The Estate of Leah Rivers v. Minister of National Revenue, [1980] CTC 2468, 80 DTC 1405

The Chairman:—The appeal of The Estate of Leah Rivers is from a reassessment in respect of the 1974 and 1975 taxation years. In issue is the amount of capital gain realized by the appellant from its share of the proceeds of disposition of an apartment building located at 253-259 York Street, in Ottawa, Ontario, known as Inter-Colonial Court Apartment.

Facts

The subject was a 57 year-old apartment building, 50% of which was owned by Leah Rivers and 50% owned by Rachael Black. The building was sold in 1974 and the proceeds of disposition were in the amount of $250,000. The cost of disposition was $16,010.

In his reassessment the respondent established the fair market value of the property on December 31, 1971 at $204,000. The capital gain on the disposition of the property was therefore $29,990 of which the appellant’s share was $14,995 resulting in a taxable capital gain for the appellant of $7,497.50.

The appellant objected to the assessment and appealed on the ground that the fair market value of the property on V-day was $250,000 and that the appellant had sustained a loss of $16,010 (the cost of disposition) on the disposition of the property.

Submissions

Mr Rivers, an accountant representing the appellant decided to file an appraisal report at the outset of the hearing, which had not previously been served on counsel for the respondent, thereby taking him by surprise. Mr Gaston Jorré, counsel for the respondent, after examining the appraisal report felt he could nevertheless proceed with the appeal. Had counsel for the respondent under the circumstances felt an adjournment was necessary, the rules of natural justice would have, in my opinion, forced the Board to grant an adjournment in respect of a trial, the date and the hour of which had been previously agreed to by the parties. The adjournment would have caused a needless loss of the Board’s judicial time. Such losses of time are prejudicial to all taxpayers who have appealed to the Board and should be carefully avoided by the parties to an appeal before the Board.

The appellant’s only witness was Mr Leonard Potechin, President of Regional Realty, who holds certificates in the fields of real estate and property management and held high offices in associations related to these two fields. Although Mr Potechin did not claim to be an accredited appraiser, he had in fact appraised small and large residential homes and commercial establishments for purposes of financing. Mr Potechin owned and managed apartment buildings and had been involved in the purchase and sale by syndicates of large apartment complexes.

In his appraisal report filed as Exhibit A-1, Mr Potechin had fixed the fair market value of the property on the December 31, 1971, at $250,000. The basis of his evaluation was that the income derived from the property in 1971 was slightly higher than it was in 1974, at which time the property was sold for $250,000. It was Mr Potechin’s opinion that he could have found a buyer for the property who would have paid at least $250,000 in 1971 on the basis of its income. In 1971 the rental income of the property was roughly $13,900 annually, whereas in 1974 the income was slightly lower in the vicinity of $13,800.

On cross-examination, Mr Potechin stated that he had not based his appraisal on any of the accepted methods of arriving at evaluations viz, the cost approach, the market approach or the income approach. He claimed that in the circumstances the prescribed methods of evaluation were unnecessary and he relied solely on his experience of some 27 years in real estate in establishing the fair market V-day value of the property at $250,000.

The evidence is that Mr Potechin’s realty firm had the property listed for sale in 1974 on behalf of the two elderly owners and that he was well aware of the condition of the property at that time.

The respondent had an appraisal report made by Mr B P Murphy, which was filed as Exhibit R-1. The appellant was served with a copy of the respondent’s appraisal report at least 15 days prior to the trial date. Mr Murphy is a real estate appraiser acting as appraisal consultant with the Department of National Revenue. He is a member of the Canadian Institute of Appraisers. In 1957 he was an appraiser in the Municipal Taxation Division of Ontario and became a municipal assessor for the city of Calgary and later for the city of Ottawa. He had also been employed by two real estate firms in the 1965 period and taught real estate salesmanship and also effected certain difficult real estate sales.

In his report Mr Murphy arrived at his evaluation of the subjects’ fair market value as of V-day on the basis of the three recognized appraisal methods, which he clearly set out in his report. In his cost approach Mr Murphy established the value of the land as of December 31, 1971 at $70,000, on the basis of 12 comparable land sales effected in 1971 and 1972. The cost of reproduction of the building using the cost data provided in the recognized Stevens Valuation Manual and estimating the depreciation on the building for a period of 15-20 years (providing no major repairs were subsequently effected), was calculated to be $134,078 (Exhibit D of Exhibit R-1). By the cost approach, Mr Murphy arrived at a fair market value on V-day of $204,000.

For the market approach Mr Murphy used 9 comparative sales which also took place in 1971 and 1972, and made the appropriate adjustments for the condition of the buildings and their remaining economic life as compared to that of the subject property. Details of the 9 sales and adjustments are to be found at page 27 of Exhibit R-1. By the market comparison method, Mr Murphy arrived at a V-day fair market value for the property at $211,200.

By using the income approach and using a 7% actual interest earned by similar properties, plus a 5.5% depreciation rate for a period of 18 years, Mr Murphy used a capitalization rate of 12.5%.

The expected gross income of the property on the basis of the various rental producing units in the building was estimated to be $3,510 per month or $42,120 per year. The estimated net income derived from the building was $16,754. Capitalizing the net income at a rate of 12.5%, the value of the building is roughly $134,000, the value of the land having been found to be $70,000. The V-day value of property by income approach is $204,000.

Finding of Facts

Mr Murphy’s appraisal report was very carefully prepared using all three of the recognized evaluation procedures. The use of the cost approach and the income approach both resulted in a V-day fair market value of $204,000. The fair market value market method gave the property a slightly higher evaluation of $211,200.

The onus of establishing that the Minister’s evaluation is wrong rests on the appellant and notwithstanding the questions raised by the appellant in cross-examination of Mr Murphy, the appellant did not succeed in showing where or how the respondent’s assessment was erroneous and I have no reason not to accept the respondent’s evaluation of $204,000 as being a reasonable estimate of the fair market value property on December 31, 1971.

Mr Potechin’s basis for his evaluation though perhaps logical is greatly oversimplified. The sole basis of Mr Potechin’s V-day evaluation, is that the property generated as much rental income in 1971 as it did in 1974 and he deduced that if the property was sold at $250,000 in 1974, he could have sold it at that price in 1971. Whether or not the property could have been sold at $250,000 in 1971 will never be known, nor in my view would it necessarily represent the fair market value of the property on December 31, 1971.

The basis or the method of evaluation used by Mr Potechin which might be meaningful in a real estate transaction does not result in what according to the Income Tax Act is understood by the fair market value of the property of V-day.

As pointed out by Mr Murphy, if one were to suppose that the property generated no rental income in 1971, the fallibility of Mr Potechin’s sole basis of evaluation becomes clearly evident since he would have to conclude that neither the land nor the building had any market value on V-day, which of course does not stand-up.

The appellant has not succeeded in convincing the Board that the basis of the Minister’s assessment was wrong. I therefore accept the V-day evaluation of the subject property to be $204,000 which was used by the respondent in his assessment for the computation of the appellant’s share of taxable capital gain on the disposition of the property.

The appeal is therefore dismissed.

Appeal dismissed.