Charles N Gowen v. Minister of National Revenue, [1980] CTC 2188, 80 DTC 1176

Delmer E Taylor:—This is an appeal heard in the City of Vancouver, British Columbia, on December 6, 1979, against income tax assessments for the years 1974 and 1975. In these assessments, the Minister of National Revenue altered the appellant’s V-Day valuation on certain real property sales which occurred in the years 1974 and 1975, and reassessed tax accordingly. The respondent relied, inter alia, upon sections 3, 38, 39, 40 and 45 of the Income Tax Act, SC 1970-71-72, c 63 as amended.

Background

In 1968 the appellant purchased for $25,000 a 440-acre ranch in British Columbia (the “property” or the “ranch”). In 1974 he sold the “main ranch” consisting of 227 acres plus improvements for $68,986. He sold Lot 1 in 1974 for $6,501, and the remaining lots in 1975 for a total of $23,514. He reported the gain on the “main ranch” as a capital gain, and the gains on the lots as business income.

Contentions

In essence, the position of the appellant, and upon which he based the filing of the tax returns in question was that the property should be considered as two parcels—one for a “cow-calf” operation to be valued at $259 per acre, and the other portion suitable for subdivision at $320 an acre.

The respondent, while recognizing that there could be some ultimate value as a Subdivision (and indeed the appellant later did sell some lots in years subsequent to 1971), averaged out the V-Day value at about $145 per acre for all the property.

Evidence

The appellant generally reiterated positions he had taken earlier in dealing with Revenue Canada, and which he had summarized in a Statement of Facts attached to his Notice of Objection. The salient points therein, in his own words, are these:

During the 4 years from 1968 to 1971, my foreman, his wife, my family and I worked long hard hours to improve the ranch so it could support us. The following are a few of the things we did and I doubt if you can imagine the hardship and effort.

During 1970 and 1971 many people stopped by wishing to buy land to build a cabin and offered from $500 to $1,000 per acre.

. . . a few of the reasons for my valuation day market value.

(1) no of acres in hay production

(2) no of acres for irrigated pasture

(3) no of acres for non-irrigated pasture

(4) amount of fencing

(5) available grazing land with trails and water

(6) cow herd capacity

(7) unique features of this valley, not found anywhere else within commuting distance of Penticton.

(a) evergreen belt, fir, birch, juniper, maple, cottonwood and wild flowers.

(b) wild game, animals and bird population.

(c) cool breeze in evenings during the hot summers.

(d) few mosquitoes

(e) low rattle snake population

(f) surrrounded by the Oshanola Forest Reserve

(g) ample water supply with several creeks running through the property

(h) sufficient water rights for all ranch needs

(8) easy access to highway

(9) just below heavy snow and frost elevation, but high enough to get extra moisture for growth.

(10) personal knowledge of sales nearby my rance 1971 and 1972.

The appellant made reference in his “Statement of Facts” to some 22 sales of property in the general area during the time period 1970-1975 which he considered relevant. A review of these by the Board with the appellant indicated that one in particular, described as “Okanagan Falls (F899) 320 acres” at $390 per acre (“Okanagan”) which was sold in 1972, was that upon which he mainly relied.

In addition, the appellant presented an evaluation report which had been prepared at his request, but on the suggestion of Revenue Canada, by a Mr Pethybridge (of Kamloops Appraisal and Agricultural Advisory Services Ltd). Mr Pethybridge did not attend at the hearing but the report indicated a value of $414 per acre (even higher than the $259 to $320 per acre valuation placed upon the property by the taxpayer in his income tax returns), and considerably higher than the approximately $145 valuation per acre accorded by the department in the assessments at issue.

Mr Gowen also filed with the Board, over the objection of counsel for the respondent, a copy of a letter received from Revenue Canada (Exhibit A-2) as a result of the appellant filing his Notice of Objection, after having provided to Revenue Canada the evaluation report prepared by Mr Pethybridge. The contents of that letter are as follows:

Regional Appeals Office

Dec 11, 1978

Mr Charles N Gowen,

P O Box 189,

Chilliwack, BC	Our file	Notre référence
V2P 6J1	R W Crawley
	WITHOUT PREJUDICE
Dear Mr Gowen:
	Re: 1974 and 1975 assessments

We have received a report from a Senior Appraiser of the Vancouver District Office, setting out his opinions following review of the Departmental appraisals prepared by the Penticton District Office, and the appraisal prepared by Mr S Pethybridge.

His report is not a formal appraisal, but an analysis of the strengths and weaknesses of each appraisal, and an estimate of the values based upon his findings.

In the opinion of the Senior Appraiser, there is a suggested value range of around $240-245 per acre for the 239.57 acres described as the “main ranch”, DL 2988. Allowing $9,400 for improvements, this gives a value of between $65,700 and $66,900 for this portion. He suggests a value of between $2,460 and $2,512 for Lot 1, and between $13,650 and $14,000 for Lots 2 to 5, and 7. He points out, however, that this “speculation” on his part is subject to confirmation or correction by further appraisal.

You arrived at an “adjusted cost base” of $68,855.11 including improvements for DL 2988, of which $7,855.11 represented costs incurred since December 31, 1971. You reported an ‘‘adjusted cost base” of $5,790.97 for Lot 1, Plan 25027, and of $29,241.21 for Lots 2 to 5, 7, Plan 25027.

Looking at the array of figures before us, we are of the opinion that a reasonable solution to this case is as follows:

DL 2988 (“main ranch”)—we will accept your valuations as follows:

V-Day value:	$61,000.00
Land clearing	4,000.00
Culverts	209.33
Fencing, gates etc	1,200.00
Equipment	250.00
Barn	845.78
	$67,505.11
Interest expense	1,350.00
Other expenses	330.95
	$69,186.06

Lot 1, Plan 25027—you will accept a cost for this property of $2,716, the value determined in the second Departmental appraisal

Lots 2 to 5, 7, Plan 25027—you will accept a cost for this property of $13,762, again the value determined in the second Penticton appraisal.

It should be understood that this is not an attempt at “horse-trading”, but our considered opinion of the realities of the situation. In setting the value of DL 2988 in the range that he does, it is our opinion that the Senior Appraiser has dispelled any suggestion that he may be trying to defend earlier valuations. You may be assured that our approach is in confirmity. It is an endeavour to dispose of the matter without further expense to either side.

If you are prepared to accept our proposal, please advise and we will have reassessments prepared accordingly.

Yours truly,

(Sgd)

for Regional Director of Appeals

REC:hf

Tel 666-1451

PO Box 11121

1820 Royal Centre

1055 West Georgia St

Vancouver, BC

V6E 3P3

For the respondent: Mr G A Folstad, a valuator with Revenue Canada, presented a detailed and comprehensive report on the property dated September 25, 1979, but with reference to V-Day value. The result of Mr Folstad’s work is summarized in this way:

Revenue Canada-Taxation,

Vancouver, BC	SEP 25, 1979
Dear Sir:

In accordance with the request of Mrs Kern dated August 14th, 1979, I have appraised the property legally described as:

District Lot 2988, Similkameen Division of Yale Land District.

The purpose of this appraisal is to estimate the market value of the fee simple as at December 31, 1971.

In my opinion, the market value as at December 31, 1971 was $57,000.

Attached is my report of 30 pages and exhibits upon which this conclusion is based.

Yours truly,

(Sgd) G Folstad

Audit Division

GAF:ps

Encl

PAGE 29

CORRELATION AND FINAL ESTIMATE OF VALUE

In order to estimate the market value of this property, estimates of value have been arrived at using three common approaches with the following results.

Land	$48,000
Add Improvement value at depreciated cost	$ 9,000
Overall value by Market Approach	$57,000
Development Approach	$40,750
Income Approach	$47,000

The overall value by the Market Approach is $57,000, which is based on actual land Sales which occurred nearby.

The Development Approach suggests an overall value of only $40,750 and would not represent a practical alternative at this time.

The Income Approach at $47,000 closely collaborates the Market Approach and lends it additional support.

In summary I feel that an overall value of $57,000 fairly represents the market value of this property as at December 31, 1971.

Mr Folstad had not used the “Okanagan” property as a comparable for the following reasons:

(a) the location with regard to built-up areas was not comparable, that of “Okanagan” being considerably superior to the subject property.

(b) the purpose for which “Okanagan” had been purchased in 1972 differed markedly from the possibility for such use of the subject property in that year. “Okanagan” had in fact been sold as a ranch in 1970 for $94 an acre.

Counsel for the Minister noted that Mr Folstad’s report was the third prepared by Revenue Canada in an effort to resolve the matter with the appellant, and this report was prepared specifically for purposes of this hearing. Mr Folstad looked at several alternate ways of valuing the property, and concluded that the greatest value could be attributed to it treating it all as a ranch at V-Day, notwithstanding he was aware that certain subdivided lots had been sold since that date. On the basis of the most recent evaluation report (that of Mr Folstad—Exhibit R-1), counsel for the respondent noted for the Board that the Minister was prepared to adjust the values used in the assessments in question to bring them up to those determined by Mr Folstad.

Argument

While providing little in the way of jurisprudence upon which his case could be founded, the appellant commented:

I have considered and do consider my ranch superior to this piece of property as far as this cow-calf operation goes for these reasons. I have more available hayland. I had more buildings. My pasture was better. My grazing land was (better) because of the various climatic conditions. I know the other property very well

(but) without irrigation, I could get two crops of hay on my land where Mr Dwinell could only get one on those he irrigated. On my own place, I could pasture through the summer seventy head of cattle and I know Dick could only pasture forty head of cattle, because his grazing land was restricted in several ways.

Now, coming to the subdivision part. I think I have to, up to a point, base it on what Mr Folstad said. It appeared at the time to be superior, but here again with this water problem, which is going to even get worse, Farley Lake could revert entirely to the Indians. They have first rights on that water . . . .

Counsel for the respondent summarized his position in this way:

The best comparables, I would respectfully submit, are those that have been put before you by the Minister and a reasonable interpretation of the report should safely lead you to the conclusion that the value of the subject property as at valuation day cannot be any higher than that as given by Mr Folstad, an expert in real estate appraisal.

Findings

The Board makes reference to certain comments to be found in Arthur Donald Lauder v MNR, [1979] CTC 2911; 79 DTC 764, particularly at pp 2914 and 767 respectively:

Before commencing to examine the matter, the Board wishes to comment on the reference made by counsel for the appellant to the Friedman case (supra). While there is no doubt that in that decision the roles of “negotiator” and “expert witness” came in for some close scrutiny when they became intertwined, I fail to find therein the support suggested by counsel that the valuation report itself should be discarded. In that matter, there are two clear statements by Mr Lucien Cardin, Chairman of this Board, which must be kept in mind—both from 1602 (78 DTC):

Although such negotiations do not detract from Mr Lussier’s qualification as an evaluator and do not necessarily destroy all the contents and the conclusion of his report, they do force the Board to look more closely at how Mr Lussier, in his calculation, arrived at his conclusion.

The Board will, nevertheless, consider the evaluation report, but with more reservations than it otherwise would.

I subscribe to this perspective regarding evaluations, and it will be maintained in determining the present case.

The Board also notes the objection of counsel for the respondent to the filing by the appellant of the letter to him from Revenue Canada dated December 11, 1978. In essence, counsel’s point was that the letter could have no probitive value to the Board since it only represented part of the “negotiation process” between Revenue Canada and the taxpayer, and because it had been designated “Without Prejudice”. The objection of counsel to having the contents of the letter exposed to the Board is not one which I can support. In my view, in an income tax hearing before the Board correspondence on the point at issue at any level and for any reason between the two parties in dispute would certainly be germane. The appellant was in order in his request and insistance that the letter itself be filed. With regard to the consideration which the Board should give to the contents of the letter, counsel is on safer ground. Unfortunately for the appellant, the letter gives no facts, merely opinions, and I do not see that it is the role of this Board to restrict in any way the efforts of either party in advance of the formality of a Board hearing to conclude a satisfactory arrangement. The conditional acceptance of certain submissions by Revenue Canada on behalf of this appellant at that stage of the affair cannot be taken into account at this level of the matter. The appraisal report prepared by Pethybridge (Exhibit A-1) and submitted by the appellant as evidence can only stand on its own merits, and its apparent value in the eyes of Revenue Canada at the time that letter was written is not relevant. As assistance to this taxpayer, the Board would make reference to a recent decision—P Lit- vinchuk v MNR, [1979] CTC 3141; 79 DTC 899, at 3143 and 901 respectively:

The Board has no doubt that some of the expenses claimed by the appellant might have been incurred, and that some or all of these might be deductible in relation to his commission income. However, the fact is that the Board has no basis at all upon which to accept either any portion or all of the amounts so claimed. No information was provided to the Board by counsel for the Minister to support the apparent offers of settlement recited in the Notice of Appeal at $600, $600, $300; and $720, $720 and $300 respectively, and the role of the assessor with Revenue Canada may well include the exercise of such discretion at that level of the matter. There were no reassessment notices issued relating to such possible arrangements and for his own good reasons the taxpayer saw fit to reject these “offers” by Revenue Canada. The Board has no power to reinstate them and the matter must be determined on the basis of the assessments in question.

The Board also adds that the ancillary information and the personal elaboration (apparently provided to Revenue Canada by Pethybridge and not available to the Board), must have been powerful and persuasive indeed to overcome the substantial areas where the support and rationale for major assumptions and presumptions contained in the report are not readily evident to me. For the record, though, the major relevant aspects of Mr Pethybridge’s valuation report were reviewed with this appellant and it was obvious that the conclusion ($414 per acre) was founded largely on the sale of “Okanagan” which had been rejected as comparable by Mr Folstad. The Board is satisfied with the evidence presented by Mr Folstad in support of his view that the Okanagan property was not comparable, and on that basis alone the Pethybridge report is considerably undermined.

Nonetheless, the Board was strongly pressed by this appellant to accept Mr Pethybridge’s report and other third party evidence or dispositions which he submitted without the attendance and availability for questioning of the responsible parties themselves as a matter of principle, in the light of the Board’s “informal” manner of conducting hearings and in view of the economic and logistical problems in making such witnesses available. I am conscious of the difficulties which may be encountered by an appellant in preparing for and attending at a hearing about his income tax liability, and the legislators have made considerable effort to minimize these difficulties in providing the Tax Review Board forum. It is understandable and natural that a particular taxpayer involved looks at his personal cost and inconvenience rather than the contrasting public cost and effort which may enter into the final determination of his income tax liability. The Board, however, must reject virtually all the evidence carefully documented and presented by this appellant, while at the same time that provided by the Minister can be accepted by the Board since it has been supported by the sworn testimony of the author.

At the level of an appeal hearing, while prima facie the Board is required to assume that the assessment is proper, all evidence presented, whether in support of or in conflict with that assessment, which may have a bearing on the outcome of the appeal, must be of equivalent character and nature. The appellant does have the initial onus of demonstrating that the assessment contains substantive deficiencies and, if he is successful in so doing, the responsibility for supporting the validity of the assessment, or of accepting the evidence proffered by the appellant then shifts to the Minister. In order to support the assessment, if called upon so to do, the Minister must be prepared to present detailed and documented evidence of an acceptable probitive nature. I suggest it would be unacceptable to taxpayers generally that the Minister be permitted to support his assessment on the basis of third party evidence or deposition, or for the Board to accept from the Minister such proof. Equally, as I see it, it is improper for the Board to accept as proof the same kind of third party, unattested evidence from an appellant for the purpose of challenging that assessment made by the Minister. In matters of property valuation, however, in order that the appellant be fully aware of the basis of the assessment, the respondent often does present the Minister’s valuation report, and indeed in certain circumstances it may be virtually all the evidence made available to the Board. That does not, in my view, change the principle involved—that the appellant may be required to first demonstrate to the Board a viable basis or rationale upon which some other valuation might be and indeed should be acceptable.

In the instant matter, after the appellant’s evidence and testimony had all been provided, he was informed by the Board that little if any damage had been done to the respondent’s position. Nevertheless, counsel for the Minister volunteered to present evidence, the Board agreed and provided an opportunity for the appellant to hear the Minister’s witness and question him in detail. Nothing came out of that exchange which supported a valuation materially in excess of that used by the Minister in the assessment. The Board however does accept the concession made by counsel for the respondent that the valuation used as the basis of the assessment should be adjusted to correspond to that reached by Mr Folstad in his valuation report, but no greater adjustment is warranted.

Summary

Neither the appellant’s perspective on the unique characteristics of his property, nor its potential value in any arm’s length transaction on Valuation-Day, are borne out by the evidence and testimony provided to the Board. The value of $150 per acre, rounded off to a total of $57,000 for the property, as detailed in the Revenue Canada appraisal report, is accepted by the Board.

Decision

The appeal is allowed in part in order to recognize the proposal from counsel for the respondent that the value of the property be accepted as $57,000 rather than the lesser amount used in the calculation of the assessment in question. The entire matter is referred back to the respondent for reconsideration and reassessment accordingly. In all other respects the appeal is dismissed.

Appeal allowed in part.