider even what weight to give to that opinion. And I submit to you, with great sincerity, that no weight whatsoever should be given to the Pro Agencies’ valuation. It is of no assistance to you, in our submission, in this hearing, and you must disregard it. Similarly, Mr Bevan has indicated some familiarity with the land in Brooks because he lived there for 30 years. But he is not qualified as an expert to value land, and all he said was that he felt his land was worth $4,500 at valuation day.

I take issue with the vague and critical demand for housing and ask you to consider carefully the evidence given by Mr Bechthold and Mr Braa, both of whom had personal knowledge of the area at the time. Mr Bechthold was staying there during the period in question and also Mr Braa made several visits to the area in making appraisals at the time. They both indicate that there was not a severe or critical lack of housing. They acknowledge that there may be a need, but Mr Braa said a year’s available supply of lots and Mr Bechthold in his evidence carried with him and presented to you the 1972 zoning book and which he had made reference to in order to determine whether or not there was land available for subdivision in the town at the time. That, compared to the 1974 report that Mr Zezulka used, referring to land being available for residential development, but he wasn't sure that it applied to the Town of Brooks. The 1972 zoning book referred to is a much more reliable source than a report done three or four years later. The further demand for lots of course would have been depressed by the availability of lots for sale in that East Brooks subdivision! [3] which is almost adjacent to the subject property. In other words, proximity to the subject property must have some bearing on the desirability of lots that would relate to the subject property.

. .. Mr Braa made no reference to contours, water tables, soil conditions and presence of services. It was brought out more than once that these were factors considered in the use of the development approach to the appraisal of a piece of property, which Mr Braa stated more than once he did not feel was an appropriate method to appraise this particular piece of property. He was looking at a piece of vacant land that was still zoned agricultural, and so he admitted that the agricultural zoning may or may not have been a hindrance at the time. He also stated that the market place actually takes care of a lot of these problems in that when you see what the developers will pay for a piece of property, they have taken in the soil, the topography and construction problems, and that those factors have been taken into the market price and reflected in that market price.

. . . I ask you to accept the approach of Mr Braa, as supported by Mr Bechthold, Mr Braa not being employed by the Department of Revenue as a standard employee, but as an independent appraiser. He comes in lower than the Departmental appraiser. His approach is very rational, very reasonable. he had no bones to pick when he was out there looking at the property, he was familiar with the area, which I believe is essential, and the fact of his excellent qualifications and the straightforward and frank way that he gave his evidence, I say give him a very credible approach that I ask you to consider very strongly.

The major diversion, without at this point being too critical of the appellant’s one reasonable appraisal (Zezulka’s), seems to be the issue of the time of developing, which would make it so critical. I submit to you that there is not enough evidence, if any at all, that would convince you to find that there was such a great boom in the economy that there was an escalation of real estate values. There is nothing there that would indicate that, and particularly when there are other properties for sale that have been developed. There is not the lack, the critical lack. The lack was more in the hotels for transients than it was for permanent residents.

Findings

It may be over-simplistic to indicate as I have done that Mr Zezulka did not utilize any of the comparables in arriving at his estimate but, as I read the report, his estimate was based upon the median of (1) a comparison with sales in Lethbridge, Alberta; (2) a mathematical subdivision development appraoch utilizing cost factors to be taken into account in bringing raw land to the sale level, and (3) a variation on (2) above, the latter two related to experience in other municipalities. In effect, Zezulka is asking the Board to agree to the calculated result arrived at, as opposed to the use of standard a comparable sale approach. I commend the author of the report on its ingenuity and completeness but while any or all of his above (1), (2) or (3) approaches could serve to support or coordinate a comparable sale approach, I am not prepared to accept in the circumstances of this case that they can be substituted for it.

Counsel for the appellant cited Robulak et al v MNR, [1979] CTC 2991; 79 DTC 809, which appeal was allowed and in which Mr Zezulka was also an expert witness for the appellant. Counsel quoted from 2995 and 812 respectively:

If the twenty per cent per annum appreciation rate referred to by Mr Zezulka were applied to the eighteen month period between V-Day and the date of sale, a V-Day value of $4,104 is indicated. It is, I think, permissible to test Mr Zezulka’s evidence in this way. In C Ralpy Lipper v Her Majesty the Queen, 79 DTC 5246, Addy, J, stated at page 5252:

It is obvious that the market value of the films in December 1971 and the likelihood and extent of any future success from a financial standpoint must be judged on the evidence available to prospective investors at that time and not determined ex post facto in the light of subsequent events. However, where, as in the case at Bar, large and totally irreconcilable differences occur in the opinion evidence of various experts, subsequent events can be used to test the accuracy and, at times also, the bona fides of the opinions expressed.

It is not my reading of Robulak (supra) that the Board takes the position that “hindsight” or any related calculated method such as that proposed by Mr Zezulka is universally acceptable, when the use of such “hindsight assumes as a given, the very critical issue in the appeal — that there was indeed such a pressing demand in Brooks in 1971 for serviced or readily serviceable land, and that a developer would have knowingly paid about $3,277 per acre for the subject property when very similar land was readily available at prices very much lower than that figure. Accordingly, as I see it, the very basis of the Zezulka report must be rejected.

Turning to the only other evidence on behalf of the appellant which is before the Board (the Pro report, as presented and supported by Mr Bevan), I do not adopt the position of counsel for the respondent that the testimony of Mr Bevan and his belief in the Pro report should be rejected out of hand simply because Mr Bevan is not a qualified appraiser (See Fambau Limited

— [1982] CTC 2228; 82 DTC 1027), but I do accept that on its own merits, the Pro report must be rejected. Its reliance on two, and only two, very small urban properties as compared to a large rural property discredits it. Properties “D” and “E” were not considered sufficiently reliable by Mr Zezulka for him to reach any definite conclusion based on them alone, and he was right, and they were not even listed by Mr Bechthold or Mr Braa — and again correctly (see above chart). It should be noted that both Mr Bevan (on account of Pro Agencies) and Mr Zezulka gave certain reasons for not listing as comparables properties “G” and “I” on the chart above, but in my view these reasons come down to only one point — that the two properties were, in 1971, outside the municipal boundaries of Brooks. In my view, that is a minor consideration when contrasted with the fact that they were of similar size (or larger), zoned and used for the same general purpose, immediately adjacent to the subject property, and save for physical differences which would be relatively unimportant to a serious developer, the properties were of the same topography and nature. Certain municipal services extended at least part way along Parcel “G” on the boundary common with the subject property, and it would appear to me to have reached at least to one corner of Parcel “I”. Leaving these comparables (“G” and “I”) out of the reports of Pro and Zezulka indicates that in the authors’ minds, no importance whatsoever should be attached to the selling price of the properties — $426 and $457 per acre by them, at a time only months removed from V-Day — a view which I do not espouse. They are by any reasonable standard the most attractive two comparables listed on the above chart.

Turning to the proposition of counsel for the appellant'— that “the true market value at V-Day was at least the amount reported by Mr Bevan in his tax return of $4,350 (per acre)” — I make reference to a recent decision of the Board, Nan M Goodwin v MNR, [1982] CTC 2675; 82 DTC 1679, in which the following comments can be found at 2677 and 1680 respectively:

Obviously one notes with interest the wide discrepancy between the Minister’s valuation, at least for the assessment purposes, of $600 per acre and the $6,000 per acre originally ascribed to the property by the appellant and maintained throughout the proceedings, including today. However, as the Board noted for counsel, I have not been asked to act as “arbitrator” in the dispute, and arrive in some manner at a “fairer” valuation. The Board’s primary role, as I see it, ina valuation case, is to decide whether the evidence presented by the appellant supports a different valuation than that used by the Minister in assessing. The mechanism chose by the appellant in this appeal, and in most such appeals, is to present evidence in support of a different valuation — in this case $6,000 per acre. Unless there is good "prima facie" evidence to support that alternative valuation, I am not of the opinion that the Board is required to consider at all whether the valuation used by the Minister is correct or incorrect.

Again it is noted that the only support that has been presented on behalf of the appellant for the $6,000 figure contended in this appeal is the sale of adjacent property previously noted, made in 1971. While it might have some possible relevance to the valuation of the subject property, it does not and cannot establish the value for that subject property on its own, even though it is adjacent to the subject property and owned by the same owner. That is the only evidence upon which the Board is asked to reach a conclusion.

While the factual situation in the Goodwin appeal was directly opposite to the instant case (the appellant therein proposed that the values adopted by the Board should be related, and only related, to the sale of adjacent property), the principle involved regarding the Board’s role remains the same, as I see it. I doubt that the Board needs to go beyond this point in order to dismiss the instant appeal — there is no acceptable independent evidence at all that the value of the subject property should be $4,350 per acre, and the only appraisal report presented (even by utilizing an unacceptable method of calculation) arrives at a figure of $3,277 per acre. As I see it, that should have been the highest level to which this appellant could have hoped to aspire at a hearing of this nature.

The proposition put forward by the appellant — that inherent in the fact that the subject property was inside the municipal boundaries in 1971 made it much more valuable (something in the order of 8 to 10 times more valuable) than immediately adjacent properties (“G” and “I” on the chart) — is not one in which I find any merit. It is clear from the evidence and testimony that the Town of Brooks was the major player, in fact the only player, in land development or proposed land development in the area. There was no indication in that same evidence of great difficulty encountered by the municipality in its eventual purchase in 1972, and I would presume subsequent inclusion in the municipal boundaries, of parcel “G” on the chart earlier provided. I am quite prepared to assume that discussions and negotiations relevant to that property acquisition (“G”) had at least commenced before V-Day and, contiguous as it was to already developed municipal property, it had the potential to fill the apparent needs of the Town for several years — which in fact it did. There is no evidence that the municipal acquisition of parcel “G”, or negotiations leading up to that acquisition, had the effect of markedly increasing the real value of the subject property, although such acquisition may well have made even more firm in the appellant’s mind that he should hold the property until he was able to obtain the price desired — which he in fact did. Just on another point — the fact that the subject property was separated in 1971 from any subdivided or developed municipal land by a 40-acre poultry farm seems to have been virtually ignored at the hearing. That fact may well have been a serious impediment to the early utilization of the subject property for development purposes, even if the “critical demand” for housing asserted by the appellant had existed in 1971 — an assumption for which the Board has not found support.

To comment on the two appraisals presented by the Minister, with regard to qualifications of the individual I would again refer to Fambau (supra) and summarize by saying that the testimony and documentation before the Board would confirm the capacity of both Bechthold and Braa to present expert evidence which should be given considerable, not minimal, weight by the Board.

Nothing has been presented which would lend credence to the appellant’s claim that the subject property at V-Day had a value of $4,350 on the open market. I fully accept that Mr Bevan may believe he would not have accepted less than that for it, and events proved him wise to hold it — But that is no substitute for arriving at a proper value to be assumed between a willing buyer and a willing seller.

The appeal is dismissed.

Appeal dismissed.