Date: 20020314
Dockets: 2001-516-IT-I,
2001-3674-IT-I, 2001-3865-IT-I
BETWEEN:
ISMAIL NANJI, PYARALI NANJI,
AMIR NANJI
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasonsfor
Judgment
Bowman, A.C.J.
[1]
These appeals were heard together and are from assessments for
the appellants' 1999 taxation year.
[2]
The sole issue is the fair market value of a parcel of land at
6000 Kingston Road on February 22, 1994.
[3]
In their 1994 taxation year the appellants, who are three
brothers, elected to report a gain on the property on
February 22, 1994.
[4]
The February 22, 1994 budget eliminated the capital gains
exemption except in respect of shares of qualified small business
corporations and qualified farm property. Taxpayers were however
entitled to preserve the capital gains exemption on other
properties in respect of gains that had accrued to
February 22, 1994. This was accomplished by filing an
election (form T664) under subsection 110.6(19) of the
Income Tax Act which created a deemed disposition and
resulting capital gain which could be offset by the available
capital gains exemption. With the exception of certain types of
property that are not relevant here, subsection 110.6(19)
provides for a deemed reacquisition at the amount designated,
subject to certain conditions that I will discuss later. The
deemed acquisition cost forms the adjusted cost base
("ACB") of the property when it is ultimately sold.
[5]
If the taxpayer designates an amount that exceeds the fair market
value ("fmv") on February 22, 1994, but is less
that 11/10 of that fmv the deemed reacquisition cost is the
February 22, 1994 fmv. If an amount is designated that
exceeds 11/10 of the February 22, 1994 fmv the deemed
reacquisition cost is reduced by the amount by which the
designated amount exceeds 11/10 of the February 22, 1994
fmv.
[6]
Subsections 110.6(25) and (27) permit the revocation or
amendment of an election under certain conditions but under
subsection (28) the amendment or revocation of an election
cannot be made if the amount designated exceeds 11/10 of the
February 22, 1994 fmv of the property.
[7]
The above is a somewhat simplistic summary of how an election
under subsection 110.6(19) works. The following is how it
was applied.
[8]
The three appellants, together with a fourth person, owned a
parcel of land at 6000 Kingston Road, Scarborough,
Ontario.
[9]
In their returns of income for 1994 they filed an election (form
T664) designating proceeds of disposition of $500,000. The
election form indicated that the property had been bought in 1980
and had an ACB of $110,000. This resulted in a capital gain of
$390,000. They then applied a reduction to that capital gain for
the purposes of the election on the basis that the property was a
non-qualifying real property. It was assumed that the property
was non-qualifying real property, as defined in
section 110.6 and I have no evidentiary basis on which to
disagree. The property was held and used in the business of
operating a garage. The reduction was $54,600, i.e. $390,000 X
.14.
[10] The .14
factor was determined by the number of months between
February 22, 1992 and February 22, 1994 (24) over the
number of months the property was owned prior to
February 22, 1994 (168).
[11] The
resulting elected capital gain was $335,400. The elected taxable
capital gain was ¾ of this amount or $251,550, divided
between the four owners in the amount of $62,887.50 each.
[12] In 1999,
the year under appeal, the property was sold for $350,000. In
their return of income the appellants filed a page from the Guide
and calculated their new ACB as follows:
FMV at end of February 22,
1994
$350,000
Designated proceeds of
disposition
$500,000
$350,000 X 110%
=
$385,000
$500,000 minus $385,000
=
$115,000
$350,000 - $115,000
=
$235,000
(new ACB)
Plus expenses of disposition $2,876.25
=
$237,876.25
Capital
gain
$112,123.75
Taxable capital
gain
$84,092.81
Allocated to each
owner
$21,023.20
[13] This
amount was included in each return for 1999 and the same amount
was deducted in computing taxable income as a capital gains
deduction.
[14] Neither
the assessments nor the 1994 or 1995 returns were put in evidence
and for them to be sent to the court, even though they do not
form part of the record and are not available for inspection by
the public, is, apparently, an illegal search and seizure
(Gernhart v. The Queen, 99 DTC 5749).
Accordingly it is not clear just what happened on assessing but I
assume the capital gains deduction was denied.
[15] Also, the
Minister must have assumed that the $350,000 shown in the return
was the correct February 22, 1994 fmv even though the
respondent called an expert witness who testified that in his
opinion the fmv on February 22, 1994 was $275,000. The
Minister also seems to have proceeded on the assumption that the
appellants did not file amended elections and since the
designated amount in the election of $500,000 was more than 11/10
of the February 22, 1994 fmv, they could not have done so in
any event. This is the type of case where the respondent should
have called the assessor to describe the technical calculations
that were made on assessing. The three appellants, whose first
language is not English and who are not familiar with the
exceptional intricacies of the Income Tax Act in this
area, are at a clear disadvantage. Moreover, the Crown has the
luxury of being able to call an expert witness from the CCRA. For
the appellants to call an expert valuation witness would be
prohibitively expensive.
[16] It is
perhaps worthwhile to consider what would have happened if they
had in the election filed in 1994 designated $350,000 rather than
$500,000.
[17] The
calculations would have been
$350,000 - $110,000 = $240,000
less reduction for non qualifying property $240,000 X .14 =
$33,600
elected capital gain $206,400
taxable capital gain $206,400 X .75 = $154,800
[18] When the
property was sold in 1999 the capital gain (assuming the CCRA
accepted the February 22, 1994 fmv of $350,000, as it
appears to have done) would have been calculated as follows.
February 22, 1994
fmv
$350,000
Less designated
proceeds
$350,000
Minus $350,000 X 1.1 =
$385,000
$385,000
0
New
ACB
$350,000
Capital gain on
disposition
0
[19] The
consequences of designating a figure that exceeds 11/10 of the
February 22, 1994 fmv are significant. Whether the
Act says so or not it is a penalty and obviously intended
to be such. This is confirmed by subsection 110.6(28) which
prohibits the amendment or revocation of the election where the
designated amount exceeds 11/10 of the February 22, 1994
fmv. It is clear on the evidence that the designated amount of
$500,000 was arrived at in good faith by the appellants.
[20] The
calculation made by the appellants of a taxable capital gain of
$21,023.20 was correct if we accept the premise that the
February 22, 1994 fmv was $350,000. The excessive
designation of $500,000 had the effect of reducing the ACB by
$115,000. The appellants' mistake was in thinking they could
claim a capital gains exemption against the taxable capital gain
of $21,023.20. It was simply not available in 1999.
[21] If the
February 22, 1994 fmv is $350,000 and the appellants are not
able to amend the $500,000 designation, the assessments must
stand.
[22] Any
increase in the February 22, 1994 fmv beyond $350,000
reduces the amount of the penalty and increases the ACB. Since
the appellants called no expert witness I must look to the expert
witness report filed by the respondent. The appellants'
failure to call an expert is understandable because of the cost
but it means that the court must rely solely on the comparables
chosen by the respondent's expert.
[23] Obviously
the court is not bound by any expert's report and the court
seldom adopts any report in its entirety: Grove Crest Farms
Limited et al. v. The Queen, 96 DTC 1166;
Western Securities Limited v. The Queen,
97 DTC 977; Erb et al. v. The Queen,
2000 DTC 1401; Bibby Estate v. The Queen,
83 DTC 5148 at 5157.
[24] The same
is true even where one party does not file a report.
[25] The
respondent's expert, Mr. Beharry, has considerable
academic qualifications and experience in making appraisals for
his employer, the CCRA. It does not appear that he has ever been
active in the real estate market as a broker or dealer in
Scarborough.
[26] In
James et al. v. Canadian National Railway Company, [1965]
Ex.C.R. 71, Cattanach, J. said at p. 76:
I must also make some general comment with reference to the real
estate experts. My understanding is that a person qualifies to
express an opinion as an expert on land values by having had
experience operating in the market as a broker or dealer. By
reason of that experience, he is in a position to express an
opinion as an "expert" as to what buyers would have
paid for the expropriated property at the time of expropriation
and as to what sellers would have sold the expropriated property
for at that time. Without that experience, I should not have
thought that a witness has any status to be expressing such
opinions as an expert or otherwise. In this case, the evidence as
to the qualifications of the experts has emphasized the academic
training and the experience of the witness as a valuator or
appraiser and has minimized his practical experience in the
market. Indeed, in one instance, the witness did not claim any
such experience.
[27] He
repeated this view in a somewhat modified form in Salt et al.
v. The Queen, 84 DTC 6395 at 6401-2.
[28] I am not
prepared to go so far as Cattanach, J. did and exclude the
evidence of a person without experience as a broker or dealer.
Such lack of experience does however go to weight. The evidence
of such persons is useful in that it puts before the court
comparables from which the court can form its own view of value.
However an appraiser must make judgement calls in such matters as
the choice of comparables, the adjustments that must be made to
the price paid for comparables and distance from the subject
property and the highest and best use of the subject property. It
is difficult to see how a person with no experience in the real
estate market as a broker or dealer can make such judgement calls
with any greater degree of accuracy than any one else.
[29]
Valuation, as Viscount Simon said in Gold Coast Selection
Trust Ld. v. Humphrey, [1948] A.C. 459 at 473, is an
art, not a science. It is however an art that requires molding
and tempering in the marketplace.
[30] I must
nonetheless base my conclusions on the evidence before me and I
cannot abrogate that responsibility by merely adopting the
opinion of the only person called to give expert testimony.
[31]
Mr. Beharry concluded that on February 22, 1994,
6000 Kingston Road had a fmv of $275,000. The CCRA did not
use this figure on assessing, and it could not use it to justify
asking for more tax (Harris v. M.N.R.,
64 DTC 5332 at 5337).
[32]
Mr. Beharry discussed three approaches: cost, income and
direct comparison. He did not use the income approach. His final
figure of $275,000 is the average of the figure of $289,000
determined by the cost approach and the figure of $261,000
arrived at using the direct comparison approach.
[33] The cost
approach starts with a land cost of $233,000, adds $139,101 for
the building and equipment less a depreciation factor of 60% (an
admittedly highly subjective determination) to arrive at a figure
of $55,640 for a total of $288,640.
[34] The
direct comparison approach uses a number of sales of unimproved
lots and a number of sales of lots with buildings on them.
[35] He
concluded that the highest and best use of the property on
February 22, 1994 was a continuance of its present use, that
of a commercial use property. He also concluded that the building
added nothing to the value of the property. I find it difficult
to reconcile these last two conclusions. I do not think it is
realistic to value such property as if it were vacant and yet to
use comparables that have similar buildings on them. With one
exception the sales of vacant land set out in
Mr. Beharry's report indicated a price per square foot
that was lower than the square foot price of the improved
lots.
[36] The
subject property is a corner lot with a frontage on Kingston Road
of 97.58 feet. The building is a garage with three bays, not two
as assumed by the appraiser. The garage has about 2,256 square
feet. The appellant, Mr. Ismail Nanji, who spoke on behalf
of his brothers, said the lot was 97 X 145 feet or 14,065 square
feet.
[37] Sale no.
1 at 6149 Kingston Road had 19,419 square feet and a
frontage of 87 feet. It was not a corner lot. It sold in
July 1995 for $330,000, or $17 per square foot. This would
indicate a value of $239,105 for the subject property, using
Mr. Ismail Nanji's figure for the size.
[38] Sale
no. 2 at 2272 Kingston Road sold in May 1994 for $380,000
and resold in May 1995 for $462,500. It had a 75.08 feet frontage
with a total size of 8,988 square feet. The service garage had an
area of 5,477 square feet. It was closer to downtown Toronto but
there was no evidence that this difference in location made it
more valuable. The garage was built in 1949 compared to the
subject property which was built in 1947. If the building on the
subject property added no value as Mr. Beharry believed, it
is difficult to see why the building on this property should do
so.
[39] The
subject property is preferable for several reasons. It is larger,
and it is a corner lot. If however we simply divide the lot size
into the May 1994 sale price of $380,000 we find that the
property sold for $42.27 per square foot. If we apply this figure
to the subject property with 14,065 square feet we would arrive
at a value of $594,648. This may be high in comparison to some of
the other sales but it does indicate that the Crown's
valuation of $275,000 is unrealistically low.
[40] Sale
no. 3, 2592 Eglinton Avenue East, is a corner lot but it is
much larger — 30,980 square feet. It sold in June 1995 for
$725,000. It may not be a particularly good comparable because of
its size, but using the per square foot price of $23.40 it would
indicate a value of about $329,000 for the subject property.
[41] Sale
no. 4, 144 Galloway Road, had an area of 23,086 square
feet. It sold on June 14, 1994 for $600,000, or about $26
per square foot. This would indicate a value of about $365,690
for the subject property.
[42] Sale
no. 5, 2906 Eglinton Avenue East, had an area of 23,760
square feet, sold on June 14, 1994 for $594,595, or $25 per
square foot. This would indicate a value of about $351,625 for
the subject property.
[43] Sale
no. 6 at 4141 Kingston Road, with an area of 8,264
square feet sold on January 31, 1994 for $252,000, or $30
per square foot. This would indicate a value of $421,950 for the
subject property.
[44] It will
be apparent that if we attribute no value to the buildings and
make no adjustments for time or distance, the values, using a
square footage of 14,065 for the subject property and based on
the six comparables with garages on them would run from a low of
$239,105 to a high of $594,648. The average is about $383,669. I
do not suggest for a moment that one can take the average of all
of the comparables of improved property and thereby arrive at a
fair market value. However where the average of the total selling
price of the six lots is $383,669 and the average price per
square foot is $27.28, which would indicate a price for the
subject property of $383,693, it should give anyone attempting to
arrive at a fair market value reason to have serious doubts about
a figure of $275,000, or 72% of the average figure. Judges should
not let themselves be overly bedazzled by the mystique and jargon
of real estate appraisals where the results, based on assumptions
that are either not articulated or not substantiated, yield
valuations that run counter to ordinary commercial common sense.
The valuation of a corner lot on Kingston Road in Scarborough,
where similar properties are bought and sold routinely, is not,
after all, an arcane endeavour. It is a rather mundane
exercise.
[45] The sale
that in my view is most comparable is sale no. 6 at
4141 Kingston Road. The sale took place only three weeks
before February 22, 1994. The lot size is smaller, but the
size of the garage, 2,062 square feet, is comparable to the size
of that located on the subject property, which is somewhat larger
with 2,256 square feet. If anything, the subject property
compares favourably to this comparable because it has twice the
frontage and is a corner lot, an obvious advantage for a garage.
The garage on the subject property is only eight years older.
[46] I can see
no basis for adjusting the value of $421,950 downwards. Indeed
there might be some justification for adjusting it upwards, but I
do not believe I have the evidence that would permit me to do so.
Where a property is as comparable to the subject as this one, and
a sale takes place at about the relevant date, I can see no
reason for making adjustments or calculations of averages.
[47] In my
view the evidence establishes that the subject property had a fmv
of $421,950 on February 22, 1994.
[48] The
appeals are therefore allowed and the assessments are referred
back to the Minister of National Revenue for reconsideration and
reassessment on the basis that the fmv of the property at
6000 Kingston Road, Scarborough, Ontario on
February 22, 1994 was $421,950.
[49] The
appellants are entitled to their costs, if any, in accordance
with the tariff.
Signed at Ottawa, Canada, this 14th day of March 2002.
"D.G.H. Bowman"
A.C.J.
COURT FILE
NOS.:
2001-516(IT)I, 2001-3674(IT)I, 2001-3865(IT)I
STYLE OF
CAUSE:
Between Ismail Nanji and Her Majesty The Queen
Between Pyarali Nanji and Her Majesty The Queen
Between Amir Nanji and Her Majesty The Queen
PLACE OF
HEARING:
Toronto, Ontario
DATE OF
HEARING:
July 16, 2001 and February 27, 2002
REASONS FOR JUDGMENT BY: The
Honourable D.G.H. Bowman
Associate Chief Judge
DATE OF
JUDGMENTS:
March 14, 2002
APPEARANCES:
For the
Appellant:
The Appellant themselves
Counsel for the
Respondent:
Brianna Caryll
COUNSEL OF RECORD:
For the
Appellants:
Name:
--
Firm:
--
For the
Respondent:
Morris Rosenberg
Deputy Attorney General of Canada
Ottawa, Canada
2001-516(IT)I
BETWEEN:
ISMAIL NANJI,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on July 16, 2001 and heard with
the appeals of Pyarali Nanji
(2001-3674(IT)I) and Amir Nanji
(2001-3865(IT)I) on February 27, 2002 at Toronto, Ontario,
by
The Honourable D.G.H. Bowman, Associate Chief
Judge
Appearances
For the
Appellant:
The Appellant himself
Counsel for the Respondent: Brianna
Caryll
JUDGMENT
It is
ordered that the appeal from the assessment made under the
Income Tax Act for the 1999 taxation year be allowed and
the assessment be referred back to the Minister of National
Revenue for reconsideration and reassessment on the basis that
the fair market value of the property at 6000 Kingston Road,
Scarborough, Ontario on February 22, 1994 was $421,950.
The
appellant is entitled to his costs, if any, in accordance with
the tariff.
Signed at Ottawa, Canada, this 14th day of March 2002.
A.C.J.
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