Henry Appell, Gwennith Appell v. Minister of National Revenue, [1981] CTC 2232, 81 DTC 206

John B Goetz:—These appeals by the appellants for their 1974 taxation year. The appellants filed identical notices of appeals as they were partners in the operation of Sunnyslope Kennels, a business operated at 4696 South East Marine Drive, Burnaby, British Columbia.

It was agreed by counsel that as the issue in the two appeals was precisely the same, evidence called would apply equally to each appeal.

In their respective notices of appeal, the appellants state that the capital gain on the sale of property in question had been increased to $37,400 by the Department of National Revenue, and it calculated the capital gain as follows:

The respondent contends that the adjusted cost base should be $129,712, whereas the appellant claims that the adjusted cost base should be $190,000.

Issue

The sole question to be determined is what was the capital gain received by the appellants on the sale of the property and the sole issue is what was the adjusted cost base of the property resulting in the interpretation of the V-Day evaluation of the land?

Facts

The appellants were joint owners of 4696 South East Marine Drive in the minicipality of Burnaby, and operated a business on that property which was located in what was known as the “Big Bend’’ area of Burnaby. There is not material difference between the taxpayers’ valuation of the buildings and the Department of National Revenue value thereof and consequently the issue resolves down to the valuation of the land.

The first witness called by the appellants was one Dennis Collingwood, AACI, RI (BC). His qualifications filed in his appraisal brief indicated that he studied Agriculture and Field Husbandry at the University of Saskatchewan. From 1942 to 1946 he served in the RCAF, nd in 1946 he entered into real estate and appraisal work. From then on he was deeply involved working for the Corporation of Burnaby in 1947, appraising land, industrial commercial, residential and agricultural real estate. The bounds of his qualifications show that he is an eminently qualified appreaiser, being thoroughly intimate with the Burnaby area where he appears to have practised all his life as a professional. His appraisal of the property, as filed, was clear, concise and readily understandable. He described services available to it and the sewage system thereon by septic tank. It was zoned M3, which zoning provides for heavy industrial activities and allows for all uses of M2 zoning (light industrial uses), plus a variety of commercial and industrial uses and most types of manufacturing and processing. The land in question, however, was listed as M-3A zoning and had to be considered as a non-conforming use. As this was in operation before the zoning change, it was held to be a permitted use and treated as such in his appraisal. The property is situated on the south side of Marine Drive and is rectangular in shape. Entrance to the driveway from Marine Drive averages approximately 40 feet wide by 150 feet deep. The remainder of the site has a 210.78 frontage on Ingram Street (not open). The existing main structure is built on concrete footings and foundation. The rear of the lot has been filled with old building materials covered with five feet of good compacted clay fill. This fill was levelled, graded and planted to grass about eight years prior to assessment and it is presumed pilings would have a high-load rating. The land on the whole is level and well drained. Mr Collingwood gave a full description of the buildings.

Mr Collingwood appraised the property at $155,000, of which $85,000 was attributed by him to the value of the land. He was familiar with and had detailed knowledge of the area and the history of the various plans which the municipality had for the area throughout the years. In fact he was the only witness who had immediate knowledge of these matters. He evaluated the land at $85,000 ($35,000 an acre for 2.428 acres). He reaches this figure on the cost approach and income approach and maintains that the central issue in the valuation is the effective zoning of the property on its V-Day value. At the time of V-Day it was zoned M3 industrial A, except for a strip along the roadway which was zoned residential. It was zoned M3, was developed for use as M3, and was actually being used for M3 (M3A—dog kennel). No other property in the vicinity had a combination of these three attributes. He clearly states that this would not be the case if the fill required to improve the land to enable the M3 activities to be carried on had not been performed by the appellants. The M3A purpose was known as a permitted non-conforming use which continues for the life of the building. There was nothing to prevent it from being continued to be used as a nonconforming use.

Mr Collingwood takes a strong view that though the City Council had indicated that it was considering a development plan for the “Big Bend’’ area which included the appellant’s property, the pertinent fact was that, at V-Day, the property was zoned M3, developed for use as M3 and actually being used as M3, and that therefore it should be valued on that basis.

Mr Collingwood states that it was not appropriate to value the property as agricultural land because even if it were eventually rezoned as agricultural, it could not be used for agricultural purposes because of the fill and work that had been performed on it by the appellants in their use of the property. He says the continuation of non-conforming use cannot be stopped for the life of the building as, even if the property were sold, others could continue to so use it. He states that the only other lot in the surrounding area was one that had fill in it but was not being used for M3 purposes and therefore had to be considered on an entirely different basis. No other lot in the area was capable of and actually being used for M3 purposes along Marine Drive. In using the market approach, Mr Collingwood attempted to get sales of comparable properties zoned as M3 industrial, and as there were no such properties in the immediate vicinity, his comparables were contemporaneous to sales of properties on Norland Avenue which were of comparable size. Although the land around the appellants’ was raw peat land, (34 feet deep of peat), it had therefore a very different value. He states that it was not practical to rezone the subject property to agricultural and it was ultimately rezoned as P2 (public use). When the property was purchased from the appellants by the municipality in 1973, it was still zoned M3. The price received by the taxpayers at that time was based on a later appraisal made by Mr Collingwood at the request of the City of Burnaby which still valued the land on an M3 basis. This was accepted by both the municipality and the appellants as an appropriate appraisal to settle a bond. It was therefore not a sale forced upon the City of Burnaby other than the fact that the City intended to use part of the land for a new road.

Mr Collingwood says at page 38 of the transcript:

A. Well, we do a lot of Valuation-Day appraisals and we’ve done, I couldn’t count the number. But our policy is, and I thought it was one of the department’s, that they accept that we are governed under our ethics really to appraise it as it was as of that date including zoning, and I would see no reason why it would vary somewhat for this particular case.

Certainly rumblings from the Municipality on about that time, but nothing was definite and it never did come to pass. There will be no reason why I would treat this appraisal any different than what I had treated others which would be for what it was at the date it was or the date it was effective.

That’s all I could say to that.

Mr Collingwood describes the “Big Bend’’ area as an area south of Marine Drive with an eastern boundary of the Fraser River or the New Westminster boundary, and would say Boundary Road on the West, the City of Vancouver and the Fraser River on the South. Marine Drive which ran directly in front of the appellants’ property was paved. At page 18 of the transcript, he describes “non-conforming use’’ as follows:

A. Well, “non-conforming use” usually falls in these categories that as long as the present buildings and business are operated in good standing, they can continue to operate for the life of the building or the imporvements, as long as they provide the utility and are capable of providing the use.

Exhibit A-4, filed by the appellants is a sketch of lot 114 (the land in question), showing that Nelson Road was driven right through it and also showed the location of the buildings that existed at the time of sale.

At page 25 of the transcript, Mr Collingwood stated as follows:

. . . Norland Avenue, 1971, has a limited number of sites used industrially that had required piling or filing and had been used (for) industry. The remainder was garden, some of it was blueberry, but it was comparable to Marine Drive and it was removed to Central Burnaby and these values reflected what was taking place for industrial land in 1971. These three sales all took place prior to December 31st, 1971 and they show a range of 33, 35 and 34,000 per acre and because of the site conditions of these three particular sales, the size of them I chose them as the most comparable in which to relate to the market value of the subject property.

In using the income approach, Mr Collingwood carefully describes how he did this at pages 28, 29, 30 and 31 of the transcript:

Q. . . . Now, would you please describe how you decided to use a 71/2 % capitalization rate for the income attributable to the land of $85,000?

A. Yes. Having arrived at what was actual income according to what I had received and it fell in accordance with my findings for rents. The question then was that part of the land was not fully developed as to buildings for an M-3 zoning. There was a permitted use for 50 to 60 percent coverage of that site and these buildings didn’t represent that much, and therefore I decided that the land was not developed to its total capacity; so I decided then that in order to keep the income in the right perspective to the building, I would use a land residual or a building residual because I felt I had established a fair market value for M-3 land in my $85,000. And at that time people were accepting vacant sites with a return of from 6 to 8 percent on land because there was accrual to land values, land was appreciating and people were accepting a lower rate on land at that time, and a good deal of land was being sold with a 6 percent return, in particular parking lots in Vancouver. 50 I applied a 7 Zz % interest to the land value and deducted that from my income after expenses.

This left a value to the building or a residual income to the building of $5,670. I then capitalized that to get the building value which I thought was appropriate. During 1971, people were selling properties or accepting a return of anywhere from 8 to 9 /2%, depending on what they wanted to recapture for their investment and 9.5% on buildings was an accepted policy that we were using in appraisal theory at that time. I applied it to this one and that gave me a value of 59,684 added to the 85,000 for land gave me a value of 144,684 and that value is determined by the existing income.

Q. All right, now if you go over the page, pages 19 and 20 are the summation of your report and could you go through that?

A. Well, then, we are supposed to be here arriving at what is market value for V Day, the same as most appraisal instructions are, what is the market value. And we felt with adjustments either for location or for site fill that the land value that we had established was satisfactory in our opinion. We had knowledge of an offer to purchase in 1972 of this property for 175,000. We were shown this and I knew that a man from Calgary had made certain investigations and was interested in buying it. His offer had been at that time 175,000 and it was subject to confirmation of zoning then by the Municipality.

By this time I was aware of what was happening and it was pretty obvious by then that Burnaby intended to expropriate the property and so when he applied to the Municipality they made it pretty obvious that they wanted, they intended to expropriate and change the zoning for the use that they proposed to expropriate it for. Therefore he declined to go through with the property, but to me, I felt that this 175,000 was the market value to the property assuming that he could have continued with his objective or what his objective was.

Therefore, between the cost approach which is 155,000, the income which was not developed to its highest potential of 145, the fact that I wasn’t sure that all the income I had been able to include here including the owner’s advantages, living at the site, he lived on a separate lot, but he was enjoying advantages, parking and other things on the site. I felt that the 155,000 in my opinion as shown on page 20 was fair market value for 1971.

Mr Collingwood was carefully cross-examined by the capable counsel for the respondent and it was from his frank and clear approach that I was impressed with his evidence. He was questioned about the availability of services to the areas as having some effect and his answer was: “True, that could be a factor that might be considered but it wasn't critical’’.

He was questioned on access whether there were more roads in the Norland area and stated:

A. No, I don’t think there is more roads (sic). The fact (is) that Marine Drive has always been an industrial route from Vancouver to Westminster and out to the freeway. Norland, 1971, Norland, while it was closer to the Trans-Canada, it certainly wasn’t, it isn’t even on this map.

He mentions Marine Drive, Patterson Avenue, Royal Oak Avenue and connecting route to Annaccis Island across the bridge, Queensborough. He was also questioned about the overall development near Norland Avenue and answered:

Q. You’d agree with me, would you not, that that is a factor in determining land values?

A. Well not necessarily. Land had one specific use, how it’s zoned and what use it can be put to and it doesn’t matter where it’s located for industrial use. The value to that use is what you can use it for and I don’t think it makes any difference in Burnaby as to the location.

Q. In other words, your position would be that properties, a piece of vacant land in a developed area would be worth exactly the same as the same vacant property in another area that is not as highly developed?

A. Well, I’m saying that Norland Avenue was not developed. Norland Avenue didn’t enjoy any different situation than Marine Drive. Had no sewer. It was peat land.

Mr Collingwood disagreed with counsel for the respondent that there was very little industrial growth in the central valley area inclusive of the Big Bend and Norland Avenue. He stated as follows in cross-examination:

A. Proposals for changes have to be considered but they also have to be, in our business we have to have pretty good evidence that there is going to be some change before we could alter our opinion.

Mr Collingwood was then questioned with respect to zoning and answered that proposals for changes have to be considered with respect to rezoning, and he found in his business that he had to have pretty good evidence that there has to be a very definite firm commitment to a rezoning plan before he changes or alters his opinion as to the existing value of a property zoned at the time of appraisal. He says specifically:

A. Well, it’s been our experience that unless there’s something pretty definite, we don’t go along with it because we’ve been caught with these things where there’s going to be a change and five years later it’s never been adopted or never been passed by Council. They may even get to third reading and never get to final reading and, as an appraiser, we can’t use it unless it’s pretty definite.

Mr Collingwood says that an appraiser would need to know about any rumblings of a possible redevelopment plan emanating from City Council and of the overall plan already set by the planners, and whether it was going to be adopted in some immediate future and not way down the road. His view and experience in dealing with the City is that adopting a developer’s plan in principle is certainly not conclusive. He stated:

A. I’m not so sure because I’ve had some bitter experiences at Burnaby council, and one of them not so long ago, and their deliberations and rumblings, whatever you might call them, turn out to be, when you get to council, there’s a complete change in the attitudes of some council, there’s changing council and it never materializes.

Mr Collingwood admitted acting on behalf of a number of property owners to “protect them against down zoning”. This was not until late 1972. He States that in 1971-1972, there was a trend upward in real estate, particularly in 1971. In answer to a question put to him by counsel for the respondent, he stated that the City of Burnaby purchased the land from the appellants in January 1974 for the declared sum of $230,000 on his recommendation and on the basis that it was zoned M3. He stated that even in 1973, the plan was still returned to the planning department for reconsideration and, further, that it was never finally adopted untill 1977.

Mr Peter J Bloxham was called by the respondent as a planner with the Corporation of Burnaby. He joined the Burnaby municipal staff in February 1973 and, in fact, was not involved with the Big Bend development until 1976. He filed Exhibit R-5 which seems to support Mr Collingwood’s appraisal in that the Marine Drive area of Burnaby (where the subject property is) is valued at $20,000 to $30,000, and land in the central valley (where Mr Collingwood’s comparables were) is valued as unserviced land at $30,000. It is to be noted that the Department of National Revenue valued the subject property at $11,000 per acre. Mr Bloxham agreed that the subject property was useless as agricultural property.

Basically, Mr Bloxham’s evidence was an attempt to set a historical picture of the very long period of time from early 1971 when the members of Council of the City of Burnaby talked, mused, considered, vacillated and, very slowly, dealt with the finalization of any development plan for the Big Bend area.

The next witness called by the respondent was Mr Koivane Yuh. Mr Yuh also filed his written appraisal and qualifications which, in comparison to Mr Collingwood’s, fall considerably short, although his academic professional training was obtained at Hong Kong Technical College and he did estate management work there and at the University of Reading, United Kingdom. He only became an accredited member of the Appraisal Institute of Canada in 1978. His work in Hong Kong related to rating and valuation surveyor (District Valuer) for the rating and valuation department of Hong Kong Government. He came to Vancouver, British Columbia, in 1975 and joined the Department of National Revenue as a senior appraiser in 1976. In comparing the two appraisals, Mr Yuh’s falls short of the force and strength of that of Mr Collingwood. Mr Yuh states that the Big Bend area was under an ‘intensive land use study” in 1971 and that an area zoning concept (phase I) was approved in principle in August 1971 by the Burnaby Council. Further, this zoning concept was modified in March 1972. He assumes that because of the rumblings in the City Council meetings with respect to zone development, a prospective purchaser would treat the land as very risky and liable to be non-conforming by the proposed changes. This is patently wrong. He thought the highest and best use of the land was to maintain the dog kennel business, with the probable reversion to a market garden if section 705 of the Municipal Act were broken. He talks of the offer to purchase the land by Greyhound Building of Calgary (which company is owned by “JPM Holdings Limited of Calgary”) on December 22, 1972, for the price of $175,000. He says this represents the market value of the subject property on December 22, 1972, only if it could be fully developed and used for industrial purposes, and therefore throws out the offer to purchase as having no import. Mr Yuh’s land value by way of cost approach related to 20 sales consisting of all available sales in the subject area transacted in 1971-1973, but it must be remembered only the lot immediately adjacent to that of the appellant’s land had been filled. It is on this basis that he values the land on V-Day at $26,000, at the rate of $11,000 per acre. His income approach very closely approximates the cost approach as did Collingwood.

Findings

Even after council approved the Big Bend development plan at one of its meetings in March 1972, it was still not final and the rezoning was subject to public hearings. From reading all the evidence and exhibits, it seems that Mr Yuh’s approach to the value of the land was that it was not zoned M-3 but that it was to be rezoned for use as agricultural property, which never in fact happened. This was a fundamentally wrong premise which certainly affects the strength of his appraisal.

Counsel for the appellants in his written submission states at page 16:

For Mr Yuh to value it on the basis of A-3 zoning because that was part of a Development Plan accepted in concept only by Council and deferred, (and never implemented, because the 1977 rezoning for the subject property was actually to P-2) when such use was practically impossible because of the fill on the land, and when such basis assumes that the owners would cease to continue to utilize the land in accordance with its highest and best use is, I submit, untenable.

Mr Yuh kept pushing the reason to valuate the land as agricultural land as being: (p 173 of transcript)

The dog kennel use was not as profitable as the alternative use, that is to say for retaining the buildings. However, retaining the use of the site for whatever is allowable under M-3 with the existing buildings, so I have accepted these agricultural use sales as indicated value for the subject property.

The highest and best use of the subject property on V-Day was to maintain its actual use, namely M3A, and Mr Yuh refused to accept Mr Collingwood’s industrial use for the land as a more appropriate comparable than the agricultural use of the land because he says it would be a nonconforming situation (which was wrong), and the planning policy for change of the zoning was the fact to be considered.

In his written submission, counsel for the appellants stated:

At transcript page 203, line 22 to page 204, line 2, Mr Yuh admits that he wouldn’t argue about the appropriateness of Mr Collingwood’s comparables if it were not for the “planning change or the zoning uncertainty’’, but as Mr Yuh admitted that when he wrote his appraisal report he was misinformed on this point (transcript page 192, lines 11 to 16), I submit that his appraisal report should be rejected as being founded on an erroneous understanding of true facts.

At transcript page 208, line 8, there commenced a discussion of sale number 1 in Mr Yuh’s appraisal, being described by him as the most appropriate sale. This property was raw peat land with scrub on it, on which no farming activity was being carried on, and which would require considerable preparation even for market gardening (transcript page 208, line 8 to page 210, line 9). It is difficult to understand how this could be described as the most comparable sale to the subject property.

Mr Yuh described the purchase of the property by the City of Burnaby as a compulsory purchase whereas in fact it was negotiated sale, the value having been determined by Mr Collingwood.

Mr Collingwood felt that it was the proper position for an appraiser in evaluating land that it be done on the basis on exact conditions on V-Day, and not on the basis of some hypothetical future plan. He stated that an owner was entitled to compensation for what he has, not for what it might become if certain events occur. Mr Yuh admitted that he was misinformed on certain facts when he wrote his appraisal.

I wish to commend both counsel for the appellants and for the respondent for the excellent and thorough way in which they represented their clients during this hearing and, in particular, I wish to commend them on the thoroughness and completeness or their long written arguments which I have very carefully considered.

I feel, though, that Mr Collingwood, having dealt so long with the City of Burnaby, having vacillated in other development plans, took the proper view that he had to evaluate the appellants’ property as it was then zoned, without regard for a vague possibility of the zoning being changed or that they could no longer use the land as a non-conforming use. It took the City of Burnaby seven years to pass the final By-Law confirming the Big Bend development. I think it is common knowledge that membership in City Council changes and, as a result, attitudes and values of the Council as a whole change, and City planners are replaced regularly and their general concepts abandoned and thrown away. On many occasions City Council development plans proceed for a considerable period of time, only to be dropped for something completely different. Quite clearly, at all relevant times, starting from prior to V-Day when the development plan concept was first raised in Burnaby City Council, many steps to deffer the plan were taken and the planners were sent back in again and again to come forward with different ideas. Early approvals in principle in actual fact mean nothing and are not binding upon anyone willing to take the risk to purchase the property such as Greyhound Building of Calgary did in 1972.

Counsel for the respondent in his argument says that the key consideration “in this particular case must be what the land could be used for a Valuation Day’’. The documentation adduced into evidence, and in Mr Blox- ham’s testimony, clearly indicates that the sole use for which the Burnaby Council preliminary plan would have been approved was for some form of agricultural or recreational use. It is on this assumption that counsel for the respondent argues that Mr Yuh’s approach was the appropriate one. I do not consider the question of access as being of too much import to weigh in the evaluation of the land on V-Day. Mr Yuh states that “the remoteness of the Big Bend area from major road routes has, to some extent, hindered its (Big Bend) development”.

At page 138 of the transcript of evidence, Mr Bloxham says:

Q. Yes, and it would come under the heading of treated service land, the subject property?

A. Under treated serviced?

Q. Yes.

A. Yes, in a sense that’s true in that many of the services are there as Mr Collingwood described.

Counsel for the respondent deprecates Mr Collingwood’s adopting the residual method of valuation in the determination of the valuation of the subject property based on the income flow (Exhibit A-6, Appraisal Report, p 16). This method requires that there be a separation of the investment between the land portion and the building portion of the property. As Mr Collingwood explained, he did this because he felt he had established a fair market value for M-3 land at $85,000. Mr Yuh’s approach is that there is a potential loss because the land, though being used for non-conforming purpose, therefore drops in value. It was on this basis that he arrived at his value of the land at $26,000, which he relates to his use of comparables. There are too many “ifs” and “mights” involved! in counsel for the respondent’s argument about the “non-conforming use” property reverting from an industrial use to an agricultural use, should the business be interrupted for more than 30 days or the property destroyed by fire. He actually states the fact that the property was used in an industrial capacity as irrelevant. I cannot agree with him here.

The appellant in fact a received compensation on the basis of the actual zoning of the subject property (M-3) from the sale to the City of Burnaby for $230,000, and not on the basis of a possible rezoning in the redevelopment plan which, on December 31, 1971, had been deferred. Yuh was not aware when he wrote his appraisal report that this plan, on which he based his assumptions, had in fact been deferred.

Counsel for the respondent referred to the case of Board of Education for the Township of North York v Village Developments Ltd (1956), 3 DLR (2d) 161, showing that the valuation should not be made as if rezoning were inevitable or as if it had occurred, but rather “whether such a probability existed and if it did exist, its degree”.

Counsel for the respondent also referred me to Re Gibson and City of Toronto (1913), 28 OLR 20, and Re Forbes and City of Toronto (1930), 65 OLR

34. I have considered all three cases quite carefully.

Having regard to the evidence as a whole, I find that the respondent’s appraisal of the valuation of the land was too low but, by the same token, having regard to all of the evidence, I find that the V-Day valuation of Mr Collingwood, the appraiser for the appellants, was somewhat too high. Mr Collingwood, in giving his valuation to the City of Burnaby when it purchased the land from the appellants, valuated the land at $45,000 per acre. This was three years after V-Day. On V-Day, he evaluated the property at $35,000 per acre, giving a revised value to the land of $85,000 . I feel that the figure of $70,000 would be more suitable and so order and direct that the matter be referred back to the respondent for reconsideration and reassessment accordingly.

Appeal allowed in part.