Zovko v. R., [1999] 4 CTC 2685, 99 DTC 1001

Bowie T.C.J.:

These two appeals are brought from assessments under the Income Tax Act for the taxation year 1990. The Appellants are both, along with others, co-venturers in respect of the acquisition for subsequent resale of a parcel of vacant land on the north side of Dundas Street in the City of Oakville, Ontario (the subject land). The only issue in the appeals is the value of the subject land on November 30, 1990.

The land was purchased on October 16, 1989 for a price of $6,200,000, of which $2,200,000 was paid in cash; a mortgage in the amount of $4,000,000 was assumed for the balance of the purchase price. The land is held by 871374 Ontario Limited as bare trustee for the co-venturers, including the Appellants. It is not in dispute that the land was bought as a speculative venture, and is held for the purpose of resale at a profit. The venture has its year end on November 30, and the Appellants are entitled to the benefit of a substantial write-down in its value in computing their incomes for the 1990 taxation year. The Respondent does not dispute that they are entitled to a write-down, but only the amount of it. The sole issue is therefore the proper value to be ascribed to this land as at November 30, 1990.

The appraisal of the subject land at November 30, 1990 is by no means an easy matter. It is common knowledge that the market for real estate, and in particular speculative real estate, in southern Ontario escalated rapidly in the late 1980’s, followed by a steep decline in values in 1990. The parcel of land with which we are concerned was sold on November 30, 1988 for $3,700,000. It was subsequently sold to the Appellants’ joint venture approximately one year later in a sale negotiated in the middle of October 1989, and closed on December 21, 1989, for $6,200,000, which is an increase of 68% in approximately one year. The parties are in agreement that a decline in the market occurred after that date, and before November 30, 1990; their disagreement is as to the severity of that decline, and its impact on the value of the subject land.

This parcel of 152 acres is situated in the northwest part of the City of Oakville, with a frontage on Dundas Street of approximately 1,440 feet. It is a more or less rectangular parcel, but has a triangular piece of almost nine acres, fronting on Dundas Street, severed from it. It is designated agricultural on the official plan, and is zoned agricultural. It is made up of some cultivated fields, some pasture land, a substantial wood lot, and some flood plain and ravine land. It is in fairly close proximity to Highway 403, which was proposed to be built at the relevant time. Other than the availability of hydro electric power, there are no services in the immediate area.

Each of the parties called the evidence of a qualified appraiser of real estate. Mr. Michael J. Mui vale is an accredited member of the Appraisal Institute of Canada holding the designation AACI, and has been appraising real estate for some 20 years. He testified for the Appellants that, in his opinion, the subject land had a value on November 30, 1990 of $3,785,000. Mr. Warren Sabourin also holds the designation AACI from the Appraisal Institute of Canada, and has been employed as an appraiser of real estate by Revenue Canada for more than 20 years. His evidence was that, in his opinion, the parcel in question had a value, as at November 30, 1990, of $5,500,000. This rather large difference between their opinions results from the most unusual market conditions that prevailed between the date of purchase of this property by the joint venture in November 1989, and the valuation date one year later.

Both appraisers agree that the highest and best use of this land at the relevant time was an agricultural use, but that it derived considerable value from its potential for development in the future. Neither of them was prepared to put a time frame upon when that development potential might be realized, but they are in agreement that it was a long-term potential only. They also are in agreement that the downturn in the market between November 1989 and November 1990 applied both to residential properties and to raw land, and they agreed that it was a substantial dislocation of prevailing market prices.

Each appraiser approached the question of value by the comparative sales method, attempting to find sales of similar properties in the same general neighbourhood as the property to be evaluated, and taking place close in time to November 30, 1990. It is in this latter criterion, of course, that the difficulty lies. The comparative sales relied on by Mr. Mulvale took place between May 1990 and December 1991. Those relied on by Mr. Sabourin took place between April 1989 and October 1991. The difficulty inherent in their task is to account for what happened in the market during the twelvemonth period between the purchase of the property by the joint venture in an arm’s length transaction, and the date at which it must be valued, bearing in mind the dramatic change in the market which occurred in that period. The further a sale is in time from November 1990, the less helpful it is in the analysis. Since there is a known value arising out of an arm’s length sale of the subject land which took place in October 1989, it is difficult to see what help can be gained from sales of other pieces of property taking place at or before October 1989. Sales occurring subsequent to that date, if otherwise comparable, are capable of shedding some light. The difficulty, however, is to know exactly when the collapse of the market took place, and how rapidly it declined.

Mr. Mulvale selected as comparables, or at least made reference to, six sales of agricultural land. The first was a parcel of 195 acres which was purchased by the City of Oakville, apparently to be banked for possible future use as a sports and recreation complex. The sale was registered in October 1991, and it was Mr. Mulvale’s belief that the price was negotiated some time between November 1990 and April 1991. The selling price was $6,550,000, which he calculated to be $33,423.99 per acre. Mr. Sabourin also made reference to this transaction. Due to a minor discrepancy in their information as to the acreage, Mr. Sabourin calculated a slightly higher price per acre of $33,543.13; this was accepted by Mr. Mulvale as being correct.

The second property selected by Mr. Mulvale is 37.619 acres, sold in April 1991 for $1,105,600, or $29,389 per acre. This sale was also relied upon by Mr. Sabourin. It is, however, a much smaller parcel than the subject land, and could therefore be expected to sell at a higher per acre price. Mr. Mulvale’s third comparable property was a parcel of 95.6 acres sold at December 31, 1991, and lying in southwest Milton and somewhat to the north of the subject land. It sold for $2,392,325, which is $25,000 per acre. I think it is fair to say that Mr. Mulvale placed considerable reliance on this sale. His fourth comparable parcel is 69.17 acres, somewhat distant from the neighbourhood of the subject property, lying to the north of it, and west of Brampton. It sold on May 15, 1990 for $2,305,666, or $33,333 per acre. His fifth sale is a parcel of 150 acres. It too is somewhat removed geographically, being north of Brampton, in the rural part of Caledon. It sold on October 2, 1990 for $3,610,800, which is $24,000 per acre. Mr. Mulvale’s final comparable sale is a parcel of 96 acres, also lying between Brampton and Caledon, which sold on November 1, 1990 for $3,460,000 or $36,052 per acre. Although it occurred close in time to the valuation date of November 30, 1990, Mr. Mulvale placed no reliance on this sale, because it had significant improvements in the form of greenhouses and barns on it at the time of the sale. In fact, it had been purchased by the Pioneer Grain Company for use in agricultural research or development work. Neither Mr. Mulvale nor Mr. Sabourin made any attempt to come to an estimate of value based on this sale by estimating the value of the improvements and deducting them from the selling price. Of the six properties he identified, Mr. Mulvale said that he considered the first three to be most comparable, and he gave the opinion that the appropriate value per acre for the subject property at November 30, 1990 was $25,000. To arrive at this, he said, he applied his judgment to make allowance for the various factors such as the differences in time, location, size and quality of the land, and that it was simply a matter of coincidence that he arrived at the same per acre value as his third comparable sale. Unfortunately, he gave no insight into the process by which he adjusted the sales data to produce this opinion.

Mr. Sabourin made reference to seven different sales. The first of these is a parcel of 202.22 acres, a 50% interest in which was sold on April 14, 1989 for $5,591,567. Mr. Sabourin concluded that this indicated a value, for a 100% interest, of $55,302 per acre. His second sale is the purchase by the Appellants’ joint venture of the subject lands. It is difficult to see how that purchase can contribute anything to the analysis, since the very question I have to decide is what change took place in the value of that land between the time it was purchased and the valuation date. The third sale to which Mr. Sabourin refers is of an 86-acre parcel on the northside of Burnhamthorpe Road, which was sold on October 12, 1989 for $6,912,560, or $80,000 per acre. The fourth sale took place on March 1, 1990 and is of a 52-acre parcel on the north side of Burnhamthorpe Road. It sold for $4,160,000 which is $80,163 per acre. The fifth sale is a 7-acre parcel sold for $1,344,962 on May 30, 1990, a price per acre of $182,244. These three sales are of considerably smaller parcels and at per acre prices vastly higher than the subject land sold for in 1989. The prices must have been negotiated before the steep decline in the market. They are of no assistance in estimating the value of the subject land in November 1990. Mr. Sabourin’s sixth sale is the same parcel that was Mr. Mui vale’s sale number 2. His final comparable is the 195-acre parcel which was Mr. Mulvale’s sale number 1. They were at $32,000 per acre and $33,500 per acre, respectively.

Mr. Sabourin attempted to deal with the problem that all of the sales which he relied on were, to some extent, remote in time from November 30, 1990 by locating properties which had sold before November 30, 1990 and then subsequently resold after that date, and using the differences in their selling prices to compute a rate of decline in value of land over that period. He found four such properties, all zoned agricultural and located north of Dundas Street. The first three of these are single family dwellings on lots of one acre or less. The first sold in June 1989, and resold in February 1992, two and one-half years later, the second sold in June 1989, and resold in May 1991 almost two years later. The third sold in March 1989, and resold in May 1992 slightly more than three years later. The fourth sale and resale was of a vacant parcel of land which sold in May 1990 for $1,344,962, and then sold again three years later in May 1993 for $350,000. This parcel therefore declined in value by 74% in three years. Mr. Sabourin viewed this as a rate of decline of 24.66% per year, and he considered the annual rate of decline of the three residential properties to be respectively, 6.63%, 9.95% and 6.82%. He then averaged these four percentage rates of decline and concluded that the appropriate rate for the period was 12.02% per annum, or 1% per month.

The fallacy of this methodology is obvious. First of all, the vast differences between the calculated annual rates of decline of the three residential properties on the one hand, and the acreage property on the other hand, suggests very strongly that different factors are in play for the two different categories of property. Secondly, the evidence relating to building permits issued points to a very steep decline in values in a very short period of time, starting in mid-1989. No doubt the fourth property lost 74% of its value between May 1990 and May 1993, but there is no reason to believe that it did so in linear fashion at 25% per year. Indeed, there are good reasons to believe that the majority of the value was lost very quickly in late 1989 and 1990.

I do not think that the analytical methods followed by either of the witnesses can be greatly relied upon. Moreover, each of them had to admit during the course of their evidence to having made a number of errors which indicated a lack of care in the preparation of their opinions. All in all, I do not have a great deal of confidence in either opinion. That said, I have the task of coming to the best judgment that I can as to the value of the subject land at November 30, 1990, on the basis of the evidence that they have given me. It seems likely that the value lies somewhere between the opinions of Mr. Mulvale and Mr. Sabourin. The difficulty is to ascertain where.

Mr. Mulvale placed most reliance on his sales numbers I, 2 and 3 which took place in October 1991, April 1991 and December 1991. Those at least were the registration dates of the deeds. Time being as important as it is in this case, it should be remembered that the prices would in all likelihood be negotiated several weeks or months prior to those dates. Of Mr. Sabourin’s sales, only numbers 6 and 7, which are Mr. Mulvale’s numbers 2 and 1, are capable of contributing to the solution. The others all took place before the market collapsed. The closest sales in time are Mr. Mulvale’s numbers 5 and 6, both large parcels which sold in October and November of 1990. Number 6, with its improvements, and sold as it was for a commercial use, would undoubtedly indicate a higher value than the Appellants’ property. His comparable number 5 is considerably to the north of the subject, and likely further from the path of future development. Mr. Mulvale’s sale number 2 would likely have been negotiated about 3 or 4 months after November 30, 1990, and therefore may be the most useful of the remaining sales in terms of timing. It is, however, a small acreage, and therefore would attract a higher per acre price. On the other hand, its price per acre probably declined somewhat between November 30, 1990 and the time when the sale was negotiated. Mr. Mulvale’s sales numbers I and 3 occurred in late 1991, and they too likely declined somewhat in value between November 30, 1990 and the time they were negotiated.

Considering all of these factors, I conclude that the appropriate value for the subject property at November 30, 1990 was $28,000 per acre. In the course of his evidence Mr. Mulvale accepted Mr. Sabourin’s computation of the actual acreage of the subject land as 152.060. This yields a total value for the parcel of $4,257,680.

The appeals are allowed, and the assessments referred back to the Minister of National Revenue for reconsideration and reassessment on that basis. The Appellants are entitled to one set of costs.

Appeals allowed.