Marco Products LTD v. Minister of National Revenue, [1972] CTC 2583, 72 DTC 1442

A J Frost:—This is an appeal from an income tax reassessment dated April 13, 1970 in respect of the 1965 taxation year wherein the taxable income of the appellant was increased by $21,579.97 representing the difference between an earlier valuation of the North West Building located at 10228 - 98th Street, Edmonton, Alberta owned by the appellant and a subsequent valuation or, as the Minister of National Revenue said, “the final value established”.

In 1965 the appellant carried on the business of owning, leasing and operating rented properties. In 1965 the said property known as the 98th Street property in the city of Edmonton (adjacent to the Chancery Hall) which had been acquired by the appellant in 1946 was sold for $140,000. The building on the property had been built in 1920 and was 45 years old when sold. It comprised a basement and three floors with a footage of 26,400 square feet. The evidence showed that the building was mainly used for storage purposes and was no longer an economically viable asset as it could not be remodelled or modernized due to age and circumstances. Consequently when an unsolocited offer of $140,000 was received in 1965 the property was sold.

At the date of sale the property had an undepreciated cost of $30,670.03. The appellant was of the opinion that the building was valueless and claimed a terminal loss in computing its 1965 income which the respondent disallowed in reassessing it on July 6, 1967. The appellant disagreed but accepted the respondent’s valuation in a spirit of cooperation. In this connection Mr R E Smith, general manager of the appellant company, testified: . in forty years of doing business with the Government we never had a dispute with them, so we paid the additional tax in the spirit of cooperation . . .”. On April 13, 1970 the respondent (three years later) issued a further assessment increasing the value of the building from $30,670.03 to $52,250 without giving the taxpayer any opportunity to discuss the situation prior to issuing the reassessment notice.

The transcript of evidence reads in part as follows:

Mr SMITH: May I ask the Department why they reversed their original assessment in this matter in the way they did it? Mr HYNES: Mr Chairman, 20(6)(g) of the Act requires the vendor and purchaser each to be treated in the same way, the allocation as to land and buildings be the same in each case. The assessment rating we are now dealing with attributes $52,000 to the building, the same to the syndicate which purchased the building. The wording of the section requires that they both be treated in the same way.

THE WITNESS: We were not advised there was dissatisfaction on their part, nor did we know the matter was reviewed by the Department when they reassessed us again in April, 1970.

Mr HYNES: Mr Chairman, the problem arises when vendors and purchasers buy and sell buildings without making an allocation themselves, and that is the case here there was no allocation agreed upon, in this day and age it is somewhat difficult to tell why parties would sell property depreciated over a number of years without making an allocation or without agreeing on an allocation. All they are doing is inviting a court case on the tax consequences.

THE WITNESS: In any case the valuation was changed from $30,000 to $52,250. That was done three years later, and we were reassessed without notifying us in any way of the proposed change in the building valuation, and it came with quite a shock. Do you know if an additional appraisal was made after the first one on which you based $30,000? Mr HYNES: No there was no appraisal on which the $30,000 was based.

THE WITNESS: According to your letter there was. May I see that letter? Mr HYNES I am not aware of the letter Mr Smith is referring to. The letter appears to be new to me. A copy of that letter is not on my file. I haven’t the slightest idea what appraisal is referred to because the only independent appraisal that appears on the Department of Revenue’s file is the one prepared by Mr Davis. There is a letter on my file addressed to Mr Tanner or Mr Shikaze which follows up on this of May 12th. It says: “Further to our proposal of May 12, 1967, we have now received submissions from both yourself and the representative of North West Building Syndicate, which are widely divergent. It has therefore been decided to use the undepreciated capital cost as the value of the building. The breakdown between land and building is as follows:

Building at book value	$ 30,670.03
Land	109,329.97
Sale price of land and building	140,000.00

Reassessments on this basis will be issued in due course.

THE WITNESS: This was after the appraisal was made. Mr HYNES: This is 12 days after the letter you referred to and prior to the appraisal made by Mr Davis.

THE WITNESS: That is why I asked if there was another appraisal made before the final reassessment.

Mr HYNES: I have now found the letter of May 12th on the Minister’s file.

THE REGISTRAR: That has been marked now as exhibit A-2.

EXHIBIT NO. A-3: Copy of letter of May 17, 1967, from B.C. Tanner & Company to Department of National Revenue.

Mr HYNES: Mr Shikaze’s reply is now in the record as exhibit A-3. It would appear that the Minister has written to both parties saying here are the figures we have. Where he got them from I don’t know. I think the letter of May 24th says this is what we are going to use, and the assessments were issued on that basis, and this taxpayer did not object to them. Some of the syndicate members did. With the obvious disparity in their views, the Minister retained Mr Davis to prepare an appraisal, which he did, and which we have before you as the basis of the re-assessments of both the vendor and the purchaser.

THE WITNESS: You see, we had no opportunity to represent ourselves in this case. Mr HYNES: I can see that.

THE WITNESS: We didn’t know this was all going on. We thought it was all finalized.

In the presiding member’s experience, it is not uncommon to find a wide divergence of opinion expressed by appraisers of the same property. One appraiser will find no value in an old building while another will find considerable value. This is the core of the problem in this appeal. The appellant, in his argument, contended that the building had no value. Counsel for the Minister, in his argument, said in effect: “We have a professional appraisal which sets a substantial value on the building.” To appraisers, real estate may have many values. Each certifies, “I have inspected the property, am a member of such and such an appraisal institute”, and then proceeds to arrive at a value or values depending on the approach or approaches he adopts. All values may be wrong for all could be true professional appraisals, hence the dilemma of a non-professional in reaching a decision.

Although the Board does not have the role of an appraiser, it is necessary to decide upon the most sensible method of valuation. The cases cited by the Minister are not helpful because they are not remotely related to the question in issue with the possible exception of City Parking Properties and Development Limited v MNR, [1969] CTC 508; 69 DTC 5332, which appeal was allowed in part. In that case, methods and assumptions were reviewed by the Court, but no single approach was adopted to determine the value, which really is not too helpful in this case as the Board cannnot avoid the responsibility of weighing appproaches in reaching its decision.

The first appraisal used by the respondent and prepared by R L Davis, AACI in September 1969 attempts to establish the fair market value by a comparative approach and supports this with an income approach using a 20% capitalization rate of the estimated income. Mr Davis stated that the purpose of his appraisal was to determine the fair market value of the property with a separate allocation for land under the existing program of utilization. In other words, Mr Davis arrived at an allocation of value subject to the above limitation. He says nothing about the highest and best use of the land and protects himself by limiting his approach. This report because of its limitation automatically favours the position of the Minister and could only be of assistance to the Board if it were proved that the appraisal problem in this particular case demanded a valuation based on the land and building as an investment unit. Since this is not so in my opinion, I reject Mr Davis’ valuation as inappropriate in the circumstances.

The second appraisal relied on by the Minister was prepared three years prior to the taxation year and in my opinion is most unsatisfactory. It was apparently prepared for the City of Edmonton in connection with a proposed land assembly. This appraisal while purporting to consider cost, income, and market apporaches is completely unsupported by the appraiser.

Mr George LeDrew, AACI in October 1970 prepared an appraisal for Marco Products Ltd, the appellant. In the early pages of his report the appraiser expresses his opinion based on a 10-year lease. In his income approach he rambles and appears to use various capitalizations without indicating why. On the final pages, however, he expresses a very Clear opinion that the market value of the building at the time of sale should have been approximately $18,500, then qualifies his opinion by stating:

Our conclusion is that the old brick structure located on this site actually had no value at the time of sale and that potentially, a maximum value of $18,500.00 if continued to be rented at the same rate to a suitable tenant.

Well? What does one conclude from this choice bit of expert evidence?

The appraisal reports were admitted in evidence but no expert was called to give evidence. The Board is not inclined to give much weight to the written opinions expressed by the appraisers in this appeal. Their reports are of little value and of no real assistance in reaching a decision. I do however rely on the evidence of Mr R E Smith, the general manger of the appellant company, who stated clearly and unequivocally that the building had a negative value. There is no doubt in my mind that Mr Smith is an astute businessman who acquiesced in a decision with which he disagreed, but who finally took the position that “enough is enough” and fought for his right and business principles.

The evidence further indicated that: the building was old and could not be considered a viable structure; the boiler and elevator were operating but in a shaky condition; a new roof was needed and the floors required extensive repairs; the property was in the area included in the Civic Centre Redevelopment Plan; the trend in that area was towards the construction of large office buildings; the old building had no place in the Civic Centre Plan; the price of land was moving up very quickly in the area; the appellant had a lease with North-West Tent & Awning Co Ltd which prevented demolition until December 31, 1967; the net return from the building amounted to about $8,000; the site is one of the choice locations in Edmonton; and, finally, the building was bought by a syndicate of lawyers at a time when there was a trend towards the construction of large buildings in Edmonton, requiring the assemblage of land to complete projects.

On the evidence as a whole it is highly improbable that the new owners acquired the property for the purpose of earning income. Its physical condition was a liability and only a comprehensive plan of redevelopment of some sort could possibly justify a cash outlay of $140,000. The minimal returns of about $8,000 net from the building combined with the dilapidated state of disrepair precludes the Board from drawing an inference that a realistic appraisal at the time of sale would have to be based on the land and building as a developed unit. In my opinion, the old building and land no longer constituted a unit for investment purposes.

Under the circumstances, I find no justification for any appraisal based on the building as a developed unit. Only the land had value and the building was not acquired in my view for producing income notwithstanding the fact that demolition had to be postponed and some rents were collected. The only valid appraisal approach is the highest and best use of the land.

I have no alternative but to allow the appeal by vacating the assessment and referring the matter back to the respondent for reconsideration and reassessment on the ground that the building was valueless and the appellant is entitled to a terminal loss equal to the undepreciated capital cost of the building as provided by subsection 1100(2) of the Income Tax Regulations.

Appeal allowed in full.

Appeal allowed.