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Citation: 2004TCC756
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Date: 20041125
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Docket: 2001-1339(IT)G
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BETWEEN:
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THE ESTATE OF THE LATE HORACE J.B. GOUGH,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Campbell J.
[1] This is an appeal from a
reassessment made under the Income Tax Act (the
"Act") for the 1994 taxation year.
[2] The only issue to be decided is
the fair market value of seven rental properties ("the
properties") that were owned by the late Horace J.B. Gough
on December 31, 1971 ("Valuation Day" or
"V-Day"). Horace Gough died on July 16, 1994.
His Estate is now responsible for any capital gains that may
result from the deemed disposition of the properties on
July 16, 1994 pursuant to subsection 70(5) of the
Act. The Appellant's cost of acquisition of the
properties is deemed to be the fair market value of the
properties on Valuation Day. The Minister of National
Revenue (the "Minister") disagreed with the fair market
valuations placed on the properties by the Appellant and
consequently reassessed. As a result of the reassessment the
Appellant's taxable capital gain increased in the amount of
$101,627.00 and interest was assessed in the amount of
$13,003.00. This increase in capital gains resulted from a
reduction in V-Day values of the properties from $326,000.00, as
filed by the Appellant, to $208,000.00, as reassessed by the
Minister.
[3] The expert report submitted by the
Respondent has valued the properties at $223,000.00.
[4] The following table depicts the
respective valuation positions of the Appellant, the Respondent
(based on initial appraisals by Glenn Todd at the audit stage)
and the expert report in respect to each of the seven
properties:
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ADDRESS
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APPELLANT'S
(ESTATE)
VALUATIONS
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MINISTER'S
(TODD)
VALUATIONS
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EXPERT'S
(BENNETT)
VALUATIONS
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22 Chestnut Place
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$50,000
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$30,000
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$31,500
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76 Viking Road
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$47,000
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$30,000
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$33,000
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77 Viking Road
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$47,000
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$30,000
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$33,000
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13 Simms Street
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$45,000
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$30,000
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$30,500
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2 Ordnance Street
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$45,000
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$26,000
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$29,500
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13 Argyle Street
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$47,000
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$30,000
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$31,500
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15 Exmouth Street
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$45,000
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$32,000
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$34,000
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Total
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$326,000
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$208,000
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$223,000
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The Appellant's Evidence:
[5] The Appellant called two
witnesses: Dr. David Gough, Administrator of the Estate and son
of the late Horace Gough, and Robert William Clouter. The
Appellant did not call an expert witness.
[6] Dr. Gough testified that in filing
the estate's original tax return, he used his own experience
in the real estate market to calculate the values of the
properties. He assisted his father and his brother in choosing
the lots, constructing the houses and in the eventual renting of
these seven properties. In addition Dr. Gough maintained personal
real estate rentals apart from his father's rental business.
He stated that he purchased his first rental property around 1965
and at one time owned as many as 81 properties. Some of
these properties were in the subdivisions where his father owned
his seven properties. He sold most of his 81 properties in
1979. Dr. Gough explained that he arrived at the valuations based
on his intimate knowledge of the properties and on his background
in real estate. He stated: "I knew what it cost, I knew what
went into them, I knew the market and I just have the knowledge
that is required to come up with the figures" (Transcript,
pg. 30-31).
[7] Dr. Gough explained why corner
lots were preferable in newer subdivisions, the tenant parking
arrangements and generally the construction of the three-unit
apartment complexes in relation to six of the properties. He
stated that St. John's city council approved a by-law in 1968
which prohibited the construction of three-unit apartment
houses in the subdivisions in which these six properties were
located. He stated there were no other properties in these
subdivisions that were similar to the six properties and that
this made them unique and more valuable within the subdivisions
where they were built. The seventh property, a four-apartment
unit located on Ordnance Street, was purchased and renovated.
[8] Dr. Gough attempted to assess the
expert's valuations by viewing the comparables used by him.
According to Dr. Gough, the comparable properties were located in
a less desirable area in the older section of the city and were
not structurally similar to the properties. Dr. Gough felt there
really were no comparable properties in these subdivisions.
[9] In addition a graph was prepared
by Dr. Gough which, according to him, showed a valuation figure
in respect to a virtually identical rate of appreciation before
and after V-Day. Dr. Gough stated that because the Minister
utilized inappropriate comparable properties in reaching its
determination, placing the Respondent's figures on the graph
results in a low rate of appreciation prior to V-Day and a
high rate of appreciation subsequent to V-Day.
[10] Lastly, Dr. Gough reviewed how he
compared 47 of the properties he owned, which were located in the
same subdivisions, with the estate properties. He looked at the
acquisition costs, his assigned V-Day values and the price he
received when he sold the properties. He argued that the
valuation figures he determined for his own properties were
accepted by the Minister.
[11] The second witness, Robert William
Clouter, was called to speak to correspondence he had authored in
1974 in his capacity as an appraiser and loans officer with the
Royal Trust Company. The letter contains Mr. Clouter's
opinion as to the value of the property located at 15 Exmouth
Street as of September 24, 1974. He did not recall specifically
why he was asked to provide this correspondence but stated that
he arrived at a fair market value for this property by assessing
various data such as real estate information and property
advertisements.
[12] On cross-examination, Mr. Clouter
stated that, although he had prior appraisal training and
experience, he did not actually receive his designation through
the Appraisal Institute of Canada until 1975.
Respondent's Evidence:
[13] The Respondent called one witness, Greg
Bennett, an employee of Canada Revenue Agency ("CRA"),
who was qualified as an accredited property appraiser in 1998. He
was accepted as an expert witness. Mr. Bennett's evidence
related to the contents of his report (Exhibit R-1). He reviewed
the three accepted methods of valuation: the Cost Approach, the
Direct Comparison Approach and the Income Approach. Mr. Bennett
employed the latter two approaches in preparing his report and
completing his retrospective appraisal. Mr. Bennett explained
that in applying the Direct Comparison Approach three properties
were selected which sold around Valuation Day, and which he felt
were similar to each of the subject properties. Based on factors
such as age, condition, size and utilization, Mr. Bennett
then selected one of these three properties as being most similar
to the subject property ("Best Comparable") being
reviewed. According to this Approach, the fair market value of a
property is the sale price of its Best Comparable.
[14] In utilizing the Income Approach, Mr.
Bennett divided the sale price of the Best Comparable (the same
one used in the Direct Comparison Approach) by the gross annual
rent, collected in respect to the property, to arrive at a figure
called the "gross income multiplier". He then took the
gross annual rent of the subject property and multiplied it by
the gross income multiplier figure to arrive at the
property's fair market value according to the Income
Approach. He testified that he reviewed the City's archives,
which contained the actual rental rolls for rental properties
during this period together with the list of tenants and amounts
of rent. These figures were used as the basis for his analysis
according to the Income Approach. In addition, Mr. Bennett's
investigation involved a search of CRA's internal Valuation
Day data bank, the local Registry office, the assessment records
and archives and an external viewing of the comparable sales
properties.
[15] Mr. Bennett's conclusion as to the
fair market value of each of the properties on December 31, 1971
was obtained by averaging the results of the Direct Comparison
Approach and the Income Approach.
Analysis:
[16] Case law has clearly established that
the determination of fair market value is a question of fact. The
term "fair market value" has been defined in
Côté v. R., [2001] 4 C.T.C.
54 at para. 14 (F.C.A.), by Létourneau J.A.:
...Fair market value" means the value obtained in a
normal market, that is, a market which is not disturbed by
unusual economic factors and where vendors, ready but not too
anxious to sell, meet with purchasers ready and able to purchase:
Withycombe Estate, Re, [1945] S.C.R. 267 (S.C.C.), at
page 288. ...
The meaning of "fair market value" was also dealt
with in Duguayv. R., [2002] 1 C.T.C. 8 at
para. 14 (F.C.A.), by Létourneau J.A.:
...Fair market value" means that obtained in the ordinary
market, namely a market not distorted by special economic
factors, in which sellers ready but not too anxious to sell deal
with purchasers ready and able to purchase: Withycombe Estate,
Re, [1945] S.C.R. 267 (S.C.C.), at 288. ...
[17] The expert report contains the
following reference to a definition of fair market value:
The highest price, expressed in terms of money or money's
worth obtainable in an open and unrestricted market between
knowledgeable, informed and prudent parties acting at arm's
length, neither party being under any compulsion to transact.
Minister of Finance v. Mann Estate, [1972] 5 W.W.R. 23, 27
per McIntyre, J. (B.C.S.C.); affirmed [1973] C.T.C. 561
(B.C.C.A.); affirmed [1974] C.T.C. 222 (S.C.C.).
[18] This latter definition, although worded
differently, respects the basic principles established by case
law. It was therefore properly utilized as a background to Mr.
Bennett's valuation analysis.
[19] In many cases where the taxpayer does
not produce an expert report to rebut the Minister's
assessment respecting the fair market value, this Court is forced
to dismiss the appeal because the taxpayer has not met the onus
which is upon him. However, there are those few cases where a
taxpayer has been able to meet the onus where no expert is
produced. The question of determining fair market value where
only one side presents an expert was considered by Bowman,
A.C.J.T.C. in Klotz v. Canada, [2004] T.C.J. No. 52 at
para. 33 where he states:
...To call no expert witnesses in a valuation case can be a
risky manoeuvre. Nonetheless, the court is not bound to accept
any expert's opinion and ultimately the court must make its
own determination of value based on all of the evidence.
[20] In the present case, the Appellant did
not engage an expert and chose to rely on Dr. Gough's own
valuations of the properties. Dr. Gough's primary expertise
is in the field of medicine, although he has had extensive real
estate holdings. He valued the properties primarily by reference
to his experience with his own rentals and to the assistance he
provided his father with his seven rental units over the years.
Although recognition is given to the substantial participation of
Dr. Gough in the real estate market, I must reject his approach
to the valuation of these properties. The method to be employed
in determining fair market value of a property may vary with the
circumstances of a case, but the general practice is to evaluate
using one or more of the three recognized valuation methods. In
initially filing the estate return, Dr. Gough simply relied on
his own knowledge and experience in the real estate field to
compile the valuations. After the assessment, he compiled data
obtained from the Registry office respecting other sales in this
period and he also drafted a graph-analysis. However, the graph
does not represent a recognized method of valuation. Even if I
did accept the graph, the rates of appreciation were not
substantiated in any way and it was these rates upon which the
graph was based.
[21] In addition I must reject the evidence
of Mr. Clouter as it relates to one of the seven properties. The
valuation completed by Mr. Clouter was for 1974. However, I am
concerned with a fair market value on December 31, 1971. His
evidence did not in any way reference this crucial date. His
testimony simply added nothing in support of the valuation chosen
by Dr. Gough in respect to the property at 15 Exmouth Street.
[22] In accepting Mr. Bennett's report,
I conclude that the numbers he utilized were derived from
objective and reliable sources and that he employed two
recognized and accepted valuation methods. I do, however, have
some reservations concerning this expert report. With respect to
the Income Approach, it was not clear from the evidence that Mr.
Bennett fully applied the four steps to be taken in using this
approach, as referenced by Tremblay J. in Club de Courses
Saguenay Ltée et al v. MNR (TRB), [1979] C.T.C. 3022
at page 3025. However, the Appellant did not question the Income
Approach as advanced by Mr. Bennett.
[23] With respect to the Direct Comparison
Approach, several of the comparables utilized were older than the
subject properties to which they were being compared. Other
physical characteristics such as size and location also varied,
although not significantly in every instance. According to Dr.
Gough, many of the comparables were located in older less
desirable neighbourhoods, an assertion not refutted by Mr.
Bennett. In addition, Mr. Bennett had not seen the interior of
all of the buildings, as they had been substantially renovated.
The Appellant also argued that the expert report did not take
into consideration that the City had passed a by-law
restricting three apartment complexes in 1968. However, it is
clear from Mr. Bennett's testimony that he was aware of the
1968 by-law change and considered it in his analysis (pp.
130-131 of the transcript).
[24] The Appellant has failed to discharge
the onus which is upon him. He did not employ objective data, use
a recognized method of evaluation, offer an expert report or
opinion, or provide evidence as to how the discrepancies in the
age and location of the comparables could potentially affect the
valuation conclusions provided in the expert report. The best
evidence before me is Mr. Bennett's report and his
testimony.
[25] Because there are some discrepancies in
Mr. Bennett's report, I reject his more conservative approach
of averaging the valuations from each of the two methods and then
accepting the result for each of the seven properties. Valuation
is not a strict science and in this regard, I believe the more
appropriate and fair conclusion is reached by accepting the
generally higher figures provided by the Income Approach as
follows:
Address
22 Chestnut
Place
$32,000.00
76 Viking
Road
$33,000.00
77 Viking
Road
$33,000.00
13 Simms
Street
$29,000.00
2
Ordnance
Street
$32,500.00
13 Argyle
Street
$31,000.00
15 Exmouth
Street
$36,000.00
Total
$226,500.00
The
appeal is allowed, without costs, based on a fair market value of
the properties on Valuation Day of $226,500.00.
Signed at Ottawa, Canada, this 25th day of November 2004.
Campbell J.
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