REASONS FOR JUDGMENT
Smith J.
I.
Summary
[1]
Paul Harvey, the appellant in this case, is appealing the reassessment by the Minister of National Revenue (the “Minister”) under section 325 of the Excise Tax Act, R.S.C., 1985, c. E-15
[2]
The legislative provision in question is a recovery measure that allows the Minister to assess an individual when he or she receives property from a tax debtor with whom he or she is not dealing with at arm’s length for an insufficient consideration, i.e. for less than the fair market value (the “FMV”) of the property at the time of the transfer.
[3]
The appellant acquired a property located at 45 Whistler Street, in Saint-David-de-Falardeau, in Quebec (“the building”) on April 19, 2012 (the “reference date”), from Frédéric Girard, who was at that time his daughter’s partner. At the time of the transfer, Mr. Girard was indebted to the Minister in the amount of $163,806.23.
[4]
The appellant does not question the presence of a transfer, a consideration, a non-arm’s length relationship or an underlying tax liability and therefore the issue solely addresses the FMV of the consideration.
[5]
Although the value of the consideration at the time of the transfer was $220,000, the appellant claims, for the purposes of this case, that the building’s FMV was in fact $207,000. The Minister stated that it was $271,000, i.e. a discrepancy of $64,000.
II.
The appellant’s testimony
[6]
There were three witnesses, including the appellant, who were called by the respondent.
[7]
There were also two expert witnesses, including Jean-Michel Tremblay, accredited appraiser on the appellant’s behalf and Julie Gauvin-Lamontagne, accredited appraiser, on the respondent’s behalf.
[8]
The two expert witnesses proceeded to appraise the building based on the cost and the comparison methods. I will first review the appellant’s testimony and then review the expert witnesses’ evidence under the next heading.
[9]
The appellant tried to explain the circumstances surrounding the purchase of the building by saying that he sought a second home for his retirement. He was interested in the Valinouët area, a ski resort, where he had friends. He further believed that his daughter and grandchildren would continue to use it to ski and moreover continued to frequent the area after the transfer, accompanied by Mr. Girard.
[10]
The appellant wanted to rent the basement, which he claimed was only 40-50% completed at the time the possession occurred. Further, there were several structural defects and gaps in the floor plan.
[11]
According to the sales records adduced into evidence by the respondent, the building was put on sale on three occasions before the reference date, i.e. in 2008 for $235,000, in 2009 for $225,000 and lastly in 2010 for $279,000, as the attached garage was not yet built. According to the 2009 record, the basement was fully set up as an apartment, whereas the one in 2010 indicated that it was [translation] “partially set up, complete”.
[12]
During the cross-examination, the appellant indicated that he did not participate in preparing these records and was unaware of them. According to him, the basement was not set up in 2009, contrary to what was indicated therein.
[13]
The appellant added that in early 2017, he argued the new assessment role to ensure that the calculation of the property taxes was based on the building’s true value. He used Mr. Tremblay’s appraisal report (dated April 11, 2016) and following that request, the value entered on roll went from $337,600 to $235,300.
[14]
Insofar as the appellant’s credibility is relevant to determining the building’s FMV, I will say that I have substantial doubts about his testimony. Specifically, I doubt that he truly sought a second home for his retirement and I find that it was rather an accommodation for the tax debtor—his daughter’s partner—and his grandchildren. It seems that this finding is rather clear, given that they continued to frequent the area after the transfer date.
[15]
Further, notwithstanding the description of the incomplete work and numerous structural flaws, the appellant only offered very few details about his approach to establishing a purchase price that would truly reflect the building’s FMV. It seems implausible to me that he agreed to conclude the transaction without considering the sales records and their contents.
[16]
It also seems unlikely that he truly intended to rent the basement since he still hadn’t done so at the time of the hearing, i.e. more than five years after the closing date. The same can be said for the property taxes adjustment request. Although understandable, the long period between this process and the transfer date casts a doubt and suggests that the request was made simply for this dispute. Consequently, I give very little weight to his description of the premises, specifically to the condition of the basement at the time of the reference date.
[17]
In view of the foregoing, the Court must rely on the experts’ testimonies.
III.
Analysis
[18]
In this dispute, the Court must determine the building’s value at the reference date in circumstances in which two expert witnesses disagree on several key points, including the state of the premises at the time of transfer, the value of the adjustments, the reconciliation method and the value attributable to the work that needs to be carried out.
[19]
Although the two experts completed an appraisal of the building based on the cost and comparison methods, they agreed to say that the comparison method was the best way to assess the FMV.
[20]
In fact, the two experts identified several properties similar to the building that allow for comparisons to be made. When such data on the market is available, the cost method is not a reliable basis to determine the fair market value: Qureshi v. The Queen, 2006 TCC 485, para 6 (informal proceeding) (“Qureshi”). Further, the building is not a new construction that would justify the use of the cost method: 9103-9438 Quebec Inc. v. The Queen, 2004 FCA 158, para 33 (informal proceeding) (“9103-9438 Quebec Inc.”).
[21]
I will therefore consider the comparison method for the purposes of this analysis.
[22]
First, note that the Court is free to accept, in whole or in part, any expert opinion about the building’s FMV or to estimate its value itself, given the acceptable evidence: Petro Canada v. Canada, 2004 FCA 158, para 48.
[23]
In Pinelli v. The Queen (1998) T.C.J. No. 583 (QL), para 19 (informal proceeding), McArthur J. explained that the Court could determine the FMV itself, despite the fact that it could not be satisfied with adopting a value that would be a simple compromise:
In arriving at a value, I refer to the often quoted statement of Walsh J. in Bibby Estate v. The Queen, F.C.T.D., No. T-358782, March 17, 1983, at page 19 (83 D.T.C. 5148, at page 5157), which reads:
While it has frequently been held that a Court should not, after considering all the expert and other evidence merely adopt a figure somewhere between the figure sought by the contending parties, it has also been held that the Court may, when it does not find the evidence of any expert completely satisfying or conclusive, nor any comparable especially apt, form its own opinion of valuation, provided this is always based on the careful consideration of all the conflicting evidence. The figure so arrived at need not be that suggested by any expert or contended for by the parties.
[Emphasis added]
i. The choice of comparables
[24]
When it comes to defining the expression “fair market value”, the courts generally echo Cattanach J.’s definition, which was expressed in Henderson v. Minister of National Revenue (1973), 73 DTC 547 (Fed T.D.), p. 5476, in which the excerpt was translated and reproduced from Qureshi, above:
The statute does not define the expression “fair market value”, but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length and under no compulsion to buy or sell. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. These definitions are equally applicable to “fair market value” and “market value”. It is doubtful if the use of the word “fair” adds anything to the words “market value”.
[Emphasis added]
[25]
For an expert, determining the FMV is not an exact science and “the standards leave room for subjective appraisals by experts”: Beaudry v. The Queen, 2003 TCC 464, para 16. This premise is even more true for the comparison method, where the experts broadly exercise their discretion, specifically in their choice of comparables and in the assessment of adjustments. Moreover, several decisions make note of the weaknesses of the comparison method due to the difficulty to find truly comparable sales: 9103-9438 Quebec Inc., above.
[26]
This is why the quality of a comparable is deemed by the few required adjustments for the purposes of comparison: Cliche v. The Queen, 2005 TCC 622, paras 45, 46 and 65. This proposition seems essential enough, since the ultimate outcome of the comparison method is to find sales that approximate the property under review as much as possible. Both experts agree that a comparable becomes random when the adjustments are too significant.
[27]
In this case, the connections between the absolute value of the adjustments on the sale price of the comparables chosen by the two experts are the following (the sales chosen at the reconciliation stage are marked with a “C”):
| Street address
|
Mr. Tremblay’s comparable sales
|
Ms. Gauvin-Lamontagne’s comparable sales
|
| 54-56 Davos Street
|
43% C
|
-
|
| 37 Whistler Street
|
54% C
|
64%
|
| 155 Banff Street
|
49% C
|
60%
|
| 41 Whistler Street
|
58% C
|
-
|
| 132 Chamonix Street
|
41%
|
-
|
| 107 Tremblant Street
|
46% C
|
-
|
| 13 Whistler Street
|
51%
|
43%
|
| 12 Whistler Street
|
41% C
|
-
|
| 20 Sestrières Street
|
29%
|
18% C
|
| 112 Courmayeur Street
|
62%
|
-
|
| 247 Banff Street
|
-
|
43%
|
| 15 Courcheval Street
|
-
|
33%
|
| Average
|
|
|
[28]
In his review report and during his testimony, Mr. Tremblay criticized Ms. Gauvin-Lamontagne’s choice of comparables due to the wide-scale adjustments. Yet, he chose properties that required considerably higher adjustments on average. In my opinion, Mr. Tremblay’s critique greatly undermines his credibility as an expert, seeing as he considered these properties in the reconciliation.
[29]
Indeed, during his reconciliation, Mr. Tremblay calculated the FMV based on an average of several of its comparables, whereas Ms. Gauvin-Lamontagne exercised her judgment to base her assessment on her best comparable. In fact, according to Jean-Guy Desjardins’ Traité de l’évaluation foncière (Montréal, Wilson & Lafleur, 1992, p. 522), we must avoid using a quantitative mechanical formula at this stage, since reconciliation requires the appraiser’s judgment and analysis.
[30]
Further, I consider that Ms. Gauvin-Lamontagne’s choice of comparables is superior to those of Mr. Tremblay. In fact, he seems to have largely relied on the category of property completion in his choice of comparables, whereas Ms. Gauvin-Lamontagne relied on the types of residences: single family, duplex, condominium, with or without a basement.
[31]
Thus, I share Ms. Gauvin-Lamontagne’s opinion that it to be wiser to select the same type of property transactions and then make adjustments. Mr. Tremblay admitted himself that it is more complex to place a value on a different structural feature than on a question of interior or exterior finish. Despite this difficulty, Mr. Tremblay selected four properties (37 Whistler Street; 155 Banff Street; 132 Charmonix Street; 107 Tremblant Street) with a slab or crawl space, i.e. without a basement, including three that were considered in the reconciliation. He also included a duplex. Ms. Gauvin-Lamontagne also showed in her review report that her counterpart underestimated the adjustments caused by the building’s structural features.
[32]
In short, I am of the view that Ms. Gauvin-Lamontagne’s choice to base her assessment on the property transaction at 20 Sestrières Street was justified because it is the one that requires the least amount of adjustments both by her and by Mr. Tremblay. I am of the view that no mistakes were made in the adjustments relating to this property.
ii. Basement layout
[33]
The layout of the building’s basement resulted in multiple adjustments by both expert witnesses. Both relied on the information submitted by Mr. Harvey, who was the only witness to have seen the basement at the reference date.
[34]
As previously mentioned, Mr. Harvey said that at the time of the transaction, the basement was 40-50% finished and the bathroom was empty, with the pipes ready and the stairs made of two by eight planks. However, I note that there were no comments about the basement’s floor covering.
[35]
However, Ms. Gauvin-Lamontagne also consulted the sales records that indicated that the surface area of the basement floor was covered by ceramics. According to her, a basement is finished when the walls and ceiling are finished. She then found that the building’s basement was 85% set up.
[36]
In light of the submitted evidence, I am of the view that the basement on the reference date was 85% set up. According to Mr. Tremblay’s progress report, there was at least drywall on the walls and ceiling, which fulfilled the requirements of a “finished” basement. There was no indication that the state of the basement’s floor was modified between the building being put up for sale in 2010 and the reference date.
[37]
In short, I am of the view that Ms. Gauvin-Lamontagne’s approach was appropriate. An adjustment based on the contributory value of the basement, rather than the cost, was also appropriate in the case of a building’s FMV, since we must assess a property’s attributes based on the value that a potential buyer would give it.
iii. Furnishing appraisal
[38]
The two experts did not agree on the adjustments relating to the furnishing of comparables. The building in question was sold unfurnished, whereas all the comparables chosen by the two experts were sold furnished.
[39]
Mr. Tremblay said that he assessed the value of furnishings from several transactions based on their net cost after depreciation according to the furnishing listed in the sales records and the surface area of the various comparables. It remains uncertain whether he truly called the buyers to determine the value of the furnishings.
[40]
Ms. Gauvin-Lamontagne tried contacting all the purchasers of her comparable properties. At the hearing, the respondent adduced into evidence the deed of sale for the property located at 247 Banff Street, which contained a breakdown of the sale price by the property sold. The parties to this transaction set the sale price of the movables at $3,200 for a residence with a living space of 1,818 square feet.
[41]
I am of the view that this transaction represents the true value of the furnishings used during the sale of a property. Indeed, I am of the view that it is common knowledge that a furnishing considerably loses value shortly after the purchase. Then, in the context of a purchase of several used furnishings in a residence, it is clear that the buyer’s impossibility of choosing his or her furnishings piece by piece reduces the price for a batch of used furnishings.
[42]
Concerning the sale of 20 Sestrières Street, Mr. Tremblay found that an amount of $5,000 for all the furnishings was clearly underestimated. He explained this discrepancy by the fact that Ms. Gauvin-Lamontagne only considered the appliances, whereas he included all the furnishings, including the appliances and a spa, pursuant to the deed of sale. Ms. Gauvin-Lamontagne relied on information gathered from the buyer. In short, it would have been useful for the Court to read this deed of sale, but unfortunately, it was not produced at the hearing.
[43]
In sum, Ms. Gauvin-Lamontagne’s approach for making the adjustments relating to the furnishings is far more appropriate and the chosen values are more realistic. Mr. Tremblay’s invariable results of $15,000 for several properties that had different living spaces still raise doubts about the thoroughness of his work when he conducted his assessment based on those surface areas.
iv. Interior and exterior work
[44]
The two experts noted the need for renovation work to maintain the building’s value due to construction flaws and faults in the finishing. Mr. Tremblay sought a contractor’s bid to repair the basement floor, paint the exterior clapboard, repair the staircase and install a heat exchanger. The contractor, Louis Sénéchal of the Methodex corporation, submitted a bid of $27,945 plus taxes dating March 31, 2016.
[45]
Mr. Tremblay considers that approximately $10,600 of interior work and $8,500 of exterior work would have an impact on the building’s value, whereas Ms. Gauvin-Lamontagne, following the corrections and additions of certain work, estimated that $13,000 was attributable to the building’s value.
[46]
I note that the contractor in question had previously prepared a bid on June 11, 2014, and that he reviewed and corrected that bid on Ms. Gauvin-Lamontagne’s request. However, she emphasized that the new bid still contained several mistakes, specifically in calculating the surface area, the anticipated duration of the work and consequently its costs.
[47]
In short, I believe that Ms. Gauvin-Lamontagne’s work is more rigorous, credible and precise, since she questioned the measures contained in the bid. She specifically excluded the elements of the bid that did not affect the building’s value and added certain required work, whereas Mr. Tremblay relied on the data noted in the bid.
[48]
Due to the multiple mistakes in the bid, I am of the view that the corrections raised by Ms. Gauvin-Lamontagne are justified. However, I agree that she should have added the administration costs, and the amount of $2,000 that she stated at the hearing appears reasonable to me.
v. The Property assessment correction
[49]
As previously indicated, Mr. Harvey said that he opposed the new assessment roll with the purpose of paying the property taxes on what he estimated was the true building’s value. He used the appraisal report dated April 11, 2016, to request that the municipality make the correction.
[50]
Concerning the municipal assessment value, in the Beaudry v. The Queen, 2003 TCC 464 decision, para 48, (“Beaudry”), Tardif J. made these comments:
The Court also takes into account the municipal assessment, which is obviously not an absolute reference point, but mainly information that has some value. There can be specifics that escape those in charge of the municipal assessment role.
[51]
In the K.M. Construction et Rénovation inc. v. The Queen, 2015 TCC 206, para 29 (informal proceeding) (“K.M. Construction”), Associate Chief Justice Lamarre reviewed some decisions dealing with the municipal assessment value and emphasized that the municipal assessment does not generally reflect the FMV of a property on the free market at arm’s length.
[52]
During his oral submission, counsel for the appellant argued that a successful challenge of the municipal assessment suggests that this assessment was exaggerated from the start. His argument is based on the following passage from K.M. Construction interpreting the decision in Beaudry:
The fact of not contesting the municipal assessment was also considered to suggest that the established amount according to the municipal assessment was not exaggerated (Beaudry, above, paragraph 49).
[53]
Mr. Harvey explained at the hearing that he submitted the appraisal report dated April 11, 2016, to convince the municipality to correct the property assessment. I cannot see how the municipal assessment can introduce anything new when the Court had the opportunity to review this report in depth and I note, in addition, that the respondent’s expert in Beaudry had essentially relied on the municipal assessment whereas in this case, Ms. Gauvin-Lamontagne done her own assessment in accordance with standard practices in this matter.
IV.
Conclusion
[54]
After carefully reviewing the evidence, I am of the view that the approach taken by Ms. Gauvin-Lamontagne to determine the FMV was appropriate and leads to an accurate appraisal of the building.
[55]
In sum, I consider that her expertise faithfully represents the FMV at the reference date and that her employment relationship with Revenu Québec does not disqualify her as an expert witness as such: White Burgess Langille Inman v. Abbot and Haliburton Co., 2015 SCC 23, para 49.
[56]
She was therefore justified in establishing the FMV at $312,000 using the comparison method, given the $26,000 in construction flaws, admitted by both parties, the contributory value of $13,000 for the work and the $2,000 in administrative fees, to find that the building’s FMV at the reference date was $271,000.
[57]
Consequently, the appeal is allowed, without costs, and the Court orders that the matter be sent back to the Minister for reconsideration and reassessment based on its finding that the building in question had a fair market value of $271,000 at the time of the reference date.
Signed at Ottawa, Canada, this 9th day of April 2018.
“Guy Smith”
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