Bay Centre Apartments LTD v. Minister of National Revenue, [1981] CTC 2521, 81 DTC 489

The Chairman:—The appeal of Bay Centre Apartments Ltd is from a reassessment dated March 17, 1980, in respect of the 1974 taxation year by which the Minister of National Revenue revised the appellant’s taxable capital gain previously assessed on the basis that the fair market value of a certain parcel of land, on December 31, 1971, was $650,000.

Summary of Facts

In its notice of appeal, the appellant alleges the following facts:

The property concerned was owned by the Company on December 31, 1971 and sold in 1973 during the Company’s fiscal period ended June 30, 1974. An independent valuation of the property was made on November 10, 1971 and showed a value of $985,000 for the land as at that date. On April 3, 1979 a second independent appraisal of the property was obtained by the Company and showed a value of $964,000 for the land as at December 31, 1971. The Department of National Revenue, Taxation made, during 1979, at least three appraisals of the value of the property as at December 31, 1971 which gave figures of $430,000, $640,000 and $650,000. The property concerned was sold under circumstances such that the price obtained was considerably less than the fair market value of the property at the date of sale. The estimated value at the date of sale, supported by an appraisal made just prior to the date of sale, was $1,446,000 for the land. The sale proceeds were only $900,000.

The respondent, in his reply, makes the following assumptions of facts:

7. In so reassessing the Appellant for its 1974 taxation year, the Respondent assumed, inter alia, that:

(a) the Appellant purchased the land in 1970 for $29,168.50 from one of its shareholders;

(b) shortly after the purchase of the land, the shareholder who had previously owned the land, and who owned 50% of the shares in the Appellant, sold his shares for $200,000.

(c) in March 1973 the company commenced construction of a 482-suite high rise apartment building on the land;—

(d) in February 1974 the land and incomplete apartment building was sold to Daon Development Corp, for $2,745,011.13 with an allocation of $900,000 to land and $1,845,011.13 to improvements, which were the incomplete apartment building;

(e) the Valuation Day value of the land was $650,000

At the hearing, counsel for the respondent withdrew the assumptions set out in subparagraphs (a) and (b) of the respondent’s reply to the notice of appeal. There was also agreement between the parties as to the selling price of the subject property and no dispute exists as to the allocation of $900,000 to the value of the land at the date of sale.

The only remaining issue for the determination of the Board is the value of the subject land as of December 31, 1971.

Finding of Facts:

Other than Mr Eirik Eirikson, President of the Bay Centre Apartments Ltd in 1974, counsel for the appellant, in support of his submission that the V-Day value of the subject land was more than $650,000, presented two witnesses who, on the basis of their credentials, were recognized by the Board as being expert witnesses. The first was Mr Wesley Hanley, who was accepted as an appraiser by the Coronation Credit Mortgage Corporation to evaluate the subject property for purposes of granting to the appellant a mortgaged loan on the said property. Mr Hanley’s evaluation report, dated November 10, 1971, estimated the fair market value of the subject land at $985,000 (Exhibit A-1).

After the property was sold and in its 1974 tax return, the appellant computed its capital gain on the basis that the V-Day value of the subject land was $860,000. In his assessment, dated March 19, 1979, the Minister of National Revenue reduced the appellant’s adjusted cost base to $430,000. Subsequently, in his reassessment of March 17, 1980 which is in issue in this appeal, the Minister of National Revenue revised the appellant’s capital gain on the basis that the V-Day value of the land was $650,000.

The appellant retained the services of Penny & Keenleyside Appraisals Ltd to establish a value of the subject land. According to that firm’s appraisal report, dated April 3, 1979, the fair market value of the land at December 31, 1971 was found to be $964,000 (Exhibit A-2).

The respondent also had an appraisal report made of the subject by Mr Gerald Allan Folstad, a qualified appraiser employed by the Department of National Revenue. His report is dated October 31, 1979 and the V-Day value is stated therein to be $650,000 (Exhibit R-2). Because of his credentials and his experience as an appraiser, Mr Folstad was also accepted as an expert witness.

Since the opinions expressed by the expert witnesses in their respective appraisal reports differ as to the V-Day value of the subject, it is necessary in determining the issue to comment as to the degree of reliance given by the Board to the evidence of each of the expert witnesses.

The opinions expressed by the three appraisers are the results of studies made of the subject and the V-Day value of the property was computed by each of the expert witnesses, according to evaluation methods which are geneally used and accepted in the appraisal profession. Once witnesses, on the basis of knowledge, accreditations and work, have been accepted as expert witnesses, it is not, in my opinion, mandatory for purposes of determining the issue to place more reliance on the evidence of a witness who appears to have the greater academic qualifications.

There are however certain factors which I believe must be considered in attempting to choose which of their differing opinions is the more realistic fair market value of the subject as at December 31, 1971. The first of course is the experience the appraiser has had in the specific type of property he is being asked to evaluate. The second is the purpose for which the appraisal is requested. The third factor would be that the reports are merely opinions of value arrived at by appraisers applying certain recognized evaluation methods to specific information about the property at a given time, considered by the appraiser to be pertinent in establishing its fair market value. Finally, without questioning the appraisers’ professional ethics, objectivity or credibility any more than one could question those of any other professional, it would be unrealistic not to realize that appraisers, like any other professionals, are retained by and work for their clients.

Turning now to the first appraisal report of the subject made by Mr Wesley Hanley, dated November 10, 1971 (Exhibit A-1): Mr Hanley is an experienced and knowledgeable appraiser and proved to be a credible witness. His appraisal report, as suggested by counsel for the respondent, was relatively short and some of the figures he used in applying the sales analysis method in evaluating the property were not otherwise substantiated. Mr Hanley testified that his report was requested for the specific purpose of permitting the appellant to obtain a loan from the Coronation Credit Mortgage Corporation and that the information contained in his report is all that was asked for by the lender,or indeed necessary for that purpose. It is the respondent’s contention that no reliance should be placed on Mr Hanley’s fair market value of the property at $985,000 because of the unsubstantiated figures contained in the report.

It is to be noted that this evaluation of the subject property was made two months before V-Day, at a time when the public was unaware of the pending capital gains tax legislation. The purpose of Mr Hanley’s report therefore could only be to provide for the lender an estimate of the fair market value of the land in November 1971 for mortgage purposes. In my opinion, Mr Hanley’s report cannot be completely ignored.

The appraisal reports of both Penny & Keenleyside Appraisals Ltd (Exhibit A-2) and Mr Folstad (Exhibit R-2), were prepared for their respective clients for the purpose of computing the appellant’s taxable capital gains. No unfavourable conclusion as to the credibility of the reports should be reached because of these facts, nor should it be inferred that the report of Mr Folstad, a qualified appraiser, should not be relied upon simply because he is in the permanent employ of the Department of National Revenue. The Board is faced with what I consider to be three professional and objective opinions. They were arrived at according to accepted appraisal methods, the accuracy of which however depends largely on the personal appreciation, experience and indeed conjecture of each appraiser as to the several factors considered by them in arriving at what they consider to have been the fair market value of the property on December 31, 1971.

From the facts of this appeal, it would appear to me logical to utilize the computation of the V-Day value of the subject, the number of suites called for in the plans of the project ie 482 suites, the construction of which was permitted in the municipal zoning and accepted by the Burnaby Council in November 1971, rather than on the basis of a different number of suites which may have been eventually built on the site, but which was not contemplated by the appellant in 1971.

Considerable discussions were held as to which of the basis of calculation of value were the more accurate: an estimate of the value of the land based on the maximum usable square footage of the building proposed for the site or value of the land arrived at on the basis of the number of units, or suites for which the building was planned.

Mr Penny, in his report, used the price per unit approach; Mr Folstad used the price per square foot method and Mr Hanley, in his report, considered both the “per unit” basis and the “square foot” method and also took into account the residual land approach as well.

There appears to be no dispute as to the highest and best used of the subject land. The evidence is that in an area zoned R-5 in which the maximum possible floor-area ratio was 2.2, the construction of at least 482 suites contemplated was permissible by the Burnaby By-Laws in 1971. Although there was some argument as to which method was the best, no one disputed that the price per unit and the price per square foot approaches to value were both accepted methods of evaluation.

The net size of the subject land was calculated to be 164,198 square feet in Mr Hanley’s report and 164,354 square feet in Mr Folstad’s report. Applying the 2.2 floor-area ratio to Mr Folstad’s figure of the net size of the land, a high rise complex of 361,579 square feet, containing 482 suites, could be built on the site.

The substantial difference between Mr Penny’s estimate value of the land in 1971 ($964,000) and that of Mr Folstad ($650,000) does not result so much from the different methods used by each appraiser in arriving at these conclusions, but in their personal appreciation of and the interpretation they gave to the comparable sales they used in arriving at their respective basic values. Mr Penny concluded that the value of the property was $2000 per unit ($2000 X 482 = $964,000). On the basis of his comparable sales, Mr Folstad arrived at a basic value of $1.80 per square foot ($1.80 X 361,579 =

$650,000±).

Since the Board must first decide whether or not the Minister, in reassessing the appellant, was correct in his assumption that the value of the subject on December 31, 1971 was $650,000, I propose to deal now with Mr Folstad’s appraisal report.

In examination in chief and in cross-examination, Mr Folstad proved to be a competent and a credible witness. Because of his age, he may not have had the experience in appraisals as did Mr Penny or Mr Hanley, but he was indeed knowledgeable and was rightly accepted by the Board as an expert witness. There are however three areas in Mr Folstad’s appraisal about which I have reservations. One is the extent of his familiarity with the amenities and the services that existed at and around the subject site in 1971 as compared to those of the sites used in his comparable sales and for which he made adjustments. In cross-examination, Mr Folstad was unable to answer certain questions as to the accessibility, transit services, or shopping facilities that existed in 1971 on the different sites used to compare values with the subject land. There were certain factors which, in cross-examination, Mr Folstad had to admit he had not taken into account and which could affect the values of some of the sites chosen for purposes of comparison, such as the existence of a cemetery in proximity of one of the comparable sales.

Another area about which I have reservations is Mr Folstad’s refusal to admit the validity of the approach used by the appellant in evaluating the land by means of the per unit method. Mr Folstad did not, to my knowledge, claim that the per unit method of evaluating the subject was contrary to accepted evaluating methods nor did he explain to my satisfaction why purchasers would prefer to buy property, the usable area of which was described in square feet rather than by describing it in terms of units, which the appellant claims to be the preferred description of buyers in the market place.

More importantly, in my view, is the doubtful basis on which adjustments were made or not made to comparable sales in order to arrive at an adjustive value of the subject on a per square foot basis. This is particularly true in adjustments for the time factor. Mr Folstad based his adjustment for time on the premise that there was an increase in the value of the land in Burnaby from 1971 to 1972 when the evidence is that there was no increase in the value of land in that period on a per square foot figure, and a slight decrease on a per unit figure. The table showing real estate trends in Metropolitan Vancouver in 1971-1972, included in Mr Penny’s appraisal report, was not challenged by Mr Folstad (Exhibit A-2).

Mr Penny, a very credible witness, testified that his appraisal was made independently of the Real Estate Trend Table, which he used simply as a check of the accuracy of his appraisal. Even taking into account the general nature of the information that goes into the computation of the Real Estate Trend Table, as suggested by Mr Folstad, it can and indeed it must give some rough indication of the values that existed in Burnaby in 1971.

It is to be noted that $6 per square foot in high rise construction, as shown in real estate trends for Burnaby, is the basic figure arrived at by Mr Hanley in his evaluation report in 1971. Although Mr Hanley’s appraisal report may indeed have omitted the source of some important figures in support of his conclusions, it was nevertheless accepted by the lender for whom it was made as being the fair market value of the subject in November 1971. Although the Board would probably not completely rely on Mr Hanley’s report in the form it was presented for the determination of a tax issue, it nevertheless, in my opinion, is a guide to land values in Burnaby in 1971.

In reviewing the evidence, I have come to the conclusion that the appellant has succeeded in satisfying the Board that the fair market value of the subject as at December 31, 1971, was more than $650,000.

I am also satisfied that Penny & Keenleyside’s appraisal of the subject, whether computed on a per unit or per square foot basis, is much more in keeping with the independent appraisal made of the subject by Mr Hanley in November 1971. Furthermore, the figures of the Real Estate Value Table, reflecting the general value of land in Burnaby, BC in 1971, are much closer to Mr Penny’s evaluation than they are to Mr Folstad’s appraisal and they are, in my opinion, a valid guideline as to what the value of the subject land was as at December 31, 1971.

For these reasons, the appeal is allowed and the matter referred back to the Minister for reassessment on the basis that the fair market value of the subject land as at December 31, 1971 was $964,000 which is to be used in computing the appellant’s capital gain arising from the disposition of the property in the 1974 taxation year.

Appeal allowed.