Arthur Wolfond and Melvyn Wolfond, Executors of the Estate of the Late Joseph Wolfond v. Minister of National Revenue, [1985] 1 CTC 2175, 85 DTC 174

Bonner, TCJ:—This is an appeal from an assessment of income tax for the 1976 taxation year. The sole issue is the value on December 31, 1971, of a parcel of real property in Guelph, Ontario, sold during 1976 by the late Mr Wolfond. The Minister, in making his assessment of tax and in particular in computing the taxable capital gain realized on the sale of the property, proceeded on the basis that the value of the property at V-Day was $325,000. Mr Wolfond filed his income tax return on the basis that the value on V-Day was $531,250.

The property in question was located in the centretown area of Guelph, Ontario. It fronted on the north side of MacDonell Street and extended through to Quebec Street on the north. The improvements thereon consisted of a thirty-six year old two-storey brick office building fronting on Quebec Street, a three- storey stone structure constructed in the late nineteenth century containing stores on the ground floor and apartments above, an adjacent two-storey brick structure containing stores on the ground floor and apartments above and a motion picture theatre, also about thirty-six years old.

The assessment in issue was based on an estimate of value made by A. B. Tonin, a real estate appraiser employed by the Minister. In 1984 Mr Tonin reviewed the work which he had done previously and prepared a narrative appraisal report, a copy of which was entered in evidence as Exhibit R-5.

Mr Tonin proceeded first to determine value based on the earning capacity of the property. If the income approach to value is to arrive at a correct result two figures must be right. The first is net income. Mr Tonin computed the net income of the property at $26,835. That figure is remarkably close to the $26,000 figure calculated by Barry Lebow, an appraiser called to give evidence for the appellants.

The second essential figure is the capitalization rate. The evidence generally bears out Mr Tonin’s statement that:

The buildings, while old and considered to be in the latter stages of their economic lives, still provide utility which is in demand.

Later in his report Mr Tonin states:

Investigation of comparable commercial older properties which sold at about the time of the value date, indicate capitalization rates from a low of 8.1 to a high of 8.63. A property offering similar utility as the subject (ground floor commercial and upper floor residential apartments) indicates a rate of 8.25%. Therefore, this rate has been adopted for the subject property.

Mr Tonin proceeded next to employ a form of market data approach. He analysed four sales which he described as comparable. He did so in order to determine two rates which he regarded as indicators of value, namely, sale price per foot front of the site and sale price per square foot of building. I cannot discover the utility of either of the rates in arriving at a V-Day value of Mr Wolfond’s property.

A rate per foot front may be of use in determining the value of a parcel of bare land by reference to the sales of other comparable parcels of bare land. It might conceivably be of use if derived from sales of land and improvements thereon which are very similar to land and improvements constituting the property being evaluated. It cannot possibly be of use where the improvements on the comparables are substantially different in utility or in their impact on sale price from those on the subject. For example, in the case of Mr Tonin’s comparable “D” the rate was derived by reference to the sale of a property improved by two buildings, one of which was demolished immediately after sale leaving seventy- nine per cent of the site vacant and available for subsequent use as a parking lot. Comparables “A”, “B” and “C” were also sales of properties having only limited similarity to Mr Wolfond’s property. None had a mix of improvements similar to that of Mr Wolfond’s property. No frontage rate derived from the sale of the comparables can be of use in this case.

Equally, a per square foot of building rate derived by dividing sale price by the number of square feet in a building covering twenty-one per cent of the site, as was the case for comparable “D”, can be of no use in ascertaining the value of real property comprising land covered almost entirely by buildings as was Mr Wolfond’s property. Further, it was not explained how such a rate derived from the sale of a two-storey building with stores at ground level and apartments above, as was the case for comparable “A”, can be of use in arriving at the value of a building containing a moving picture theatre or in arriving at the value of a building three stories high.

In summary, Mr Tonin’s market data analysis lends no logical support to the ultimate conclusion which he reached. That conclusion and the assessment which rested on it can therefore only be correct if Mr Tonin happened to select the right capitalization rate in arriving at value by the income approach. The statement quoted previously is the only evidence given by Mr Tonin as to the basis on which he selected the 8.25 per cent capitalization rate. In a situation such as this:

The Court is not justified in jumping with an expert to a conclusion that is sustained only by the evidence of his expertise; it simply must have evidence as to facts so that it can both understand and evaluate the process leading to the conclusion and the validity of the conclusion itself.* [1]

For the foregoing reasons I can give no weight to Mr Tonin’s conclusion. It is possible that it was right, but it certainly was not shown to be right.

Mr Lebow, the appraisal expert called to give evidence on behalf of the Appellants, reached a conclusion that the V-Day value of Mr Wolfond’s property was $650,000, a figure which I note exceeds the $531,250 value declared by Mr Wolfond in his return of income and, as well, exceeds the $625,000 sale price realized in 1976. Mr Lebow reached this rather startling! [2] conclusion on the basis of an analysis of four sales of commercial property. He apparently found other sales, but rejected them because they were “not true comparables in relation to the subject property’’. The analysis of the four sales was made with a view to determining three figures, the gross rental multiplier, the overall rate and the price per square foot of building. As to the latter, Mr Lebow testified that he accorded it no weight and that he had included it in his report only because it is traditional to do so.

The gross rental multiplier is a rate arrived at by dividing the sale price by gross rent. Mr Lebow stated that buyers of small commercial properties are unsophisticated and do in fact rely on on the gross. At best this figure can be nothing more than a crude indicator of value because the costs of earning rental revenue are not taken into account. I could have attached limited weight to indications provided by this rate and considerable weight to the overall rate had Mr. Lebow derived the rates from sales of comparable properties in comparable circumstances.

The first sale used was made by Joseph Wolfond to a Mr Pourtounes on May 2, 1973. The property was a two-storey building containing a restaurant below and apartments above located on the north side of MacDonell Street, just west of the subject.

The second and third sales were of property on the north side of MacDonell Street, just east of the subject. The vendor in one case was Mr Wolfond. In the other case it was his wife. At the time of sale both properties were improved by two-storey buildings containing stores and apartments. Both sales took place on December 11, 1967.

Sales 1, 2 and 3 are not comparable. The time intervals between December 1967 and V-Day in the case of sales 2 and 3, and V-Day and May 1973 in the case of sale 1, are simply too great for true comparability. Furthermore, in the case of sales 2 and 3 the purchaser was a company which had an office tower a short distance to the east of the subject and which proposed to use the lands purchased for the purposes of expansion. The purchases were made as part of a land assembly operation. Thus sales 2 and 3 can hardly be regarded as sales of properties bought for their attributes as generators of rental income.

Sale 4 was made on March 30, 1971, by Mr Wolfond’s wife to Odeon Theatres (Canada) Limited. The property in question was improved by a building, apparently erected specifically for Odeon. It had been leased to Odeon in 1946 for a term of twenty-five years. Odeon was buying the property for its own use. The price paid probably reflected market value. Mr Lebow was unable to explain how the relationship between Odeon’s 1971 market value and its income based on rents fixed in 1946 could be of use in arriving at the market value of Mr Wolfond’s property by reference to its 1971 rents. His work is all the more remarkable because while making no attempt to adjust the Odeon rents to values current in 1971 he did so adjust the rents generated by the subject at V-Day. In fact, in arriving at the 1971 rents of the subject both Mr Lebow and Mr Tonin made use of rates fixed in a 1973 lease of Mr Wolfond’s theatre. Mr Lebow’s opinion cannot be accorded any weight at all.

I am left with no evidence of any value either supporting the assessment or contradicting it. The onus rests on the appellants to establish on the balance of probabilities that the assessment was wrong. They have failed to do so and the appeal must therefore be dismissed.

Appeal dismissed.