Quinten Van De Vrie, MRS Tiny Van De Vrie v. Minister of National Revenue, [1982] CTC 2781, 82 DTC 1797

Roland St-Onge [ORALLY]:—The appeals of Mr and Mrs Quinten Van de Vrie came before me on August 31 and September 1, 1982 in the City of London, Province of Ontario and were heard on common evidence. The issue has to do with valuation of a property on V-Day in order to fix the amount of capital gain with respect to the appellants’ 1976, 1977, 1978 and 1979 taxation years.

The facts and the reasons for appealing are well spelled out at paragraphs 1 to 5 and 1 to 7 inclusive of the notice of appeal which read as follows:

STATEMENT OF FACTS OF APPEAL

(1) The taxpayers sold the property known as Part Lot 8, Cone. 7, Puslinch Twp, Wellington County, in 1976 for the sum of $613,512 taking back a mortgage of $503,512 with the balance in cash.

(2) The taxpayers filed their 1976 income tax returns showing a capital gain in 1976 of $9,011 each.

(3) The capital gain calculation was based on a V-Day valuation of the property of $361,800. The appraisal was made by a qualified appraiser on March 4, 1976.

(4) The 1976 capital gain was calculated by the taxpayers as follows:

Taxable Capital Gain

Sale Price		$613,512
V-Day	$361,800
Legals	2,725
Sales Commission	30,000	394,525
Capital Gain		218,987
Less: Exempt portion — land	2,956
— house	15,000	17,956
		$201,031
Taxable Capital Gain — /2 of $201,031		$100,516
Less: Reserve $503,512 x $100 516
		82,493
613,512
Portion to be taken into income for 1976		$ 18,023

1971 Land Value

Estimated value of land and

building — December 31,1971		$361,800
Buildings		25,000
Land Value		$336,800
Value Per Acre — $336,800
76.686		$ 4,392
1976 Land Value
V-Day value of building was $25,000.
Estimated 1976 value of these
buildings is $50,000
Sale Price		$613,512
Less: Buildings		50,000
		$563,512
Value Per Acre — $963,512
76.686		$ 7,348
House Gain
Sale Price	$ 30,000
V-Day Value	15,000	$ 15,000
1 Acre of Land Gain
Sale Price	7,348
V-Day Value	4,392	2,956
Total Exempt Gain for House and Land		$ 17,956

(5) Revenue Canada, Taxation based their reassessments on a V-Day value of $177,725 as indicated in the calculations below in determining the capital gain, capital gains reserves, and taxable capital gains to be taken into income in the relevant tax years, as indicated.

REVENUE CANADA TAXATION’S

REVISED TAXABLE CAPITAL GAIN SCHEDULE STATEMENT OF REASONS FOR APPEAL

Proceeds 1976					$613,512
Deduct:
Fair Market Value — December 31, 1971
75.686 Acres at $2,150 per acre				$162,725
Principal Residence and 1 acre				10,500
Barn and silo				4,500
Building additions subsequent to V-Day
Silo				1,344
Steel Barn				13,577	192,646
					420,866
Less: Outlays and Expenses					32,725
Total Capital Gain					$388,141
Allocated:
			Quinten	Tiny	Total
Total Capital Gain			$194,071	$194,070	$388,141
Less: Capital Gain on
Principal
Residence:
Deemed Proceeds			$17,000
Fair Market Value
— V-Day		$10,500
$17,000	x $32,725 =	906	11,406
$613,512
Capital Gain			$ 5,594

1 /2 applicable		2,797	2,797
Election Paragraph 40(2)(c)	6,000		6,000
Capital Gain	188,071	191,273	379,344
Less: Mortgage Reserve
$188,971 x $251,756
	154,351		154,351
$306,756
$191,273 x $251,756
		156,979	156,979
$306,756
Net Capital Gain	$ 33,720	$ 34,294	$ 68,014
Taxable Capital Gain	$ 16,860	$ 17,147	$ 34,007
1977 and 1978 — No change in Reserve
1979
Reserve December 31, 1978	$154,351	$156,979
Reserve December 31, 1979	Nil	Nil
Capital Gain	$154,351	$156,979
Taxable Capital Gain	$ 77,175	$ 78,484

(1) Subsequent to Revenue Canada, Taxation’s original issue of assessments and reassessments against the relevant years, the taxpayers obtained two additional independent appraisal reports dated April 12, 1980 and June 19, 1980 respectively to establish the V-Day value of the property disposed of. These reports were issued by experienced and fully accredited independent appraisers.

(2) Both of these subsequent appraisals are very close in value, one indicating a V-Day value of $279,026, and the other a V-Day value of $295,450. Based on these appraisals, as well as the original appraisal obtained at the time of sale of $361,800, it is felt that Revenue Canada, Taxation’s appraisal value of $177,725 is unrealistically low, and should therefore not be used as the basis of determining the issues involved in this appeal.

(3) The appraisal report used for the source of the V-Day value for the original return filed states .. . “market value is the price which a property will bring if exposed in the open market allowing sufficient time to find a buyer who is aware of the uses to which a property is capable of being used”. This indicates that the property in question may be of greater value other than as agricultural land.

(4) The fact of the property having a V-Day value greater than that of agricultural land at that time is further substantiated by the two more recently dated appraisal reports.

(5) This concept of valuation as to rely on development potential of the land rather than agricultural potential has been dealt with in a recent court case in William Barker and Mary Barker v. MNR (79 DTC 700). In the decision it was held that Valuation Day value was influenced more by development potential than agricultural potential.

6) As a result, the taxpayers feel that the V-Day value as assessed by the Department is notan indication of the market value of the property at December 31, 1971.

(7) The taxpayers therefore request that the re-assessments be vacated and that the gains be assessed as indicated by the following calculations:

The 1976 Capital gain, Capital gains reserve, and taxable Capital gains are:

Capital gain as filed			$201,031
Less: Post-1971 additions to buildings
Silo		$ 1,344
Steel Barn		13,577	14,921
Add: Portion of outlays and expense applicable
to principal residence
$17,956	x 32725
			958
613,512

Capital gain	187,068
Less: Reserve x 187,068 =
613,512
	$ 33,540
Taxable capital gain	$ 16,770
Allocation of taxable capital gain
Quinten Van de Vrie	$ 8,385
Tiny Van de Vrie	8,385
	$ 16,770
The 1977 taxable capital gain is NIL since the 1977 reserve is:
$503,512 x $187,068	$153,528
613,512
Allocated:
Quinten Van de Vrie	$ 76,764
Tiny Van de Vrie	76,764
	$153,528
The 1978 capital gain is NIL since the 1978 reserve is:
$503,512 x $187 068 =	$153,528
613,512
Allocated:
Quinten Van de Vrie	$ 76,764
Tiny Van de Vrie	76,764
	$153,528
The 1978 reserve brought into income in 1979 is $153,528 as shown in
the Facts and Reasons.
The 1979 reserve is NIL.
Capital gain allocated as follows:
Quinten Van de Vrie	$ 76,764
Tiny Van de Vrie	76,764
Taxable Capital Gain allocation:
Quinten Van de Vrie	38,382
Tiny Van de Vrie	38,382
Purchase of I.A.A.C. by taxpayer	$ 36,640

In a nutshell, the difference between V-Day value used by the appellants and the respondent is as follows:

Mr Van de Vrie, who is a research technician in agricultural matters, purchased in 1962 the farm which is situated one mile from the City of Guelph, Ontario. This farm was 100 acres, 25 acres of which were sold to the Conservation Authority in 1974 at $2,200 an acre.

According to the appellant, the 75 acres left were worth three times more than the 25 acres sold. The farm was annexed by the City of Guelph in 1966. In January 1976, some 76 acres were sold for $8,000 an acre with a downpayment of $10,000, $100,000 at closing and a mortgage at a rate of interest of 7% which was 2% cheaper than the current rate at that time.

Mr Van de Vrie referred to two sales:

1. Campagnaro Farm — which was sold in 1969 for $3,500 an acre;

2. R H Multifoods Limited and Best-A-Poultry Limited, sold in 1972 for $3,500 an acre.

According to him these two farms were comparable to his farm.

Upon cross-examination he admitted that the R H Multifoods Limited and Best-A-Poultry Limited farms had six steel barns instead of four and the said properties were purchased and used by the buyer who was in the same line of business as the vendor; that one of the clauses of the sale of his farm was 18 months free of interest and also at a lower rate of interest than the current rate; that his barn was in need of renovations and that the Hanlon Parkway was completed only after 1971.

Mrs Van de Vrie corroborated her husband’s testimony.

The appellants’ first expert witness filed his report as Exhibit A-7.

On V-Day (1971)

He put a total value of:

$268,411 for 76 acres or $3,500 an acre; and

$ 22,840 for the house and one acre.

In February 1976

$ 31,750 for the house and one acre.

In order to fix a value of the acres in 1971, he used some six comparables which, under cross-examination, seem to be not too reliable, either because of the size, time, site or motivation element. Also, his adjustment procedure was not based on sound principles.

To appraise the house and one acre, he used:

In 1971 — the income approach method on 8 years use of the house to put:

$19,339 for the house, and

3,500 for one acre

$22,840 total value.

In 1976, he used the reproduction cost approach, but upon cross- examination he admitted that he could have put more depreciation than some $15,000 or used the same method than in 1971, the income approach method.

The appellants’ second witness, Mr Rod Wright, started to use some 18 comparables to retain only 3:

1. Sale No 2 — Martin to Woodlands — sold in April 1969 for $340,000 — 105 acres;

2. Sale No 4 — Campagnaro — sold in November 1969 for $350,000 — 99 acres;

3. Sale No 6 — Rutherford — sold in December 1973 for $310,000 — 43 acres.

His Campagnaro sale was the closest one to the appellants’ sale regarding time, size and location elements.

As to the time allocation, he used some price index from 1969 to 1974 to come up with the following percentage with respect to the market rates:

He did not need any location adjustment with respect to Sales No 4 and No 6, but only for Sale No 2. He used 5% as size adjustment for Sale No 4.

The respondent called two witnesses:

1. Mr Kenneth Perry, an employee of the City of London as Director of Planning and from 1969 to 1971 Director of Planning and Development for the City of Guelph.

2. Mr AB B Tonin, real estate appraisers with Revenue Canada in Kitchener.

Mr Perry explained that the policy area of the City did not preclude the industrial area 1 to become residential, but the intent of the City was to extend the services to stage 2 and that stage 3 would be the last area that could be serviced by municipal services. The official plan was prepared in 1960, but at that time and even in 1971 there was no prediction as to when the services could be installed in the stage 3 area.

Upon cross-examination he admitted that there was some flexibility in the official plan; that around 1971 there was a progressive man employed in the City to encourage the coming of industries in the industrial area, but insisted on the fact that the City was very specific as to where to put the municipal services.

Mr Tonin appraised the property as follows:

In 1971

$228,000 — for 100 acres

$ 10,500 — for the house and one acre.

On February 2, 1976

¢ 17,000 — for the house and one acre.

To appraise the acres he used the same method utilized by the two appellants’ expert witnesses, with the exception that he used 100 acres instead of 76 acres. He explained that in 1971 there was a large inventory of serviced land of some 800 acres and in his report he gave the following neighbourhood data of the subject property. P 6 of the report reads as follows:

Neighbourhood Data

The lands, as of the value date, south of Stone Road and within the city limits, comprising of approximately 3500+/- acres were predominantly agricultural with the odd sprinkling of older low density residential development (Gordon Subdivision) located just south of Stone Road at Gordon Street.

Municipal services were to the residential development located at the south quadrant of the intersection of College Avenue and Hanlon Road. The extension of these services was expected to continue along the Hanlon Creek and north to the Stone Road vacant lands and south around McCurdy Hill and back toward the Brock Road.

Development in the neighbourhood was stopped pending the results of the ecological study of the Hanlon Creek expected in March 1972.

The subject property is located in the extreme southern portion of this neighbourhood fronting Hanlon Road.

In order to find out the highest and best use of the subject property he utilized three factors:

1. The zoning

2. Municipal services

3. Low demand for industrial land.

He took Sale No 1 and Sale No 5 to show that agricultural zoning for future industrial development land had a higher value than agricultural land in 1971. He also explained that on V-Day the municipal services were two to five miles from the subject property; that there was a low demand for industrial land and he did not know when future industrial development would occur with respect to the appellants’ property.

To appraise the 100 acres on V-Day, he used only two sales: Sale No 3 and Sale No 6 in the period after V-Day, but five sales around December 31, 1971, because they had similar characteristics with the subject property. The comparables utilized are well spelled out on 17 to 21 of the report which read as follows:

Market Data Commentary

Sale No 1

This was a November 1969 sale to a speculator/developer of a vacant parcel of land fronting Clair Road. It is located about one lot south of the subject property. Its frontage was approximately 975+/- feet and has an area of 29.619 acres. Zoning and official plan designation was the same as the subject property.

Adjustments

No concrete market evidence was found in the market place to warrant a time adjustment from late 1969 to the value date — December 31, 1971. This parcel is much smaller than the subject (29/100+/-) and a downward adjustment was made for this factor. Other factors were considered but no adjustments are warranted. (Page 17)

Sale No 2

This was a January 1968 sale of a farm fronting the old Hanlon Road. It has a frontage of approximately 1350+/- feet and an area of 105.292 acres. It abuts the south boundary of the subject property. It was reported that this property was improved with a two storey frame sided house and some farm buildings. Also the sale has been described as an advantageous purchase as the vendor was in need of cash. Zoning and official plan designation was the same as the subject property.

Adjustments

An upward adjustment should be made for motivation to compensate for the advantageous purchase. An upward adjustment for time was made to compensate for the considerable market increase from 1968 to late 1969. The improvements were estimated to contribute approximately $15,000 to the value of the property and a downward adjustment was considered reasonable. (Page 18)

Sale No 3 (Photocopies of buildings are located in the addenda)

This was a February 1972 arm’s length open market sale of 52+/- acre parcel having approximately 675 feet frontage on the old Hanlon Road and bounds the north boundary of the subject property. The improvements consisted of a ten year old, 1,120 square foot brick bungalow, a concrete block boiler building and four, two storey, (about 80,000 square feet in total) steel covered insulated broiler barns, between five to ten years old. The purchaser, (Best A Poultry) who was in the same type of business as the vendor, was an adjacent property owner.

Zoning and official plan designation were similar to the subject. Investigation reveals that this property was exposed to the market in 1970, 1971 and early 1972. The information available at the date of the sale indicates that the broiler operation could continue for approximately ten to fifteen years. It is my understanding that offers received during the market exposure were all within close range of each other indicating little or no market increase.

Adjustments

Adjustments were made for the superior improvements (house and broiler barns) which were of considerable value to the vendors and purchasers and which were estimated to contribute to value for approximately ten to fifteen years. This property is closer to services and in line for development prior to the subject. A slight adjustment to compensate for the better location factor was made. The purchaser was an adjacent property owner and a downward adjustment was considered but no adjustments are warranted. (Page 19)

Sale No 4

This was a December 1969 sale of 99+/- acres of vacant land, having approximately 1,350+/- feet fronting the old Hanlon Road and is located north of the subject property. The Hanlon Creek, where municipal services are expected to be located, runs over the property. Investigation indicates that at the date of sale, the property was slated for future residential development, however, as of the value date, the official plan designation and the official plan amendment indicated other use for a large portion of the property. The transaction was for $350,000 with $50,000 cash down payment and a ten year 7% mortgage for $300,000. Highlights of the mortgage indicate no principal payments required for the term of the mortgage and that the first two years of the term were interest free.

Adjustments

No market evidence was located from the sale date to the value date to warrant a . time adjustment. Adjustments were made for generous financing terms and superior

location (in line for services and earlier and other development potential). (Page 20)

Sale No 5

This was a December 1970 agreement of sale for 8 acres of vacant land at a price of $16,000 ($2,000 per acre) between the vendor (Dooley) and the Wellington County Separate School Board subject to severance approval. This was a rear parcel of land approximately one lot south of the subject property, on the south side of the Cox Property (Sale No 2) and close to the Cergo Property (Sale No 1 — Dooley to Cergo). Adjacent property owners were notified of the severance application by the Committee of Adjustment. The zoning and official plan designation was the same as the subject property. Severance was primarily denied because the intended use of the land was not in keeping with the official plan industrial designation.

Adjustments

This property is considerably smaller than the subject property and a downward size adjustment was considered but no adjustments are warranted. (Page 21)

Sale No 3 is a very significant sale, but Mr Tonin put lesser weight on Sales 1, 4, 8, 2 and little weight on Sales 5, 6 and 7.

As to the house and one acre, he used the income potential approach which is well explained on 29 and 30 of his report which read as follows:

Principal Residence and One Acre Allocation

The purpose of this part of the assignment is to allocate a reasonable value for the principal residence and one acre as of February 2, 1976 (Registration date of instrument #167725 — Deed) Van de Vrie to Major Holdings. The highest and best use of the subject property, as of the transfer date is concluded to be the same December 31, 1971, namely, a speculative future industrial development property with an interim agricultural or hobby farm use. This interim use was envisioned to continue for approximately ten years (about 1985) at which time a change in use is anticipated.

The subject property, as previously stated, contained an old brick house which was in average condition and considered to be quite rentable until such time as a change in use was made of the property. (Expected in about 1985, or about ten years.)

A prudent purchaser (speculator or developer) could consider the rental value of the house. In this regard, a market rental analysis was completed to estimate the market rent of the subject property.

It was concluded that the subject house could command a rent of $260 per month plus utilities under responsible management. The net annual rent was calculated to be $2,555 and a competitive interest rate of 8 /2% was considered reasonable.

The capitalized value of the residence was calculated as follows:

$2,555 < *6.561348 = $16,764 (rounded to $17,000)

*(lnwood factor for the present worth of $2,555 per year at 872% for ten years)

Therefore, it is my opinion that a reasonable allocation for the subject residence and site as of the sale date was:

Seventeen Thousand ($17,000) Dollars

He chose this income potential approach because the house was very old, 1,000 feet back from the road and also because it was difficult to find out the amount of depreciation.

Mr Albert Fish, a real estate broker and appraiser, testified that there was a slight increase in the residential market from 1967 to August 1972.

Mr Reimer, a real estate appraiser and broker, was called by Mr Van de Vrie and stated that there was an increase in land from 1969 to 1972, but he also stated that to appraise the subject property on V-Day and being free to do so, he would take 100 acres instead of 76 acres.

The Board is not impressed by the reports filed by the appellants’ experts, nor by the explanation given by them.

It is not the number of experts that counts, but the quality and the exactitude of the work done. Messrs McDonald and Wright chose the right method of appraising to know the market data method, but Mr McDonald made too many errors, had many comparables that needed substantial adjustment and consequently, they are not valuable and reliable comparables.

Mr Wright started with 18 comparables, to retain 3, and with respect to his best comparable, the Campagnaro property, he forgot to make an adjustment for the two years free of interest which represents some $42,000. He forgot to discover that the vendor had the mortgage because Victoria and Grey Trust was acting as trustee for the vendor.

Furthermore, both appraisers for the appellants used 76 acres to appraise the value of the property on V-Day when there was over 100 acres at that time, 25 acres thereof had been sold in 1974 for $2,200 an acre. It is true that these 25 acres were not as valuable as the 76 acres sold in 1976, being mostly swampy land and bush, but 8 acres thereof were arable land and the whole parcel was sold in 1974 for $2,200 an acre. This sale should be taken into consideration to appraise the whole parcel of land on V-Day.

As may be seen, the evidence reveals that Mr Tonin’s appraisal report is more realistic and reliable than the ones filed by the appellants’ experts.

The Board is satisfied with Mr Tonin’s expert’s report and with the explanations he has given at the hearing and counsel for the appellants was unable to contradict his appraisal report.

For these reasons, the appeals are dismissed.

Appeals dismissed.