Construction Sylvain Ltée v. Minister of National Revenue, [1982] CTC 2791, 82 DTC 1848

The Chairman [TRANSLATION]:—This appeal by Construction Sylvain Ltée is from an assessment by the Minister of National Revenue for the taxation year 1979. The point for decision in the case at bar is the fair market value of the appellant’s inventory on December 31, 1979. The applicable rule of law is to be found in the Income Tax Act, SC 1970-71-72, c 63, as amended, which reads as follows:

Sec 10 Valuation of inventory property

(1) For the purpose of computing income from a business, the property described in an inventory shall be valued at its cost to the taxpayer or its fair market value, whichever is lower, or in such other manner as may be permitted by regulation.

Summary of Facts

In September 1977 the appellant had purchased for residential construction about 150 square arpents of land, which was part of lot 120 and lots 122, 125 and 130 of the cadastre of the parish of Varennes, Quebec, for the sum of $505,000, or $3,366 an arpent.

On December 22, 1978 Bill 90 to Preserve Agricultural Land (included in the record) was adopted by the National Assembly of Quebec retroactive to November 9, 1978. This law created a provisional plan for the establishment of green zones in the province of Quebec. The appellant’s lands, which are the subject of this appeal, were provisionally declared an agricultural zone by the law.

The commission de protection de territoire agricole [agricultural land preservation commission] created under Bill 90 had a period of six months, commencing June 19,1979, to hear objections made to the provisional plan before making the agricultural zoning provided for in Bill 90 final and permanent.

As no final decision had yet been made by the said Commission at the end of 1979, the appellant in its 1979 tax return reduced the value of the land purchased for construction in 1977 by $455,222, giving it only the market value of agricultural land, which it estimated as $450 an arpent in the Varennes area.

By notice of assessment, the Minister of National Revenue rejected the reduction in value of $455,222 and included it in calculating the appellant’s income for the taxation year 1979.

The appellant’s representative maintained that as long as Bill 90 was in effect, the land which is the subject of this appeal could only be used for agricultural purposes. In the appellant’s submission, its fair market value could be no different from that of agricultural land in the area, that is $450 an arpent. He concluded that the fair market value of the land at December 31, 1979 was $450 an arpent, and in accordance with subsection 10(1) of the Act, this value was used in preparing the tax return for 1979.

Counsel for the respondent argued, first, that the appellant had not succeeded in discharging the burden of showing that the fair market value of the land at December 31, 1979 was $450 an arpent. Second, she argued that the plans imposing green zones under Bill 90 to Preserve Agricultural Land were only provisional, their application to the appellant’s land was uncertain and it was too early at this time to conclude that their market value would only be that of agricultural land. She concluded that the only value which could be applied was that of the purchase price, namely $3,366 an arpent, which she considered was below the fair market value of the land immediately before Bill 90 came into effect.

This case creates a precedent in a taxation matter. So far as I know, this type of problem has never been raised in connection with the Income Tax Act.

Issue

The facts are not in dispute and the issue is solely as to the market value which should be assigned to the appellant’s land at December 31, 1979 for the purpose of subsection 10(1) of the Act.

Submissions

The appellant was represented by Mr Roméo Cadieux, a chartered appraiser, and by Mr R Brunelle, CA.

Mr Carieux filed as Exhibit A-1 a general appraisal report, covering appraisal of lots located at St-Antoine and at Varennes, including appraisal of the appellant’s land, the subject of this appeal. In his report, Mr Cadieux indicated that the said lots are located in the town of Varennes near residential development. However, under Bill 90 designating the appellant’s land as an agricultural zone, and in view of the fact that the land could have no market value other than as agricultural land, Mr Cadieux had made an analysis of several sales of land in Varennes, St-Antoine and Verchères zoned as agricultural, and come to the conclusion that throughout the region agricultural land had a market value of about $450 an arpent, which he had assigned to the appellant’s land.

It is clear from reading the appraisal report and from his testimony that Mr Cadieux only attempted to determine a market value for agricultural land in the area, without making any adjustment to take into account the special circumstances in which the subject land was placed on December 31, 1979.

In order to explain the special position in which the subject land was placed on December 31, 1979, namely the provisonal agricultural zoning which was then applicable to it, counsel for the respondent called Mrs Luce Doucet, registrar of the town of Varennes. It appeared from her testimony that a part of lot 120 and lots 122, 125 and 130 had been zoned as residential by the municipality of Varennes in 1960. Consulting engineers had prepared plans for the residential expansion of Varennes in 1976. On September 6, 1977 the municipality adopted municipal by-law 134, providing in a zoning plan for the residential expansion of the town of Varennes, including the subject land (Exhibit 1-1). By-law 134 was ratified in 1978 by by-law 170, in accordance with new plans for the execution of work to extend municipal services. The subject land was contained in zone 3 of these plans (Exhibit I-2).

It was alleged by the respondent, and not disputed by the appellant, that the by-law to instal municipal services was drafted at the request of the appellant, among others. Authorization was obtained from the Commission de protection de l’environnement [environmental protection commission], and the by-law was adopted by the council on November 9, 1978.

Mrs Doucet stated that in spite of Bill 90, which had come into effect on December 22, 1978, the municipality applied for a loan authorization which was granted in three stages in 1978, 1979 and 1981, and the municipality carried out the work contemplated in the Varennes residential expansion plans. As appears in Exhibit 1-3, this work was done by the municipality in the green zone of the provisional plan prepared under Bill 90.

On June 19, 1979 the Commission de protection du territoire agricole sent the municipality a notice to negotiate for the purpose of arriving at an agreement on zoning of the land in Varennes provisionally zoned as agricultural. Following meetings and discussions with citizens and organizations in Varennes, a brief was prepared for submission to the municipal council and the Commission (Exhibit I-4). The municipality also had a brief prepared by the firm of Somer, covering the town planning projects as a whole (Exhibit I-5). The subject land was referred to in the Somer brief as module 1.3 of the town of Varennes.

The first meeting between the municipality and the Commission de protection des terres agricoles took place on December 18, 1979 and the Commission submitted a preliminary proposal to the municipality, indicating the permanent zone. At a hearing with the Commission on February 8, 1980, the town of Varennes made a counter-proposal. On February 18, 1980 the Commission gave its decision, by which the subject land (module 1.3), among others, was treated as a white zone, that is excluded from the agricultural zone.

On February 21, 1980 the municipality adopted a resolution rejecting the Commission’s decision, and asked the Commission also to de-zone certain other areas in the town of Varennes to be used for medium and heavy industry, as well as certain residential sectors located along the St Lawrence. The latter requests by the municipality were not approved, but the decision of the Commission on February 18, 1980 was upheld, and the appellant’s land was confirmed as a white zone.

In her testimony, Mrs Doucet stated — and this is admitted by the appellant — that no residential development would have been possible in Varennes if the provisional plan, made under Bill 90, had not been amended to make the zoning of the appellant’s land non-agricultural.

As as second witness, counsel for the respondent called Mr Lionel Duguay, a Chartered appraiser for the Minister of National Revenue, who had prepared a narrative report on the market value of the subject land dated December 31, 1978 and December 31, 1979 (Exhibit I-7).

In his report Mr Duguay included certain copies of correspondence and certain basic information obtained from the Varennes municipal officers, which he had used in arriving at his opinion as to the market value of the subject land in 1977 and 1978.

In his appraisal Mr Duguay, while aware of the scope of Bill 90 and the fact that the subject land had provisionally been zoned as agricultural, took into account everything which had occurred before Bill 90 came into effect and which directly affected the subject land. Residential expansion plans which had existed since 1958, the outlining of municipal services in 1975, the obtaining of authorization for loans to perform work on municipal services, construction projects which were under way in 1978 and 1979, the extension of boulevard Gauthier and the fact that a residential extension of Varennes was only possible in the direction of the subject land led Mr Du- guay to conclude there was a strong possibility that the provisional agricultural zoning of the appellant’s land would again become a white zone. According to Mr Duguay, the potential for a better use of this land, which could be realized by a possible change in its zoning, existed on December 31, 1979, and should be regarded as just as important as the provisional agricultural zoning which existed at the time.

It was admitted that agricultural land in the Varennes area could then obtain between $450 and $800 an arpent, but Mr Duguay did not agree that the appellant’s land was only valuable as agricultural land, even during the period of provisional zoning. Like Mr Cadieux, Mr Duguay could find no sale of land comparable to that of the appellant after Bill 90 came into effect. Both appraisers agreed it was better for the appellant to wait until a decree of the Commission de protection du territoire agricole had fixed the zoning of the land permanently, before considering whether to sell it. In fact, all transactions in this type of land were suspended and the market completely ceased to exist during the provisional period.

For the purposes of his study, Mr Duguay found five transactions of comparable land which had occurred before Bill 90 came into effect. In these transactions, the persons interested in purchasing the land were building developers, not farmers, and the prices paid were between $3,000 and $7,360 an arpent.

In his report Mr Duguay considered that the sum of $3,366 paid by the appellant for the land in 1977 was within the market limits and reflected its market value at that time. Both appraisers agreed that the effect of Bill 90 was to freeze values, and that the value of land had neither increased nor decreased during the provisional zoning period. Mr Duguay maintained that the market value of the land had held steady at no less than $3,366 an arpent during this period and represented its fair market value on December 31, 1979.

In his argument, Mr Cadieux maintained that when Bill 90 came into effect and the appellant’s land was designated as part of the green zone, since the use of this land was limited to agricultural purposes the only value that could be assigned to it was that of agricultural land, which he had valued in his report at $450 an arpent.

Though it was clear that Bill 90 contained provisional information and the zoning of the appellant’s land could subsequently be changed by a decision of the Commission, Mr Cadieux stated several times that he was not required to interpret the Act but to apply it as it stood in December 1979. It is in light of this that Mr Cadieux valued the land by assigning to it a value given to agricultural land, without taking into account the existence of a potential for other use. To indicate that he could not, as an appraiser, adise a client to pay more than the market value of agricultural land for land zoned as agricultural, Mr Cadieux noted that his client (the appellant) had paid $2,700 an arpent for lots 284 and 285. These lots had also been zoned as agricultural in the provisional plan, and as the Commission had not yet changed the zoning to permit the land to be used for non-agricultural purposes, the appellant was stuck with land having a present market value of $450 an arpent which was well below its purchase price. He concluded that even if this was a transitional period, the only certain market value of the appellant’s land is its unadjusted agricultural value, for as long as the agricultural zoning is in force. However, in answer to a question from counsel for the respondent, Mr Cadieux admitted that there was a difference between transitional and permanent zoning. He admitted that the subject lands had potential but said that adjusting for this potential was very difficult, if not impossible, and that in view of Bill 90 the only market value which could be determined at December 31, 1979 was the market value of agricultural land; and that he could not arrive at any other market value as long as the zoning change remained only a hypothesis and a vague possibility

In his cross-examination of Mr Duguay, Mr Brunelle also sought by his questions to indicate that no other market value than that of agricultural land could be assigned to the subject land as long as the Commission had not changed the provisional agricultural zoning. However, he was not able to cause Mr Duguay to contradict himself or to shake his statements.

Conclusion

As counsel for the respondent pointed out, the circumstances in which the fair market value of the subject land must be determined for tax purposes are clearly unusual for the Tax Review Board. When Bill 90 came into effect, directing that the appellant’s land was provisionally included in the agricultural zone, it created a period of uncertainty as to the best use of the subject land and made the appraisal methods ordinarily accepted and used by appraisers impracticable.

It clearly is not easy in the absence of comparable sales to calculate positively the fair market value of the appellant’s land during this transitional period. It is easier to regard the problem from a negative standpoint, and decide what was not the fair value of the land on December 31, 1979. At that date the market value could not have been the amount calculated in accordance with appraisal methods based on the assumption that the use of the land for residential purposes had in fact been accepted. Similarly, the fair market value of the land on December 31, 1979 could not, in the circumstances, despite its being zoned provisionally as agricultural, be regarded merely as agricultural land.

Although these hypothetical amounts might reflect the market value of the land in the event that one or other of the two possibilities involved in the eventual decision of the Commission occurred, these estimates of value are both premature: they have no basis in fact, and in my opinion cannot be accepted as the fair market value of the appellant’s land on December 31, 1979. However, it is possible that its value on December 31, 1979 lies somewhere between these two extremes.

It was admitted that the appellant paid and the seller accepted an amount of $3,366 an arpent for the said land. In the absence of any contrary evidence, this amount represents the market value of the land in 1977, the year it was purchased.

The evidence showed not only that the land had been declared a residential zone by the municipality long before, but that the only possible residential expansion for the town of Varennes was in the direction of the appellant’s land and included it. In addition, the municipal services requested by the appellant on this land were under way, so that the market value of the land immediately before Bill 90 came into effect had not decreased since 1977, and on December 31, 1979 was at least $3,366 an arpent. This is the only concrete amount and the only actual market value of the subject land which was established by the facts.

This amount of $3,366 an arpent, which exists independently of whichever of the two hypotheses is realized, as a result of the introduction of Bill 90 regarding the possible future use of this land, provides a general confirmation of the level of its market value before the bill came into effect. The appellant was not able to establish that $3,366 an arpent was not still the fair market value, even during the transitional period, and its appraisal of $450 an arpent is unacceptable since it is based only on a presumption or possibility that the Commission pour la protection du territoire agricole will decide to make permanent the agricultural zoning which, on December 31, 1979, was only provisional.

In her argument, counsel for the respondent cited two decisions of the Bureau de Revision de l'évaluation forestière du Québec [forestry appraisal review office of Quebec] (included in the record). These are Susann Olkin v Ville de Longueuil, heard at Montreal on November 15, 1979, and Les placements Claire-France Ltée et al v Ville de Boucherville, heard at Montreal on March 27, 1980. Although in both cases the decision turned on the municipal valuation and not on the appraisal for tax purposes, the circumstances and facts are identical to those of the case at bar.

Very briefly, land had been purchased for speculation at high prices, and was recorded in the municipal valuation roll accordingly. As in the case at bar, the coming into effect of Bill 90 had provisionally limited the use of this land to agricultural purposes. The complainants in both cases submitted that their agriculturally-zoned land had lost much of its value and asked that its valuation on the municipal roll be considerably reduced. The complainants admitted that the agricultural zoning was only provisional and that the value of the land depended on the use assigned to it by the Commission protectrice du territoire agricole, once the transitional period was over.

In the reasons in Susann Olkin (supra), Mr Paul Blier, President of the Bureau de l’Evaluation foncière of Quebec, stated at pp 3 and 4:

The present situation accordingly offers two possibilities. The first is that the lot under consideration will be excluded from the permanent agricultural zone, and its speculative value will increase on account of the reduction in the number and size of lots available for development. The second is that the lot under consideration will continue to be within the agricultural zone and that its value will decrease to the level of the market for agricultural land.

The Bureau cannot presume that the lot under consideration will be either included or excluded. To make such a presumption would be to go beyond the evidence presented, since by its own admission complainant has taken no action with the Commission or the municipal authorities in an attempt to ensure that its lot is excluded from the permanent agricultural zone.

In the circumstances, in view of the transitional and provisional situation that prevails, the total absence of a market and the refusal to sell at a price lower than the municipal valuation, when the permanent agricultural zone has not yet been created, the Bureau could not rest its decision to reduce the valuation of the lot under consideration merely on presumptions and hypotheses.

The true value of a piece of real property cannot be established by presumptions or hypotheses, unless such presumptions and hypotheses are supported by specific facts showing a change in attitude by sellers and buyers, one which clearly indicates that the true value of the real property has been affected by the current situation, which in accordance with the provisions of the Act to preserve agricultural land we can only regard as provisional.

Intervening at this stage and modifying the valuation before knowing the outcome of action which the complainant itself would have to take, knowing the position of the municipal authorities and the conclusions which the members of the Commission de protection du territoire agricole may draw therefrom, would be a step that could in no way be justified by the need to determine the true value of the real property under consideration. That true value, which is the only one the Bureau is authorized to determine, could only be subjective, since the facts presented in evidence provide no basis for arriving at it with a minimum degree of certainty.

In Les Placements Claire-France Ltée et al v Ville de Boucherville (supra), Mr Maurice Bergevin, Ing, CA, who presided over the hearing of the Bureau de Révision de l’évaluation foncière of Quebec, cited in extenso the statements of Mr Blier in Susann Olkin, and concluded by stating, at pp 8 and 9:

For these reasons, the Bureau shares the view taken by Mr Paul Blier in the aforesaid case that intervening at this stage would be premature. The Bureau is especially convinced that it would be premature to intervene at this stage since the expert witness for complainants, Mr Van Der Meerschen, stated that speculation has ceased, that the market is dead, that we are in a period of transition, that for the moment no one is making any move, and that the values as stated would be valid if the land was excluded from the permanent agricultural zone.

The Bureau is accordingly of the view that complainants did not discharge the burden on them to show that the value of the land under consideration was affected by the filing of the provisional plan. The evidence submitted by complainants was to the effect that if the zoning is made permanent the value of the land will be that of agricultural land, whereas if the land is excluded from the permanent zone it will be worth at least the value stated.

The municipal value of the land before Bill 90 came into effect was upheld in both cases.

Although the Board is not bound by the decisions of the Bureau de Révision de l’évaluation municipale foncière of Quebec, it certainly should not ignore them. In my view, the observations made in the two cases cited are very relevant and the decisions are correct. In deciding the case at bar I have no hesitation in accepting the rule embodied in these decisions.

I conclude that the appellant has not established that the true value of the land at December 31, 1979 was $450 an arpent, and has not discharged the burden upon it of showing that the market value of the land on December 31, 1979 was not at least the purchase price, namely $505,000. The respondent did noterr in his application of subsection 10(1) of the Income Tax Act.

The appeal should accordingly be dismissed.

Appeal dismissed.