Edward Schlenker v. Minister of National Revenue, [1978] CTC 2848, [1978] DTC 1614

Roland St-Onge:—The appeal of Mr Edward Schlenker came before me on July 11, 1978, at the city of Calgary, Alberta and it involves the valuation of land at Valuation Day in order to establish the existence of either a taxable capital gain or a deductible capital loss in his 1974 taxation year.

The facts of this appeal are clearly spelled out as follows in the amended notice of appeal:

1. The appellant resides in the city of Medicine Hat, in the province of Alberta.

2. The appellant purchased in the year 1951 a parcel of land, in the province of Alberta, a portion of which land is legally described as portion of the south half of section 21, and the north half of section 16, township 12, range 5, west of the fourth meridian, comprising 535.42 acres more or less (hereinafter called the ‘said property’).

3. The appellant sold the said property for the sum of $555,000 on the 8th day of April, 1974.

4. The appellant, in his return of income for the 1974 taxation year as recently amended claimed as a deduction from income an allowable Capital loss arising from the sale of the said property in the amount of $149,365 on

following

Proceeds at disposition	555,000
Adjustéd cost base	842,230
Outlays of expenses	11,500
Capital loss	298,730
Allowable capital loss	($149,365)

5. The respondent, in assessing the appellant’s return of income for the 1974 taxation year, added to the appellant’s income a taxable capital gain from the sale of the said property in the amount of $174,700 and in so doing acted on the basis that the value of the said property as at December 31, 1971 was $194,100, being approximately $362.50 per acre.

As may be seen, the two opposing views concern the adjusted cost base:

1. $194,000 or $362.50 per acre for the respondent;

2. $842,230 or $2,000 per acre for the appellant.

If the appellant is right, he is allowed a capital loss of $149,365. Conversely, if the respondent is correct, the appellant becomes taxable on a capital gain of $174,700.

Therefore the appeal at bar is mainly a question of valuation of. land on Valuation Day.

At the hearing, five witnesses were heard.

1. Mr Thomas F Sunderland, buyer. of the subject property;

2. Mr Edward Schlenker, the appellant;

3. Mr Philip A Stonhouse, non-accredited appraiser for the appellant;

4. Mr Roy Joseph Weiderman, family lawyer who was asked by the appellant to sell the farm;

5. Mr Harold James White, an accredited appraiser who was familiar with the subject property and was called by the respondent to file the appraisal report prepared by Mr Bechthold, another accredited appraiser who had lately suffered a heart attack.

Mr Sunderland testified that, in the years under consideration, he was a land developer in Medicine Hat. In 1972 he purchased the F & M farm adjacent to the property under discussion at $2,000 per acre. In 1974 he was contacted by the appellant’s family lawyer and acquired the farm for the asking price of $1,000 per acre,-which in his opinion was below the market price. He also stated that, at that time, he was prepared to pay more for the appellant’s farm than what he actually paid because the services were close to the appellant’s property and also the said property was worth as much as the F & M Farm.

After the acquisition of the appellant’s property, Mr Sunderland proceeded to develop it. The property was depressed on one side but had frontage from two directions with non- -obstructed view. In 1911 a plan to subdivide the property was prepared but later abandoned due to the Depression.,

Upon cross-examination, Mr Sunderland admitted that after he acquired the F & M property, he immediately sold thereafter 20 acres therefrom at $500,000 for the erection of a shopping centre and that the remaining 110 acres were close to the city limits and were to be subdivided.

Apparently the witness made the down payment (25%)’out of the proceeds of disposition for the shopping centre and for five years thereafter he had only to pay the interest on the 75% of the purchase price. He terminated his testimony by saying that in the fall of 1972 he turned down an offer of $1,000 per acre, that the city was developing land to sell lots and that he was the only buyer of land.. A builder would have to deal with him because he was the only one possessing land in the area. In the fall of 1974 the appellant’s property was annexed to the city but the F & M property was not., .

Mr Schlenker testified that although he knew the F & M property had been sold, he did not know the price thereof; that his property was listed six months before he sold it; and that at the time he thought he had received a good price but later discovered that he had not asked enough.

The appellant was not sure whether he fixed a price with his family lawyer but he remembered that the latter told him to wait a little longer to obtain a better price.

He also stated that the city made an offer that he considered insufficient and consequently refused it; that the city should have bought his farm because it was cheaper than other lands it acquired.

Mr Stonhouse testified that he had experience in appraising land, was abreast of the market value of land in Medicine Hat and was asked to find out about properties of comparable value in order to appraise the appellant’s property.

Upon cross-examination, he was questioned about his comparables and the result was that he needed a great deal of adjustments to use the said comparables.

Mr Weiderman testified that at the first meeting with the appellant, he discussed the sale rather than the price; that he told him about the price obtained for the F & M Farm; that he advised him to wait for a more substantial price and that the appellant was agitated and asked him to find a buyer.

Mr White in his testimony adopted the conclusion of Mr Bechthold’s appraisal report; that on V-Day the appellant’s property was treated as agricultural land because it was being farmed on that date and that the comparables should be farm land properties.

Counsel for appellant argued that at the time of sale in 1974 the appellant was agitated and consequently anxious to sell his farm. He did not advertise and had he waited a little longer, he could have received a more substantial price.

To him, the best comparables to appraise the appellant’s property on V-Day is the price obtained for the F & M property at the end of 1971. He also contended that Mr Sunderland, the buyer, had to. consolidate that property. Consequently he sold part thereof for a shopping centre and the rest remained unsubdivided. He: paid $2,000 per acre for the F & M property in 1972 and was ready to pay the same price for the appellant’s farm in 1974. Counsel for appellant terminated by saying that the appraiser for the respondent should have used the F & M property as a comparable to appraise the appellant’s farm because the property should not be considered as agricultural but as commercial land for its appraisal on V-Day.

Counsel for respondent argued that the appellant’s contention that he made a mistake and sold for a price below the fair market value on V-Day is untenable.

In 1974 the appellant was happy to obtain that much money for his farm, which amount was much more than his expectations.

Although his lawyer had told him to wait for a better price, the appellant decided to accept what the buyer was offering him in 1974. According to counsel for respondent, the F & M transaction is not a good comparable because the buyer recovered his money right away and did not have to use his own money to pay for the farm. As to the other comparables, they should be discounted because the transactions occurred in 1973 and 1974 and required too many adjustments. At the end of 1974 there was no land available for sale where the appellant’s property was situated and there were just two buyers of land mainly the city and Mr Sunderland.

As may be seen, there is a substantial discrepancy between the two views.

At first glance it seems that the appellant could be right since Mr Sunderland, the buyer, was ready to acquire the appellant’s farm in 1974 for the same price he paid in 1972 for the F & M property.

On the other hand, when one scrutinizes the nature of the 1972 transaction, he realizes rapidly that although it occurred almost on V-Day, it is not a good comparable. Mr Sunderland did not disburse any money in that transaction; he acquired some 130 acres for $500,000 and not long after sold 20 acres thereof for half a million dollars. After such a transaction in 1972, the Board understands that Mr Sunderland would be ready in 1974 to pay $2,000 per acre for the adjacent land. But one must remember that in the case at bar the appellant’s property must be valued on V-Day which is December 31, 1971 and the Board is not sure at all whether Mr Sunderland would have been ready to pay that much money for the appellant’s property on V-Day.

In the case at bar both parties exaggerate: the appellant in trying to obtain a substantial capital loss and the respondent in trying to tax on a substantial capital gain. The best solution in my view would be not to allow any capital loss because in 1974 the appellant received a fair market value for his farm, and not to tax any capital gain because there is no cause to justify an increase in land value to the extent of $349,400 within a period of 28 months. In other words, the factors affecting the fair market value of the appellant’s property appeared around V-Day when the 20 acres were sold by Mr Sunderland for the purpose of building a shopping centre. There is no evidence whatsoever to justify a substantial increase in land value within the 28-month period as the respondent contended because the peak in valuation of land within the 28-month period occurred with the beginning of the said period which is close to V-Day. In 1974 the appellant received for his farm what he could have received around V-Day namely $1,000 per acre.

In 1974 the appellant was willing and able to sell at $1,000 per acre because in 1972 the buyer was able to acquire the F & M property under the conditions previously mentioned.

The Board is not certain that Mr Sunderland, if he had not been the owner of the F & M property, would have been ready to pay more than $1,000 per acre on December 31, 1972 for the appellant’s farm. Consequently the appellant should not be allowed any capital loss but, on the other hand, should not be taxed on any capital gain because there was no perceptible increase in land value from the date of the sale of the land to build a shopping centre up to the date of Sale of the appellant’s farm.

For the above reasons, the appeal is allowed and the matter referred back to the respondent for reassessment.

Appeal allowed.