Julia Heard v. Minister of National Revenue, [1986] 2 CTC 2117, 86 DTC 1573

Brulé, T.C.J.:—This is an appeal with respect to a reassessment of income tax for the 1979 taxation year of the appellant. In that year she sold property for $660,000 and claimed a Valuation Day value of $480,000 for the said property. In addition she claimed $28,500 for mortgage interest, $6,000 for mortgage costs and $7,692 for property taxes which amounts were utilized by the appellant to reduce the gain from the sale of the property. The costs were disallowed by the Minister and the gain reassessed on the basis that the property had a Valuation Day value of $179,500.

The subject property involved was a parcel of land on which was situated an unoccupied house. It was located on the south side of No. 7 Highway, north of Toronto, about 800 feet east of Woodbine Avenue (as it is now known) and consisted of an area with an approximate 400 foot frontage and a depth of approximately 1,300 feet for a total property area of approximately 12 acres.

The appellant in her evidence said that the property was used to store construction equipment and materials along with a site office, all used in her husband's business. The property was used in this manner immediately after the purchase in 1968 until it was sold. In 1973 an unsolicited offer for the property was received in the amount of $276,000 or $23,000 per acre. The offer was signed back at $312,000 or $26,000 per acre, but nothing further developed. When asked by the Court if any charges were made to the husband's company for use of the property, the answer was “No”.

Expert evidence given by an appraiser, Mr. Edward Elliott, on behalf of the appellant provided considerable detail both in the written report and the oral testimony. The appraiser used the comparative sales method and made adjustments for time and the effects of rivers and streams which limited the use of some of the comparable lands. His conclusion was that the subject property was not worth on V-Day $480,000 as originally claimed, but $264,000 or some $22,000 per acre. When questioned about the 1973 offer for the property Mr. Elliott indicated that he would have mentioned it if he had known about it at the time he prepared his report. He said further that he would not have placed much emphasis on a single offer.

Mr. Roger D. Sharpe, an expert real estate appraiser for Revenue Canada, used a similar sales comparative method, but not all the same properties. He arrived at a V-Day value of $190,600.

Analysis

There are two factors to consider in arriving at a value as of December 31, 1971, for the subject property. One is the evidence of the two experts who submitted reports and gave testimony. For the appellant a conclusion was reached that the property at the relative date was worth $264,000 whereas in filing her tax return the appellant had shown a figure of $480,000. On the other hand, the expert offered by the respondent indicated a value of $190,600 as opposed to an assessed value of $179,500. Both used what is commonly known as the comparative sales method. The results of applying this method should produce approximately the same values when employed by two different individuals. There is, however, often a great deal of variance because two people never seem to choose the same properties to compare and in addition they seem to introduce other factors such as the time when sales occurred, the variance in the comparative to the subject property topographically and also their respective locations. Even if all these factors were constant this method of valuation does not take into consideration why the comparative sales took place. Was the vendor forced to sell? Was the purchaser trying to accumulate land for development? Was he considering a long-term investment? Perhaps the comparative property was desired for a particular endeavour. All of these things may influence the sale price of comparative properties but seldom does the Court have before it the motives for these sales and purchases. This, I believe, demonstrates the inherent weakness in this approach to valuation.

Besides in V-Day valuations the appellant’s appraiser is generally much higher in this estimate than the value suggested by the Minister's appraiser. Adrian Keane in his text "The Modern Law of Evidence’’, 1985 edition, sets out at page 377:

The tribunal of fact, although free to reject any opinions proffered, might be tempted simply to accept those opinions rather than draw its own inferences from the facts of the case. The danger is particularly acute in the case of opinions expressed by expert witnesses, of whom it has been said, not without some sarcasm,“it is often quite surprising to see with what facility and to what extent, their views can be made to correspond with the wishes or the interests of the parties who call them”. (Taylor, Treatise on the Law of Evidence, 12th ed. at p. 59)

The other factor of significance in valuing real property in the past, such as on V-Day, is the awareness of any offers made for the purchase of the subject property which occurred relatively close in time to the valuation date.

As was said by Tremblay, T.C.J., in Matador Co-operative Farm Association Limited v. M.N.R., [1984] C.T.C. 2046 at 2050; 84 D.T.C. 1038 at 1041:

In valuation the best criterion is an offer to purchase the subject property from independent and interested persons. This criterion has priority on a direct sales comparison approach when the sales concern properties other than the subject property.

Similarly the case of Friedman et al. v. M.N.R., [1978] C.T.C. 2809; 78 D.T.C. 1599 held that an offer to purchase, not proven to be invalid nor fraudulent, even though not accepted can be used by the Court as an indication of fair market value for a property.

In the present case the appellant tendered as an exhibit an offer to purchase the subject property dated in April of 1973 for $276,000. This was signed back for $312,000 but not accepted by the original offeror. Subsequently, both counsel mentioned this in argument. There was a difference of opinion, however, as to whether the figure of $276,000 or the one of $312,000 should be considered, or somewhere in between which might indicate a then true market value. Both expert witnesses felt that a value of $300,000 might be reasonable. The expert for the appellant used a time factor for sales after 1971 of 1.75 per cent per month which would discount the offer value of $300,000 to $216,000. On the other hand, the witness for the respondent only used a discount value of 1.2 per cent per month and arrived at a figure of approximately $242,400.

In this case I do not feel that either report can be taken at its face value. In the final analysis they only differed by some $73,000. At the same time the evidence offered of discounting post-1971 sales of 1.75 per cent or 1.2 per cent per month was not conclusive.

In the absence of being able to make a concrete determination on the evidence if one were to average the two expert reports and also the two discounted values of the offer there results figures of approximately $230,000 which I find to be reasonable considering all the facts and therefore the value of the subject property as of V-Day.

The other part of this appeal refers to the disallowance by the Minister of certain costs claimed by the appellant during the time the property was held by her. These included mortgage interest, mortgage costs and property taxes. Counsel for the appellant argued that these costs should be capitalized and used to reduce the capital gains as provided under section 53 of the Income Tax Act.

Paragraph 53(1 )(h) makes provision for the deductibility of carrying costs and taxes if such are disallowed by subsection 18(2).

The matter has recently been dealt with in the case of Horst Bauerle v. M.N.R., [1986] 1 C.T.C 2175; 86 D.T.C. 1131 where in considering a similar situation, except that only property taxes were involved, Bonner, T.C.J., said at 2176 (D.T.C. 1133):

Effect must be given to all the words of paragraph 53(1 )(h) of the Act.

He then goes on to quote from the case of Hill v. William Hill (Park Lane) Ltd., [1949] A.C. 530 at 546; [1949] 2 All ER 452 at 461:

When the legislature enacts a particular phrase in a statute the presumption is that it is saying something which has not been said immediately before. The rule that a meaning should, if possible, be given to every word in the statute implies that, unless there is good reason to the contrary, the words add something which would not be there if the words were left out.

Bonner, T.C.J., then continues as follows:

The Appellant's argument improperly ignores the words “. . . by virtue of subsection 18(2) . . .” which operate to exclude from the addition to adjusted cost base called for by paragraph 53(1)(h) any property taxes which were previously paid, but were not deductible for some reason other than subsection 18(2). That subsection, as is clear from its words, has application only when property taxes are relevant to the computation of the taxpayer's income, whether from business or property. Such a computation is not made where, as here, the land in question was not used or held in connection with the generation of income, whether from business or from the property itself. The non-deductibility of the municipal taxes in question here rested not on subsection 18(2), but on the fact that the taxes did not form any part of the cost of earning income.

For the same reason, the appellant cannot claim as an addition to her capital cost of the property the expenses set out in this appeal.

The end result is that the value of the property as of December 31, 1971, shall be placed at $230,000, leaving a gain from $660,000 of $430,000, from which may be deducted commissions and legal expenses of $34,535 and from the resulting capital gain there may be claimed a mortgage reserve of $87,625 leaving a capital gain to the taxpayer in her 1979 taxation year of $307,840 and a taxable capital gain of $153,920.

The matter will be referred back to the Minister for reconsideration and reassessment on the above basis. No costs are awarded to the appellant.

Appeal allowed in part.