Arthur Salt, Elwin E Howlett, Eldred Edward Jamieson v. Minister of National Revenue, [1979] CTC 2420, 79 DTC 361

M J Bonner:—These three appeals were heard together. Much of the evidence was common to the issues in all three appeals. In all there was a dispute as to the value on December 31, 1971, (V-day) of lands lying in a more or less triangular block on the northern outskirts of the City of Vernon, British Columbia.

The triangle is bounded, (a) on the south by 48th Avenue which, on V-Day, was the northerly boundary of the city, (b) on the east by Highway 97, the Kamloops-Vernon highway and a main entrance to Vernon, and (c) on the west by the Canadian Pacific Railway.

All of the lands involved in this appeal were disposed of by the appellants to the Dominion Construction Company Limited (hereinafter called “Dominion”). The dispositions took place as a result of the granting of options in May of 1972 and the exercise thereof in the following year. The lands now form parts of a block of lands within the triangle, which block was assembled by Dominion for purposes of constructing a regional shopping centre.

On the east side of Highway 97 opposite the southerly part of the lands in question here there is now located a modern motor hotel known as The Village Green Inn.

The appellant Salt was the principal of Coldstream Auto Wreckers Limited (hereinafter called “Coldstream”). That company carried on the business of selling cars, trucks and used parts. The business required a substantial area of land for the storage of wrecked cars. For some years prior to and during 1971 the business was carried on on two parcels of land forming part of the triangle, namely, Lot 1, Plan 11687 and Lot 1, Plan 14167. Those two lots were rectangular in shape and ran from Highway 97 on the east to the CPR right of way on the west. Lot 1, Plan 14167 lies immediately to the south of Lot 1, Plan 11687.

Immediately to the south of Lot 1, Plan 14167 lies Lot 9, Plan 2347. It too fronts on Highway 97 and runs through to the CPR right of way. It was purchased on February 26,1971, by Mr Salt for purposes of expanding the Coldstream business. The purchase price was $38,820. The land had been listed for sale at that price from November 7, 1970, to the date of the sale.

Lying to the south of Lot 9, Plan 2347 is Lot 1, Plan 10548 (the Murtack lands). As in the case of the lands previously mentioned, it was rectangular in shape, fronted on Highway 97 and ran through to the CPR right of way at the rear.

The southerly boundary of the Murtack lands formed the northerly boundaries of a number of lots fronting on 48th Avenue. From the CPR on the west to Highway 97 on the east those lots were numbers 8, 7 and 6 on Plan 2347, Lots 3 and 4 on Plan 3071 and, finally, a long narrow parcel, the north half of which was known as Parcel A and the south half of which was called Parcel 4. There were also plots of land carved out of the southeast and southwest corners of Lot 3, Plan 3071, which parcels did not run back the full distance to the south boundary of the Murtack lands.

Mr Salt purchased Lot 8 on March 27,1972, for $16,000. On that same day he also purchased Lot 7, Plan 3071 for $17,900. Mr Salt stated that these lands were somewhat swampy. He said that he bought them with a view to filling them, fencing them and storing car bodies thereon. Lot 7 had an old but rentable house on it at the time Mr Salt purchased it. Lot 8 had an old house erected on it at the time of the purchase, but it was of no value.

In May of 1972 Mr Salt was approached by a real estate agent acting on behalf of an undisclosed principal. The agent asked what property Mr Salt owned and what price he would take for it. Mr Salt tried to hold Lots 7 and 8 out, but was told that it was an all or nothing proposition. He fixed a price of $300,000. On May 17,1972, an informal memorandum was prepared. On May 18 Mr Salt gave an option to Tradeland Realty Limited which was acting for the then undisclosed client, Dominion. The consideration for the grant of the option was $5,000. The option permitted the optionee to purchase for $300,000 Lot 1, Plan 11687, Lot 9, Plan 2347 and Lots 7 and 8, Plan 2347. The option was exercisable up to November 18,1972. The option agreement provided for a one hundred and eighty day extension of the time for exercise upon payment of a further $7,500.

On September 1, 1972, Mr Salt and a Mr Haller, as optionors, entered into a still more formal version of the agreement with Dominion. The price, exercise date and extension provisions remained unchanged, but the land named as subject to the option for the first time included Lot 1, Plan 11687. Mr Haller was the registered owner of that added lot. On September 1,1972, Messrs Salt and Haller entered into an agreement providing that one fifth of the $5,000 consideration for the granting of the option, one fifth of the $7,500 extension price, and one fifth of the purchase price in the event of exercise be paid to Mr Haller.

The option was ultimately exercised by Dominion in November of 1973 after a further six month extension had been granted. Mr Salt was assessed to tax for the 1973 taxation year on the basis that he realized a taxable capital gain on the disposition of Lot 1, Plan 14167 and Lot 9, Plan 2347. In assessing the respondent treated the profit realized on Lot 7 and 8 as income.

The respondent calculated that the $240,000 received by Mr Salt from Dominion should be allocated as follows:

The respondent computed the V-Day value of Lots 1 and 9 as $46,530 and $48,502 respectively.

The appellant alleged:

(a) the gains on all four lots were on capital account,

(b) V-Day value as calculated by the respondent was wrong in that the respondent failed to take into account the upward pressure on the value of the appellant’s land occasioned by the announcement in July of 1971 of plans to build The Village Green Inn at the northeast corner of Highway 97 and 48th Avenue, and

(c) the respondent incorrectly apportioned the purchase price as among the four lots and ought to have taken into account the physical characteristics and relative locations of the four lots.

Messrs Howlett and Jamieson were and are equal shareholders in a company called Twin Elves Fuel-O-Mat Limited. They became interested in lands at Highway 97 and 48th Avenue as a location suitable for bulk sales of petroleum products to farmers. On July 5, 1971, they entered into an agreement to buy the north half of Lot 4, Plan 3071 and Parcel A. Parcel A was a narrow strip of land separating the north half of Lot 4 from Highway

97. The purchase price called for by the agreement was $32,500. There was a house on Parcel A. The north half of Lot 4 was hay land. The vendor, who owned all of Lot 4 and Parcel A, could not obtain permission to subdivide Lot 4. Messrs Howlett and Jamieson therefore decided to proceed to buy all of Lot 4 and Parcel A. The evidence was that there was a verbal agreement that if permission to subdivide could not be obtained the vendor would sell his entire holdings. That land was acquired pursuant to an agreement dated November 27, 1971, at a purchase price of $55,000.

Next, Messrs Howlett and Jamieson proceeded to obtain an option to purchase Lot 3, Plan 3071, save for the two small rectangular lots cut out of the southeast and southwest corners. The option agreement was formed August 31,1971, and provided for purchase at a price of $40,000 if exercised by May 31, 1972. On March 29, 1972, Messrs Howlett and Jamieson listed Lot 3 for sale at a price of $70,000 because they were having difficulty financing their planned business expansion.

In May of 1972 a real estate agent approached Messrs Howlett and Jamieson to see if they would sell. After some dickering they entered into an option on May 18, 1972, with Tradeland Realty Limited as agent for an undisclosed purchaser. The option was for the sale of all of their lands in Lot 3, Lot 4 and Parcel A at a price of $230,000. The option was exercisable by the optionee prior to November 18, 1972. Provision was made that the purchaser would either permit Messrs Howlett and Jamieson to establish a sevice station on the site or, if not, the purchaser would pay an extra $100,000 upon exercise of the option. The undisclosed purchaser was, of course, Dominion. By an agreement of November 13, 1972, the time for the exercise of the option was extended to May 18, 1973. By agreement of April 4, 1973, the time for the exercise of the option was extended to November 18, 1973. The option was exercised by Dominion on November 14, 1973.

Messrs Howlett and Jamieson were each assessed on April 24, 1978, on the basis that the adjusted cost base (V-Day value) of Lot 4, Parcel A and Lot 3 was $110,000.

Evidence was given by Henry Desnoyer of Tradeland Realty Limited that the market value on V-Day of (a) Lot 1, Plan 14167 and Lot 9, Plan 2347 was $179,057.58, being 229,561 square feet at 78¢ per square foot (see Exhibit A-24 at pp 4 and 12) and, (b) the Howlett Jamieson properties was $228,824.

Evidence was given by M G Koeper that the market value on V-Day of the Howlet and Jamieson properties was $260,000.

Evidence was given by R L dePfyffer that the market value on V-Day of (a) the Salt properties (Lot 1, Plan 14167 and Lot 9, Plan 2347) was $91,532, and

(b) the Howlett and Jamieson properties was $97,295.

In 1971 it was evident that the lands in the triangle lay in the path of future commercial development. The triangle was located at an intersection which was the focus of regional traffic. The highest and best use of the properties was found by Mr Koeper to be for commercial redevelopment, assuming a reasonable probability of a change in zoning. It was found by Mr Desnoyer to be commercial and by Mr dePfyffer to be light industrial and commercial.

Rezoning of all the lands in question was required at the end of 1971 if their commercial potential was to be realized. Annexation appears to have been a prerequisite to the obtaining of municipal services such as sewer and water. The front or easterly two hundred feet only of the Salt lands was zoned for commercial use. The Howlett and Jamieson lands were zoned rural residential, save for the southerly two hundred feet in which the zoning was R-2.

Much was made of the effect on the value of nearby lands of the announcement made in July of 1971 of plans to develop The Village Green Inn on lands at the northeast corner of Highway 97 and 48th Avenue. It should be noted that the announcement was of a plan to so develop those lands. The developers of the Inn had acquired most of their land by option. Actual approval of the annexation by the city of The Village Green Inn lands did not occur until February 10, 1972, and it was not until after that had happened that the developers of the Inn exercised their options. The extension of municipal boundaries and obtaining of municipal services appear to have been prerequisites to the development of the Inn. That boundary extension did not include the lands in the triangle. An application to provincial authorities was made in February of 1972 for the extension of the city limits northward to the southerly boundaries of the Murtack lands. That area became a part of the city on November 2, 1972. A third extension brought Lot 1, Plan 14167 and Lot 9, Plan 2347 into the city on November 1, 1973. It is significant that Dominion did not exercise its options on the lands in the triangle until after November 1, 1973.

Undoubtedly, the announcement in July of 1971 of a plan to develop The Village Green Inn had an influence on the value of surrounding lands. The announcement was a further demonstration of the likelihood of a continued northerly push of commercial development along Highway 97.

Mr Desnoyer, to whom I referred above, was President of Tradeland Realty Limited. Because he was personally active in selling and reselling many of the properties in question, and as well in selling some of the comparables mentioned in the valuation reports prepared by him, and finally because he was one of the principal actors in effecting the assembly for Dominion, his opinion might normally be expected to carry considerable weight. However, I believe that Mr Desnoyer’s conclusions were based on reasoning which accorded far too much weight to the announcement of the development of The Village Green Inn. One of his valuation reports read in part as follows:

The announcement of the development of the Village Green Motor Inn complex had a tremendous impact (sic) into the sudden increase in value of the subject property. This announcement was released in the local press on July 26,1971. The subject property being identical property and directly across the highway from the development was influenced probably more than any other property in the area.

Unfortunately, the announcement of the Village Green also caused all the properties that were for sale in the area to be optioned for 6 to 9 months and other property owners refused to sell, therefore, making it impossible to find comparable sales between July 1971 and early 1972.

Again, I point out that Comparables 3, 4 and 5 show an increase over 20 months of 3.18$ per square foot per month. Yet, the subject property, in 10 months, increased 6.88¢ per square foot per month, over twice the normal appreciation, proving that an unusual development had influenced the sudden change in Market Value. Of course, there is no doubt that it had to be the Village Green development.

Conclusions

It is therefore only sensible to believe that the major increase in land values of the subject property had to occur from July to December 31, 1971. Thereafter, the lands had settled down to a steady increase as shown by the comparables 2, 3 and

4. I, therefore, feel that the only accurate way to establish Market Value as of December 31, 1971 is as follows.

There is no evidence to indicate that the potential use of the lands in the triangle as component parts of a block suitable for use as a site for a regional shopping centre was recognized on or before V-Day. It is, I believe, reasonable to infer that Dominion, in obtaining the options, had that use in mind and that it was not prepared to exercise the options prior to completing the assembly, effecting the annexation of the lands to the city and rezoning. Thus, the sales which took place as a result of the exercise by Dominion of its options cannot be regarded as reflecting any substantial rise in property values prior to V-Day generated by the July of 1971 announcement of The Village Green Inn plans. That conclusion is, I believe, reinforced by the evidence of the purchase in November of 1971 by Messrs Howlett and Jamieson of Lot 4 and Parcel A; the evidence as to the obtaining by those gentlemen of the option to acquire Lot 3, Plan 3071; and, to a lesser extent, by the purchase by Mr Salt of Lots 7 and 8, Plan 2347. Unit values in all such cases were so dramatically different from the unit values reflected by the options given to Dominion that I cannot conceive that the prices paid by Dominion reflected forces present in the market place prior to V-Day.

The evidence of Mr Koeper, Assistant Area General Manager of General Appraisal Company of Pasadena, California, as to the value of the Howlett and Jamieson lands is also difficult to accept, having regard to the post July 1971 transactions referred to above. The pre V-Day sales of lands within the triangle are much stronger evidence in my view of the V-Day value of those lands than the results of the comparative analysis made by Mr Koeper. He stated that annexation and a zoning change were needed on the date of the appraisal and asserted that he made adjustments to the prices paid in comparable sales which he surveyed to take this and other factors into account. However, he acknowledged that none of the comparables which he used was closely comparable to the subject lands and that accordingly very substantial adjustments were required. I do not believe that the adjustments which he made were sufficient to reflect the differences between those comparables and the subject lands. Furthermore, Mr Koeper admitted on cross examination that his valuation of the Howlett and Jamieson properties was made as if they had the potential of forming part of an assembly of a larger parcel. He stated that he had placed a higher value on the lands in recognition of that potential. As noted above, I cannot conclude that that potential was recognized in the market place prior to V-Day.

It therefore appears to me that the conclusions reached by Mr dePfyffer, the appraiser called to give evidence on behalf of the respondent, are preferable. The unit values reflected in his evidence accord much more closely with the pre-1972 transactions within the triangle than do those of Mr Desnoyer and Mr Koeper, and they indicate that the V-Day values used by the Minister on assessing were not too low.

I turn next to the question whether the gain realized by Mr Salt on the disposition of Lots 7 and 8, Plan 2347 was income. The uncontroverted evidence of Mr Salt was that he bought the lands for use for purposes of storing auto bodies. The land was relatively inexpensive and, if filled, was Suitable for the intended purpose. While it was clear that before the purchase Mr Salt had not obtained a right of way across the rear of the Murtack lands adjacent to the CPR, it was also clear that Mr Salt had alternative if less desirable access by means of the Highway and 48th Avenue. Furthermore, Mr Salt did in fact try to get Mr Murtack to agree to the grant of a right of way. It was suggested that zoning was an obstacle to the proposed use. Mr Salt’s evidence was that he had called Mr Connolly, who was I assume a planning official, and that he was in favour of the required zoning change. I conclude that Mr Salt purchased the lands with every reasonable expectation of being able to use them for the stated purpose. The property purchased was not, in my view, at the relevant time the subject of any evident speculative interest. It is true that the lands purchased by Mr Salt as a new location for his business following the move from the triangle were only five acres in area, but it was not shown that the new site could not be used more efficiently than the old. Furthermore, the aerial photograph made May 7, 1971, Exhibit R-4, shows that Lot 9, Plan 2347, purchased by Mr Salt only a few months before, was beginning to fill up with old car bodies. I find therefore that these lands were not purchased with a view to turning them into account for profit.

The assessments of Messrs Howlett and Jamieson have not been shown to be wrong and their appeals must therefore be dismissed. The Salt appeal succeeds in part and the assessment is referred back to the respondent for reconsideration and reassessment on the basis that the gain realized on the disposition of Lots 7 and 8, Plan 2347 is on capital account.

Appeal allowed in part.