Stanley M Smith, Donald K Campbell v. Minister of National Revenue, [1980] CTC 2208, 80 DTC 1185

The Chairman:—The appeal of Donald Kilgour Campbell from an assessment in respect of the 1975 taxation year was heard on common evidence with that of Stanley M Smith.

The issue in these appeals was the calculation of taxable capital gain earned by each of the appellants on the disposal of their respective farmland in South Cayuga in the County of Haldimand-Norfolk situated between Grand River and Lake Erie. In the latter years of the 1960’s there were discussions and plans for the establishment of an industrial complex on the shore of Lake Erie in the Nanticoke area. The industrial complex consisted of a Steel Company of Canada Plant; a large hydro generating station and an oil refinery for Texaco Canada Ltd. This industrial development in a predominantly agricultural area caused the Government of Ontario to have extensive research studies made to facilitate industrial growth by planning for adequate urban development in the area.

During the period of 1969 to 1974, several such studies were prepared.

On the disposition of their properties in 1975, their returns having been reassessed, the appellants objected to the V-day value placed on their respective farmlands in computing their capital gains.

In support of their V-day valuation the appellants filed appraisal reports prepared by Mr Wilfrid Ford (Campbell Property—Exhibit A-4; Smith Property-Exhibit A-24).

The respondent in turn filed an evaluation report for each property which had been prepared by Mr Ray Corman. (Campbell Property—Exhibit R-1; Smith Property—Exhibit R-2).

The difference in the fair market value of the properties as of December 31,1971, as estimated by Mr Ford and Mr Corman is very substantial as can be seen by the figures contained in Exhibit A-11 and Exhibit A-23, which read as follows:

(Exhibit A-11)

D K CAMPBELL

ANALYSIS OF LOTS 8 &9 SOUTH CAYUGA

				V-DAY VALUE					1975 ADJUSTED COST BASE
		Tax	Ford-			Ford-			Tax		Ford-
		Dept		Corman		Campbell			Dept	Corman	Campbell
Land—239 acres					505,500.00
Barn		102,570.00				4,500.00			102,570.00		505,500.00
Gas Shed						200.00					(1,300.00)
Implement Shed		3,170.00				1,300.00			3,170,00		1,870.00
		105,740.00		117,400.00	511,500.00				105,740.00	117,400.00	508,670.00
House 1	acre	17,430.00		19,600.00		47,500.00			29,300.00	26,500.00	100,000.00
		123,170.00		137,000.00	559,000.000				135,040.00	143,900.00	608,670.00
Selling Price
Farm									619,237.30	622,037.30	548,537.30
House & Acre									29,300.00	26,500.00	100,000.00
									648,537,30	648,537.30	648,537.30
											(3,170.00)*
Farm Capital Gain									513,497.30	504,637.30	43,037.30
Less Outlays & Expenses									6,810.35	6,810.35	6,810.35
											(3,170.00)*
Capital Gain for Tax Purposes									506,686.95	497,826.95	36,226.95
											(1,585.00)*
Taxable Capital Gain—50%									235,343,47	248,913.47	18,113.47
											16,528.48
Omitted from ACB in error in filing original return but reflected in ACB on Notice of Objection
to give revised taxable capital gain of $16,528.48 instead of $18,113.47.
(Exhibit A-23)
				S M SMITH
		ANALYSIS OF LOTS 15 &					16,	Cone 7, S Cayuga
			V-DAY VALUE						1975 ADJUSTED COST BASE
		Tax						Tax Tax
		Dept	Corman		Ford			Dept		Corman	Ford
Land		$51,700		$55,700		221,760
173 Ac				1,300
		$51,700		$57,000		$221,760			51,700	$ 57,000	$221,760
Sale Price									$280,000	$280,000	$280,000
Less adjusted cost base									51,700	57,000	221,760
Farm Capital Gain									$228,300	$223,000	$ 58,240
Less outlays & expenses									2,508	2,508	2,508
Capital Gain for Tax Purposes									$225,792	$220,492	$ 55,732
Taxable Capital Gain -50%									$112,896	$110,246	$ 27,866

Counsel for the appellants suggested that the Board should reject both appraisals and arrive at a V-day value of the properties on the basis of the information placed before it.

The wide disparity in the appraiser’s evaluations of the subject properties is undoubtedly due to the fact that on the basis of information allegedly available prior to 1971 Mr Ford considered the highest and best use of the properties to be residential, while Mr Corman’s view of the highest and best use of the properties remained agricultural.

The Board has no reason to doubt the professional competence and integrity of either expert witness. However to determine the issue, it becomes necessary to review all the information that was available as at December 31, 1971, in order to ascertain whether it did effect the price of land in the area at that time and whether a future dramatic rise in the price of land was foreseeable in 1971.

In 1968 the Steel Company of Canada had commenced building its plant in Nanticoke in the County of Haldimand-Norfolk. In 1970 the construction had been interrupted.

In March of 1970 the Haldimand-Norfolk Study directed by Mr N H Richardson was completed and presumably released shortly after (Exhibit A-6). The report is a summary and statistical forecast then available and provides an approach for the development of the Haldimand-Norfolk County which is in harmony with the overall government development plan for the whole of South Western Ontario. The report does not represent government policy but it gives an indication of changes which were anticipated in the area by government agencies and which could raise the value of real estate in certain areas because of the industrial development taking place and the necessity of providing adequate urban facilities.

The study was drafted in the very general terms and did not reflect government policy nor did it give any indication as to where in the County the urban expansion was to take place.

Exhibit A-7 is a study in two volumes on the evaluation of urban systems in Haldimand-Norfolk County, although several alternative sites for urban expansion were recommended in particular the Port Dover area some twenty miles west of the subject properties in South Cayuga.

Exhibits A-15, A-16 and A-17 are newspaper clippings dated March 31, 1971, October 27,1971 and February 16,1972 respectively all referring to the studies being made on the possibility of the creation of a new town of some 100,000 population in the County of Haldimand-Norfolk. The stories were apparently based on leaks as to the studies being made on the possible site for a new town but the studies themselves “threshold of change” though commenced in 1971 were not released to the public before 1973. (Exhibit A-8, Exhibit A-9 and Exhibit A-10).

Although considerable evidence was adduced as to what occured after December 31, 971, in relation to the establishment of a new town, it is not helpful in determining the basis on which the V-day fair market value of subject properties must be arrived at.

As I see it there can be no doubt that prior to 1972 the population of Haldimand-Norfolk was aware of the industrial expansion that was projected for the area and that the government was planning for urban expansion. But the studies made and the newspaper reports as to the possible establishment of a new town in the area were still far too general and far too vague as at December 31, 1971 to cause a substantial increase in the fair market value of the subject properties. No matter how considerable the industrial complex might become, it is unlikely that the land in the whole county would become residential within the foreseeable future. On the basis of the information generally available in 1971 there may well have been hopeful expectations throughout the county, but in my opinion there was as yet no basis sufficiently realistic to cause or justify a generally marked increase in the value of real estate in Haldimand-Norfolk prior to 1972, nor was there any valid reason in 1971 to evaluate all land in Haldimand-Norfolk County as urban. The distinction between residential and urban land could only have been made once the new townsite had been definitely chosen, which was well after 1971. Moreover, of the 718,000 acres of land in Haldimand-Norfolk County only 50,000 acres, ie 7% were earmarked for urban uses (including industry) by the end of this century.

The comparative sales used in the appraisal reports can be meaningful only if the land transactions are similar to and in the vicinity of the subject properties and took place within a period of time relatively close to December 31, 1971.

In Mr Corman’s appraisal of the Campbell property he used 32 comparable sales, the transaction for which all took place between 1969 and 1973 affecting lands which were in the vicinity of the subject property. For the Smith property, Mr Corman, used 18 comparable sales which also took place between 1969 and 1973 and which are situated in the vicinity of the subject property. Exhibit R-2.

In his report on the Smith property, Mr Ford, states (Exhibit A-24, p 3-3):

However, as the basic reason for this appraisal is to estimate the market value of the rear 140 acres as of December 1971, a search was made at the Registry Offices in Cayuga and Simcoe for historical sales data. That is, for sales which had taken place prior to Valuation Day but which would have come under the influence of the Hydro and Stelco announcements.

Mr Ford then lists 6 sales (Exhibit A-24, p 3-4) and adds:

The above sales, as mentioned earlier, all took place in July 1969 and were for properties ranging in size from 50 acres up to 146 acres. The price paid per acre ranged from a low of $1,875 to a high of $3,143. However, none of the above sales can be considered as truly comparable to subject property, particularly in location. (Subject property is situate close to Lake Erie and has access to the sandy beach.

Because none of the above sales are truly comparable to subject property and because subject property (rear 140 acres) was not sold until late 1975, it is our opinion that the most realistic method of estimating the value is to discount the selling price of $280,000 back to December 31st 1971. Or, stating it another way, if the property had been sold as of December 31st 1971 and the money realized from the sale had been invested in say Government bonds, then in December 1975, it would have realized a value of $280,000.

Mr Ford’s discounted “market” price approach, was admitted by the appellants to have been unrealistic because the market price in 1975 had risen considerably because of factors which occurred after 1971, and which were not known at that time and should not have been used in calculating the fair market of the property on V-day.

Appraisal Reports

In his appraisal report Mr Ford’s opinion of the highest and best use of both, the Campbell and the Smith properties, was the continuation of their existing use as farmland until it became part of a new development resulting from the industrial and urban developments.

Mr Corman’s highest and best use of the subject properties was a combination of agricultural and rural residential. He indicated that at the appraisal date there was a potential for rural residential development on some land between River Road and the Grand River.

The similarity of both appraisers’ opinion as to the highest and best use of subject properties which apparently was foreseeable in 1971 is however not reflected in the widely divergent V-day values attributed to the properties by each appraiser.

The best test as to whether or not the construction of Stelco in 1968 and the knowledge of government planning for an urban development somewhere in the area had the effect of raising the fair market value of subject properties in 1971, are the comparable sales used by both appraisers.

Mr Ford in his report on the Campbell property listd nine sales (Exhibit A-4). However, on p 3-3 he states:

A search was made at the Registry Offices in Cayuga and Simcoe for historical sales data; that is, for sales which took place prior to Valuation day but which would come under the influence of the Stelco announcement.

The following is a list of sales which ranged in price from a low of $1,000 to a high of $3,100 per acre; however, none of these sales are truly comparable to subject property in size or location.

In both the Smith and Campbell appraisals, the Mr Ford chose sales because of the effect that Hydro or Stelco may have had on the value of land in the immediate area. Although these sales had taken place in 1969, they were some 20 miles away and had no bearing whatever on the fair market value of subject properties as of December 31, 1971 and are not a meaningful basis for the evaluation of land in South Cayuga at that time.

Dealing now with the evaluation of the principal residence on the Campbell property, it must continually be borne in mind that we are seeking to establish the value of the residence as of December 31, 1971. From the Stokes report dated September 5, 1968, it appears that the old brick residence on the Campbell property which could have some historic value had been neglected and could be restored but with great care and at considerable cost.

In estimating the value of the Campbell residence as at December 31, 1971, the Board cannot ignore the offer to purchase the Campbell property dated October 1,1974 (Exhibit A-5), which allocates a value to the residence of $100,000. Although some historic value may be attributed to the property. I am not prepared to accept $100,000 as representing the fair market value of the resident on V-day. The sale was not closed and no reasons were offered as to why the transaction was not concluded. In my opinion the terms of an offer to purchase may, under certain circumstances, serve as one of the many guidelines in evaluating the fair market value of property but it is not necessarily by itself proof of that value.

The one acre of land on which the residence is located cannot realistically be evaluated as agricultural land. In my view that one acre of land and any other acreage of the Campbell property which is situated directly on the river front, can reasonably be evaluated as of December 31, 1971, as residential property not because of the industrial complex or the planning for future urban development, but because of the natural beauty of the river front land. The remainder of the property was properly evaluated as rural.

In the circumstances of these appeals and on the basis of the appraisal reports, it appears to me that the best approach to the V-day market value of the subject properties is that of comparable sales.

Counsel for the appellants asked that Mr Corman’s evidence on his comparable sales be rejected on the grounds that he did not know under what circumstances the transactions had taken place.

In support of his request for the rejection of Mr Corman’s comparable sales, the appellant cited the case of Karam v National Capital Commission (1977), 16 NR 327, decided by the learned Chief Justice of the Federal Court, Mr Justice Jackett, who at 329 stated:

The significant fact in this connection is that knowledge of the “comparable” sales on which the experts based their opinions in this case appears to have been, without any significant exception, obtained from copies of conveyances of agreements with no accompanying information as to the surrounding circumstances or the purposes for which the properties were acquired.

Although the Karam case deals with expropriation the principle set out by the learned Chief Justice is rightly applicable in giving weight to the comparable sales approach in evaluations for income tax purposes. In the Karam case the appraisers had “without any significant exception” established their comparable sales exclusively from conveyances of agreements and had no information as to the circumstances and/or the purposes of acquisition.

The evidence does not support that Mr Corman established his comparable sales list exclusively from the conveyances. On the contrary, Mr Corman had attempted to obtain as much information as he could and indeed had obtained information on the circumstances of many of the transactions but, because the comparable sales took place from 1969 to 1973 and the appraisal was made in 1978, it was not possible to obtain information as to the circumstances of all the transactions that took place some Six or seven years previously. The very number of comparable sales, some of the circumstances of which were known to Mr Corman, and adjusted accordingly establishes a meaningful and acceptable pattern of the value of land in South Cayuga in the period immediately prior to and following December 31, 1971.

By Mr Ford’s own admissions, the sales that he selected as a basis of comparison for his appraisal, were not truly comparable sales principally because they were not in the immediate area of the subject properties. I cannot reject Mr Corman’s comparable sales, because they were not exclusively based on information gleaned from conveyances and they represent the best available evidence as to the value of land similar to and in the proximate area of the Campbell and Smith land.

Moreover, I do not believe that there is any justification in evaluation cases for tax purposes for setting aside the principle enunciated in the case of RWS Johnston v MNR, [1948] CTC 195; 3 DTC 1182, by which the appellant has the onus of establishing that the Minister’s assumptions are wrong. Mr Corman in his role of expert witness has expressed an opinion as to the value of the said properties in support of the assumptions on which the Minister based his assessments.

The onus of proving that the Minister’s assumptions are wrong still remains with the appellants.

In my opinion the appellants have failed to convince the Board that there existed circumstances in some of the sales used by Mr Corman which would have significantly altered his estimate of the value of land in South Cayuga as at December 31, 1971.

In summary I find that although there may have been hopeful expectations in 1971 as a result of the construction of the new Stelco Plant and information concerning a possible urban development in the area, they did not justify nor in fact did they cause a marked increase in the value of land because the site of the new town had not yet been decided. The decision of the Government of Ontario as to the site of the urban development which caused an increase in land value in the area took place two to three years after December 31, 1971.1 find that the comparative sales used by Mr Ford, are unacceptable as a basis for determining the value of the subject property and that this appraisal is largely influenced by retrospection.

I find that Mr Corman’s appraisal to be generally sound and I accept his comparable sales as being the best available evidence of the price of land in South Cayuga as at December 31, 971, and a proper basis on which to base the value of the subject properties.

Since the V-day value of the Smith property used by the respondent in computing Mr Smith’s capital gain is less than the value attributed to the property by Mr Corman, the appeal of Mr Smith is allowed and referred back to the Minister for reassessment and variation on the basis that Mr Corman’s appraisal of the Smith property is correct. The appeal is dismissed in all other respects.

For the same reason the appeal of Mr Campbell is also allowed and referred back to the Minister for reassessment and variation on the basis that the one acre of land on which the residence is situated be evaluated as residential; that all the land of the Campbell property situated between the River Road and Grand River be also evaluated as residential; that the principal residence building because of the historical potential be evaluated at $25,000 as of V-day and that Mr Corman’s appraisal value of the remaining land of the Campbell property is reasonable. The appeal is dismissed in all other aspects.

Appeals allowed in part.