Wallace R Carter v. Minister of National Revenue, [1980] CTC 2623, 80 DTC 1537

M J Bonner:—This is an appeal from an assessment of income tax for the appellant’s 1974 taxation year. The appellant, on V-Day, owned a farm situate in the Township of Puslinch in the Province of Ontario, near the City of Guelph. The appellant’s principal residence was situated on that farm. In 1974 the appellant sold the farm, save for a one-acre parcel which he retained and on which he later erected a new home. In computing his income for 1974 the appellant claimed a capital loss of $7,442, which the Minister pleaded was calculated as follows:* [1]

In making the reassessment under appeal the Minister included a taxable capital gain of $12,038, which he pleaded was calculated as follows:

Although the notice of appeal is unclear, it became apparent at the hearing that the issues in this appeal are issues of value and allocation which required determination of:

A. the V-Day value of the farm, exclusive of the value of the principal residence, including such land as falls within that term by virtue of paragraph 54(g) of the Income Tax Act; and

B. the portion of the 1974 sale price attributable to the farm, exclusive of the principal residence so defined.

The house, its land, the barn and other farm out buildings and the remainder of the farm land were sold in 1974, apparently as a package. If, at the time of the sale an allocation of the total consideration paid by the purchaser was made among the various component elements of the package, there was no mention made of it in evidence.

There were two major areas of difference between, on the one hand, the experts in real estate valuation who testified on behalf of the appellant and, on the other hand, the Minister’s expert. The theory on which the appellant’s experts approached the question of allocation involved valua- ing the house and its land as hypothetically severed from the rest of the farm. The Minister’s position was that the principal residence ought not to be valued as severed unless it was in fact severed or severable under The Planning Act, RSO 1970, c 349. The other major area of difference lay in the determination of the depreciated replacement cost of the residence building.

With respect to valuing on the basis of a hypothetical severance, Stephen P Saxe, one of two appraisers who gave evidence for the appellant, said in his appraisal report:

Basically, the department’s position is that the land component of the principal residence shall be evaluated on the basis of the prorata land value rate for the entire parcel of land.

It is the opinion of the appraiser that the literal interpretation of Paragraph 15 of IT-120R provides for an automatic discriminatory policy against certain rural land owners. By allowing an exemption on the principal residence of a taxpayer, most urban taxpayers will have an exemption equal to the market value of their principal residence property. In the case of the rural land owner who has in (sic) excess of lands necessary for the reasonable use and enjoyment of the principal residence, the prorating method of determining the value of the land component provides for an arbitrarily low land compenent (sic) value at the time of disposition and at V-Day. The result of this situation causes the exemption for the principal residence disposition to be reduced and consequently, a higher tax burden is imposed upon those rural land holders who fall into this particular category.

In order to counter this inequity, the appraiser has evaluated the principal residence on the basis of its hypothetically severed highest and best use which effectively places it in the same position as the principal residence of an urban dweller or one with one acre of land or less from which the evaluation figures are to be determined. The accompanying appraisal report has been completed in this manner and the appraiser is prepared to provide additional data which supports his position, should such be required.

To arrive at the value of the farm, exclusive of the principal residence, Mr Saxe determined the value of the whole and deducted the value of the principal residence component determined as if severed or severable. Obviously, there could be nothing wrong with this approach if the market place operated to generate consideration for the whole package equal to the sum of the value of the principal residence component, if severed or severable, plus the value of the rest of the farm. It was implicit in the evidence of Mr Saxe and Mr Bond, the second real estate expert called for the appellant, that the market place did not operate in such a manner unless the principal residence component of the farm package either had in fact been severed or was severable. They clearly felt that the package was worth less than the sum of the values of its components if sold separately, or if capable of being sold separately.

Evidence was led with a view to establishing that a severance could have been obtained. Exhibit A-7 was admitted by the Minister to be a letter written to Mr Saxe by the chairman of the committee of adjustment for the Township of Puslinch. That committee is a body having power under The Planning Act of Ontario to grant consents to severances. The body of the letter states:

This will confirm our meeting at which time we discussed the severance policies of the Township of Puslinch as applied by the Committee of Adjustment of which I was chairman from its inception until the advent of the Wellington County Land Division Committee.

With respect to the Carter farm, I will state that the gravel operation was legal nonconforming and was made legal conforming by the rezoning prior to the severance granted to permit sale of the 38± acre parcel in 1972.

This action was in the best interest of the community and it provided an otherwise unavailable restriction on expansion of the operation of the area stated above. It was the policy of the Committee of Adjustment, throughout my term as chairman, to allow a severance to a retiring farmer for the purpose of construction of his retirement home and this was done on numerous occasions in spite of the fact of previous severance(s) having been granted in respect of the particular property.

In the case of the Wallace Carter farm, I am certain that a severance of approximately one acre would have been allowed by the Committee of Adjustment as at December 1971 had it been applied for by Mr Carter, as a retiring farmer, and that the gravel area severance would not have prejudiced the retirement home severance application or decision.

Zoning By-law 20-68 and Amendments thereto provided at Section 7.1 that the permitted use was A (Agricultural) including a detached single family dwelling. Section 7.2 provides that the detached single family dwelling must be situated on a site of not less than 1,500 square feet in area nor less than 80' in width.

As the Agricultural Code of Practice was not in effect in 1971-72, it is reasonable to assume that it would not have influenced the application for severance of the entire residence from the farm had such application been made at that time. (To my knowledge no such application was made then or later).* [3]

Quite apart from any question whether the chairman of a committee of adjustment could or even should try to state what a committee of three persons would have done had a set of circumstances arisen, I cannot find that this letter assists the appellant. At best for the appellant, the letter purports to indicate that in 1972 the appellant could have sold all of the farm, save for the principal residence component. It does not even attempt to show that the appellant could have done likewise in 1974. If the appellant had the ability to obtain a severance on V-Day, but could not have done so in 1974, the portion of any gain on the farm attributable to the principal residence component would have been lessened because, in effect, the enhancement in the value of the principal residence resulting from severability would have disappeared.

The appellant failed to establish that, in 1974, he could have obtained a consent to sell the principal residence separately from the rest of the farm. In 1973 an official plan covering the area within which the appellant’s farm was located came into effect. This planning document laid down general policies governing, inter alia, the granting of consents to severances. Section 5 of the official plan was entered as Exhibit R-2. Section 5.1.1 provided as follows:

5.1 General Consent Policy

In consideration of applications for consent to sever land, consideration shall be given to the following:

5.1.1 That the granting of any application for consent to sever will conform to the general development policies established by this Plan.

There was no evidence that severance of the principal residence from the rest of the farm would have conformed to “general development policies” established by the plan, as to which policies there was no evidence. Had the appellant sought a severance of his principal residence for purposes of sale, he would not have fallen within the exceptions established for retiring farmers by sections 5.2.1.1(b) and (c) of the official plan.

It therefore appears that Mr Saxe and Mr Bond have proceeded on a theory or hypothesis which is inconsistent with the facts. The result of their doing so is to overstate the contribution to the sale price of the farm as a whole which was made by the principal residence component. Their conclusions must be rejected.

An attempt was made at the hearing of the appeal to tender evidence that the respondent has, on at least one or more occasions, allocated between farm and principal residence on the basis of the hypothetical severance theory. I ruled that such evidence is irrelevant and utterly useless. The fundamental issue in an appeal from an assessment of income tax is whether that assessment is too high. If, in making other assessments, the Minister did allocate consideration paid for a farm on the basis that the principal residence was severable, he may, on the facts before him, have been right in doing so. If he proceeded on that basis when it was not open to him on the facts to do so, the result may have been that he did not assess enough tax. There is no basis in law for an argument that, because the Minister has failed in some cases to assess enough tax, the benefit of such failure should be extended to other cases.

Before leaving the topic of hypothetical severance I should comment that both Mr Saxe and Mr Bond were sincere in their view that “equity” demands the adoption of measures to counter what they regarded as the unfair tax treatment of many owners of rural principal residences. They were mistaken, however, in concluding that a situation which they perceived to be unfair could be rectified by the misapplication of valuation techniques. A skilled or expert witness loses all value when he becomes an advocate for a client because, when he crosses the line into advocacy, his judgment becomes warped and he loses the ability to form an objective opinion.

J Douglas Henderson, a qualified valuator, was called by the respondent to give evidence. He was an employee of the Department of National Revenue. The assessment in issue was made on the basis of a somewhat informal appraisal and allocation done by another member of the Department. The latter was not called to give evidence. Following objection to the assessment Mr Henderson was directed to do a full narrative appraisal. That appraisal report was entered in evidence as Exhibit R-1. To determine the V-Day value of the appellant’s farm and allocate that value among the component elements of the farm, Mr Henderson used two approaches, cost and market data. The cost approach involved a determination of bare land values on a comparative market data basis, the addition of reproduction cost of improvements and a deduction for depreciation of such improvements. The results obtained by this method were compared with results obtained by analysis of market data from sales of comparable farm properties improved with buildings which were considered to have a significant impact on price.

Mr Henderson naturally accepted the 1974 sale price as the then market value of the farm. To allocate it he determined bare land value on a comparative market data approach. He also determined the 1974 reproduction cost less depreciation for the residence. He analysed three sales of improved farm properties to estimate, so far as possible, the contribution to the sale price made in the market place by the residence located on those farms.

It is unnecessary to set forth a more complete summary of Mr Henderson’s work. While criticisms of it might be made in areas of minor detail, neither the approach nor the results were shown to be unsound, despite lengthy cross-examination. Neither Mr Saxe nor Mr Bond tested his own allocation between the principal residence component and the remainder of the farm by checking comparative market data to determine whether the amounts allocated to the farm less the principal residence component were reasonable. In this respect the Saxe and Bond analyses were incomplete. Mr Henderson did and found that his results checked out. I cannot therefore concolude that the criticisms levelled at Mr Henderson’s determinations of the depreciated replacement value of the residence are valid.

Thus, on the balance of probabilities, I find Mr Henderson’s figures are right. Those figures indicated that, if there was any error at all in the assessment, it was that the Minister attributed too large a part of the gain on the farm to the principal residence component. If the assessment is wrong at all it is too low. The appeal must therefore be dismissed.

Appeal dismissed.