William Earl Laycock v. Her Majesty the Queen, [1978] CTC 471, 78 DTC 6349

Smith, DJ:—The question on which this action turns is the value on December 31, 1971, (Valuation Day for the purpose of determining Capital gains on dispositions of property) of the north-east quarter of section 17-6-4 west of the principal meridian in Manitoba, less one acre, hereinafter called the subject land.

On or about March 1, 1973, the land was sold by the plaintiff to Circle Three Custom Feeders Limited, a company whose shares were owned by three partners, one of whom was John Walker Hetherington, a witness at the trial. The price paid was $300 per acre, half being paid in cash at time of sale, the balance a year later.

In his income tax return for the taxation year 1973 the plaintiff disclosed the selling price of the land but did not include any amount as taxable capital gain on the sale. The Department assessed the land for capital gain and later, under date June 26, 1976 reassessed it on the basis that its value on Valuation Day had been $200 per acre. The plaintiff objected to the reassessment, claiming that on Valuation Day the value had been not less than $300 per acre.

The quarter section in question lies two miles east and one mile south of the town of Carman. It had been owned by the plaintiff for years prior to Valuation Day (December 31, 1971), the date of acquisition not being put in evidence. The plaintiff’s grandfather began farming in the vicinity many years ago and the family have farmed there ever since. To-day the plaintiff and Ross Laycock own and operate several sections of land in that area.

For some five years prior to 1973 Circle Three Custom Feeders Limited had been operating a cattle feed lot business on 40 acres of land which it owned and which was located immediately north and adjoining the subject land. Some 4,000 cattle were fed on these 40 acres. According to Mr Hetherington the company’s investment, apart from the value of the bare land, was about $250,000, including construction of a large drain, 3600 feet of sheds, and 36 feeders. From the evidence of the plaintiff and James Burnett, a Carman real estate agent, the subject land is higher in its interior area than near its boundaries, so that it drains naturally in all directions, assisted by a drainage ditch near its northern boundary and several slight depressions leading into it. On the evidence as a whole I conclude that this quarter section is somewhat better adapted for feedlot purposes than is that of the 40 acres Mr Hetherington’s company was operating prior to 1973.

In 1971 Circle Three Custom Feeders made an offer to buy 40 acres of the subject land, adjoining its feedlot, for a price of $400 per acre. The plaintiff was not interested and nothing came of it. That it was a genuine offer was confirmed to the appraiser of the Department of National Revenue, Mr L R Caron, and accepted by him.

Mr Hetherington stated that the company wanted more land. A further reason for making the offer and for a continuing interest in the subject land was the fact that the company required a licence from the clean environment authority, to conduct a feedlot operation. A complaint had been made, apparently because of the nearness of the feedlot to Carman, and a hearing had taken place. The company had been permitted to continue, but had been advised that its licence could be cancelled at any time.

Early in 1973 the plaintiff decided that he would be willing to sell the whole of the subject land. He asked Mr Hetherington if the company was interested in acquiring the whole quarter section. Mr Hetherington asked him to set a price. He did so, offering to sell for $300 per acre. His offer was promptly accepted and the sale was completed by formal agreement within a week.

Since acquiring this quarter section the company has increased considerably the scale of its operations. In Mr Hetherington’s evidence, in addition to the price paid for the land, the company has invested about $2,000,000 in its business establishment there. The company had decided, before purchasing it, that it needed even more land than in 1971. It wanted capacity to handle about 3,000 cattle per month. It appears that on the average the company is actually feeding from 8,000 to 10,000 cattle at any one time.

Both parties adopted the market approach for the determination of the value of the subject land, as at December 31, 1971. By this method the prices paid for a number of parcels of similar land sufficiently near in time and location to be comparable to the land whose value is to be determined, are obtained, taking into account special circumstances, where they exist, which may affect the price. The prices paid for those parcels are regarded as a useful guide for determining the market value at the required date of the land that is being appraised. The validity of this method depends, of course, on the degree to which the land and the circumstances surrounding the sales of the other parcels of land are truly comparable to and actually compared with the land being appraised and the circumstances surrounding it.

In this instance the plaintiff relied on five sales of small parcels of land made by him to different purchasers all of them for special purposes. In addition he had investigated sales of land by others than himself as shown on records in the Carman and Morden land titles offices and in the relevant municipal offices. He filed photocopies of three transfers of land that had been registered in one or other of the land titles offices relying on the consideration stated thereon for the value of the lands transferred thereby.

The sales of small parcels by the plaintiff were described by him, as follows. I have placed them in chronological order.

1. In 1960, sale to the Carman School Board of 9.4 acres situated just east of the eastern boundary of the town. The price was $10,000 and it was acquired by the school board for a school (to be erected) and playground.

2. In 1965, sale to Manitoba Hydro of 5 acres in the nw A of 30-6-4 (about /2 mile north of Carman). The price was $5,000 and the land was acquired for electrical power purposes. Hydro built a substation on it.

3. In 1970, sale to the local Co-operative Association of 2 acres in the same quarter section as in 2. The price was $3,000, and it was acquired by the Co-op to be used for storing lumber.

4. In 1971, sale to Mr and Mrs J E B Phillips, of 4.5 acres of NW corner of section 20-6-4. The price was $2,000, and it was purchased for residential purposes. The purchasers have built a house on it.

5. In 1976, sale to W W Implements Ltd of 5 acres in the NW /4 of section 30-6-4. The price was $15,000. The company has built a Store on it.

I cannot feel any real confidence in the prices paid for any of these five small parcels of land as being helpful for the purpose of determining the value of the subject land. To begin with they are all small parcels, which, as the evidence indicates, normally command higher prices per acre than are paid for substantial acreages. Then, number 1, 2, and 5 of these sales were from 5 to 11 years removed from the critical date, viz: December 31, 1971 (Valuation Day), periods during which fluctuations in the market price of farm lands occurred from time to time. More important is that in each case the land was acquired for a special purpose, which is a circumstance whose upward effect on the price varies greatly and in the present instances cannot be measured with any degree of accuracy on the evidence before me.

The photocopies of the three transfers of land made by others than himself became Exhibits P-4, P-6 and P-8 at the trial.

Exhibit P-4 is dated April 28, 1969, and indicates that the original was registered in the Carman Land Titles Office on June 2, 1969 as No 40125. It was made by the executors of T A Wilkie to Aubin Nurseries Ltd. The consideration for the land is stated to be $9,775. The description of the land is: part of the NW /4 of 29-6-4, but does not state the acreage of the land being transferred. In his evidence the plaintiff said tt was 15 acres, which, if correct, would indicate a price of $651.67 per acre. This land is used as a nursery.

Exhibit P-6 is dated March 25, 1976, and indicates that the original was registered in the Morden Land Titles Office on March 30, 1976 as No 156980. It was made by Alfred Vier to Mr and Mrs E R Mutcher. The stated consideration is $150,000. The land transferred is described as the W /2 of 18-6-4, excepting thereout land taken for public roads as shown on 2 registered plans and also a rectangular portion of the NW A of the section measuring 341 feet by 281 feet. The acreage of the land being transferred was therefore not disclosed but it was a few acres less than 320. The price per acre therefore was more than $150,000 divided by 320, ie: somewhat higher than $468.75. This land is operated as a farm.

Exhibit P-8 is dated February 15, 1976, and indicates that the Original was registered in the Morden land titles office February 26, 1976 as No 156494. It was made by Amalgamated Grain Growers Ltd to Sunny Western Farms Ltd. The stated consideration is $345,000, and the land transferred is Section 3-6-4. There is nothing to suggest it was less than a full section of 640 acres. The price per acre was therefore $345,000 divided by 640 or just over $539. This land is operated as a farm.

At the trial, counsel for the defendant objected to the admission of the above three transfers of land, on the ground that the truth of what is contained in a registered transfer cannot be proved by the mere production of the document. They should have been marked for identification, but in error I permitted them to be filed as exhibits. No witnesses were called to testify to the accuracy of anything contained in any of these transfers. I cannot give them any weight. If all the facts had been proved they would have afforded a strong indication that the market value of farm land had risen considerably by 1976, but would have been of little help in determining the value of the subject land in December, 1971.

Quite apart from the above objection, very little assistance could be derived from these transfers. Only the first of them, the one that records a transfer of 15 acres is sufficiently close to December 31, 1971 to be of much use for the purpose of determining the value of the subject land at that date. Further, the land areas of only 15 acres reduces its value as a comparable sale, and its special use as a nursery, for which purpose it was bought would also have an effect, undetermined in extent, upon the price.

The other two transfers are of acreages substantially in excess of the subject land, and in both cases the land transferred lies within 2 to 3 miles of it. On these facts they could be useful as comparables. Unfortunately they both record transfers dated more than four years subsequent to December 31, 1971. Further, the date when a transfer is made may be and often is many years subsequent to the date when the contract that fixed the price was made. No evidence was submitted on this last point. Finally, no evidence was submitted about the nature of the soil, whether it was well drained, whether some of it was marshy, whether it was reasonably clean, or whether there were buildings on it that would affect the price the buyers were willing to pay.

In the result, the court must rely almost entirely on the evidence adduced on behalf of the defendant.

Unlike the plaintiff, the defendant had the subject land inspected by a qualified, experienced appraiser, who submitted a detailed report containing his considered estimate of its value as at December 31, 1971, based on the assumption that a special purchaser could be found. His estimate was $32,100 or a few cents less than $200 per acre for the 159 acres.

The appraiser who made the inspection and report is L R Caron, who has had many years of experience in valuing farm and other lands. Since 1974 he had been doing this type of work for the Department of National Revenue of the Government of Canada. He is now a senior real estate appraiser for the Department. Since 1974 he has been an accredited member of the Appraisal Institute of Canada. He is also a fellow of the Real Estate Institute of Canada and a member of the executive of the Manitoba real estate board.

Counsel for the plaintiff. objected to -his expert evidence being admitted on the ground that he was an employee of the Government and of the Department of Government directly concerned with collecting income tax, and that consequently his report might be biased. On this issue the court was informed that departmental appraisers frequently made inspections and reports and gave evidence in court in support of the findings in their reports. Mr Caron outlined the procedure followed by the Department in cases of this kind. He stated that the normal practice, which was followed in this instance, was for a junior appraiser to make an inspection and report to the Department. If a further report was thought necessary a senior ap- praiser (in this instance himself) was directed, by means of a government form, to inspect the land and make a report with his estimate of its value. The senior appraiser was given no further instructions about the appraisal. He was not allowed to see the junior appraiser’s report or to talk to him. He said the purpose of the inspection was for him, as a professional appraiser, to arrive at an independent evaluation of the property

(a) As bare farm land. There were in fact no buildings on it.

(b) With an allowance for a special value of the land, if such were shown to exist.

I decided that Mr Caron’s expert evidence should be admitted, but that careful consideration would be given to the question of possible bias, either conscious or unconscious. As his testimony proceeded, I was completely convinced that there was no conscious Dias on his part. His statements and answers to questions, as also his attitude and the manner in which he gave evidence, left me with no doubt whatever about his integrity. His answers not only indicated thorough knowledge of what was involved, but impressed me as being completely frank, honest, objective and fair. The question of unconscious bias is naturally more difficult. I can say only that in nothing that he said or did and in nothing in his attitude did I find any indication that it might exist.

Adopting the market data approach to evaluating the subject land, which in his view was the only practical approach, Mr Caron examined many sales that had taken place in the Carman area within a period of two or three years from December 31, 1971. Of these he selected 12, 2 of which had taken place in 1971, and the remaining 10 in 1972, as the most suitable for comparative purposes. In each case he noted that all the land sold was under cultivation, and mentioned the cases in which farm buildings were included in the sale. He further noted in each case the distance of the land from the subject land and from the town of Carman, and one case in which the land was located on a main paved highway. I note here that the subject land is located on a gravel road but is only one mile along that road from provincial trunk highway No 3, at a point thereon two miles from Carman, a town of about 2,000 people.

Mr Caron’s report, with the required certificate attached, is Exhibit D-1. At the bank of the report is an area map showing the location of the subject land (coloured red) and the location of the 12 parcels of land (coloured green and numbered 1 to 12) used by him as comparables. I note here the relevant facts related to the sales of these 12 parcels.

Sale No 1 — 476.11 acres located 2 miles east and 1 mile south of

the subject land; 4 miles east and 2 miles south of Carman. Sold November 30, 1972 for $65,000, including buildings—$136.52 per acre.

Sale No 2 — 127.29 acres, part of NE /4 of 19-6-4, located on No 3

Highway, less than half a mile from Carman. Sold in October 1972 for $23,500, or $184.61 per acre. The purchaser was Aubin Nurseries Ltd, which was one of several businesses established in the then recent past, east of Carman along No 3 Highway.

Mr Caron considered this land superior to the subject land. In the court’s opinion it is not comparable with any accuracy to the subject land, by reason of its special purpose and the fact that it adjoined other land owned and operated by the nursery, I

Sale No 3 — 155 acres, NW A of 29-6-4, located just east of Carman.

Sold in July 1972 to the town of Carman for extension of the town’s sewage lagoon, for $34,500 or $222 per acre. The price reflected the special use for which it was bought and not its value for farm use.

Mr Caron considered this land superior to the subject land. In the court’s opinion it has very little value as a comparable to the subject land.

Sale No 4 — 155 acres. SE /4 of 32-6-4, located immediately northeast

of the land in Sale No 3. Sold in September, 1972, for $18,000 or $116 per acre. Buildings, topography and drainage poor. Purchaser had to spend about $2,000 for ditching and grading. This alone added about $13 per acre to purchaser’s cost.

Mr Caron considered this land inferior to the subject land.

Sale No 5 — 160 acres, SE /4 of 36-6-4 located six miles east of

Carman and one mile north of Highway No 3. Sold in September, 1972 for $20,000 or $125 per- acre. This was a non-arm’s length transaction between members of a family.

Mr Caron considered this land superior to the subject land. The court places little value on it as a comparable, because of its non-arm’s length character.

Sale No 6 — 156 acres, NW /4 of 22-7-4, located three miles east

of Carman and six miles north of Highway No 3. Sold in December 1972 for $15,000 or $96.15 per acre.

Mr Caron considered the land similar to the subject land but inferior in location.

Sale No 7 — 148 acres, part of SE /4, of 25-7-4, located six miles

east of Carman and six miles north of Highway No 3. Sold in December, 1972 for $15,000 or $101.35 per acre.

Mr Caron considered this land inferior to the subject land.

Sale No 8 — 305 acres, E /2 of 3-6-5, located two miles west and

three miles south of Carman. Sold, with some buildings, in October, 1972 for $45,000 or $147.54 per acre. The purchaser was Northern Sales (1963) Limited, Winnipeg, as was also the case in Sales Nos 9 and 10.

Mr Caron was advised by the purchaser that Sales Nos 8, 9, and 10 were part of a land assembly and that they were prepared to pay $10 to $15 over market value to acquire. Whether they did pay more than another willing buyer would be prepared to pay is, of course, unknown.

Mr Caron thought these sales could be considered purchases for a special purpose.

Sale No 9 — 310 acres, SE / of 9-6-5 and SW / of 10-6-5, located

immediately north-west of the land in Sale No 8. Sold in December 1972 with buildings for $45,000 or $145.16 per acre. The same comments apply as in Sale No 8.

Sale No 10 — 312 acres, E /2 of 10-6-5, located immediately north of

the land in Sale No 8 and immediately east of that in Sale No 9. Sold in October 1972 for $40,000 or $128.15 per acre.

Mr Caron considered the land poorer than in Sales Nos 8 and 9, and stated that it had soil erosion problems. There is no mention of buildings, so the court assumes there were none. Otherwise the same comments apply as in Sale No 8.

Sale No 11 — 150 acres, NW / of 31-6-5, located six miles west

and one and one-half mile north of Carman. Sold in December 1971 for $17,500 or $117 per acre.

Mr Caron considered this land inferior to the subject land.

Sale No 12 — 157.55 acres, SE / of 12-7-5, located three miles north

of Carman. Sold in April, 1971 for $16,000 or $101 per acre.

Mr Caron considered this land inferior to the subject land.

On the basis of his examination of the subject land and of the above described 12 sales of land in the area Mr Caron formed the opinion that the market value of the subject land at December 31, 1971, considered as bare farm land, was $135 per acre. For the 159 acres he rounded the value out to $21,500.

Mr Caron then considered the fact that a genuine offer had been made in 1971 to purchase 40 acres at $400 per acre, the plaintiff not being willing to sell. In reaching his final value he estimated as follows:

He then rounded the value out at $32,100, which works out at an average price for the 159 acres of $202 per acre.

From the point of view of the court it is unfortunate that no report by a qualified appraiser engaged by the plaintiff was presented to the court. Such a report would no doubt have dealt with other sales than those contained in Mr Caron’s report. Its analysis of comparable sales and its opinion on values would have been helpful to the court.

Counsel for the plaintiff submitted that the genuine offer to purchase 40 acres of the subject land for $400 per acre, made in 1971, established that the subject land had a special value. In his view it could be concluded that $300 per acre for the 159 acres was a fair assessment of this special value in 1971. Against this submission are the facts that the offer was for 40 acres only, which was all the land needed by the offeror for expansion of its feedlot business at that time, and that no offer to buy or sell the quarter section was made then or at any time before early 1973. From these facts it is arguable that the balance of the subject land had, in 1971, no value beyond that of a grain and potato farm.

As I view the situation, some allowance for special value of this land should be made, but as much as contended for by counsel for the plaintiff. The following facts lead me to this conclusion. Circle Three Custom Feeders Limited had begun business on the 40 acre piece of land immediately north of the subject land in 1968. It had invested about $250,000 therein, over and above the price paid for it. It is clear that it intended to continue business there. It was a growing business, evidenced by its offer to purchase, from the plaintiff in 1971, 40 acres adjoining the 40 it already had, for expansion purposes. The subject land was more suitable for a large scale feedlot business than was the 40 acres then being used by Circle Three, partly because it was well drained, but more particularly because plenty of water was readily available. A feedlot business where as many as 8,000 or more cattle are being continuously fed requires, as a necessity, a steady supply of large quantities of water. In my view the logical and best direction for Circle Three to expand was on the subject land. In my view also it was very likely, though not certain, that this growing company would, within a fairly short period of time, feel, more strongly than in 1971, the need for more land to accommodate its growing business. In such case it would probably desire to purchase either all of the subject land or at least substantially more of it than 40 acres. Mr Hetherington stated they were always looking at the subject land, and when, early in 1971, it was Offered to the company at $300 per acre, the offer was accepted, without any argument over the price.

In these circumstances, as at December 31, 1971, the subject land would command a higher price in the market than bare farm land. In fact it was only 14 months after that date when Circle Three bought the entire 159 acres. At December 31, 1971 there was nothing to indicate that the company would want all the land. There was much to suggest that before long the company’s growing needs would make more land a practical necessity and that its first interest would be in the subject land.

After weighing all the known facts. my conclusion is that the 40 acres for which $400 per acre was offered in 1971 should be valued at that figure. and that the remaining 119 acres should be valued at about 50% above its value as ordinary farm land. On the evidence before me, I accept Mr Caron’s conclusion that the value of the 119 acres for ordinary farm purposes was $135 per acre. On this basis the 119 acres should be valued at $202.50 per acre. In the result the total value at December 31. 1971. of the 159 acres sold to Circle Three Custom Feeders Limited works out as follows:

I round this out, for convenience, to $40.100.

The appeal is allowed, with costs, and the matter is referred back to the Minister of National Revenue, for reassessment of the plaintiff’s income for the taxation year 1973 on the basis that the value of 159 acres of the north east quarter of section 17-6-4 west of the principal meridian in Manitoba, sold by him to Circle Three Custom Feeders Limited on or about March 1. 1973 for $300 per acre had a value of $40,100 on December 31, 1971.