William Gordon Barker, Mary L Barker v. Minister of National Revenue, [1979] CTC 2820, 79 DTC 700

M J Bonner:—These are appeals from assessments of income tax for the 1974 and 1975 taxation years of William G Barker and his wife, Mary L Barker. The appeals were heard together on common evidence. At issue is the value on December 31, 1971, (V-Day) of a farm in part owned by W G Barker and in part by both appellants as joint tenants. An offer to purchase the farm at a price of $575,000 was made and was accepted by the appellants in October of 1973. The transaction closed in April of 1974. At the time of closing $200,000 was paid in cash and the remainder was to be paid at the rate of $75,000 per annum, plus interest. The respondent found that the V-Day value of the farm was $275,000. In assessing tax for 1974 he included, in each case, all the taxable portion of the capital gain based on that finding and he allowed a reserve in respect of the unpaid portion of the gain. The appellants contended that the price realized on the sale did not exceed V-Day value and thus that there was not taxable capital gain*.

At the hearing evidence was given by the appellant, W G Barker, by his accountant and by three real estate valuators, two called by the respondent and one called by the appellants.

The farm was located just east of the City of Calgary. It comprised a block formed by three quarter sections and part of another, all fronting on a road known as Glenmore Trail and, as well, a further quarter section touching the southeast angle of the block and not having road frontage. The northwesterly corner of the block lay one and one quarter miles east of the east boundary of the City of Calgary. The land was, on V-Day, used for farming as was most of the surrounding land. However, at the end of 1971 land values in the immediate area of the farm were affected, not only by suitability of the land for agricultural use, but also by potential use for subdivision and sale of small parcels for residential development. It is, I think, a question of how much emphasis can properly be placed on subdivision potential which is basic to the differences in the opinions expressed by the various experts called to give evidence.

Certain features of the part of the appellants’ farm fronting on Glenmore Trail contributed to its suitability for subdivision purposes. Some areas of the land afforded attractive views of the mountains to the west. The entire farm lay within an area designated as a medium density district on a plan adopted in 1971 by the Calgary Regional Planning Commission. That designation was, according to the evidence, intended to recognize the developing urban interest in the district and, at the same time, to preserve its essential rural character. The designation did not, however, mean that Subdivision could proceed without permission.

An irrigation canal adjoined the west boundary of the part of the farm which fronted on Glenmore Trail. The canal was described in evidence as a potential convenient water source available to the appellants’ lands. There was conflicting evidence, however, whether permission to take water from the canal for non-agricultural purposes could be obtained. It was not established to my satisfaction that it could. The farm was readily accessible to the City of Calgary via the Glenmore Trail. That road was paved in 1972 and plans for paving were public knowledge in 1971.

Mr Barker gave evidence that he had been president of Calgary Cooperative Association Limited and a member of the planning commission of the municipal district of Rocky View. In both roles he had the opportunity to become conversant with the growth and development of Calgary and the surrounding area. He, of course, knew of the steps taken before the end of 1971 whereby the area in which the farm lay was designated as a medium density district. He expressed the opinion that a person not familiar with the planning status of the land would not be a fully informed purchaser*. [1]

Mr Barker stated that he felt that in selling at the price realized, he “left money on the table”. His opinion, based on sales in the distict of which he was aware, was that the V-Day value and the sale price which he ultimately realized were equal. He did not, however, in evidence identify any of the sales from which he derived his view and, in light of evidence from qualified appraisers as to arising trend in real estate values in the area, I cannot con- elude that Mr Barker was correct in asserting that the fair market value of the farm did not rise during the period between V-Day and sale.

The appellants called J L Zezulka, a qualified real estate appraiser, as a witness. Mr Zezulka stated that:

.. . the subject property, on December 31, 1971, was a speculative proposition, where the existing agricultural use could be regarded as an interim use. At that time, indications were that the land along Glenmore Trail could soon be subdivided and developed along the lines of other acreages in the vicinity.

There seemed to be a ready market for country residential estates, and surrounding developments were experiencing some measure of success. Furthermore, the adoption of the Preliminary Regional Plan, in February, 1971, indicated that even the Planning Authorities viewed this area as having subdivision potential.

I might observe that the area designated in the regional plan as a medium density district appears, from Exhibit R-2, to have been larger than that of the entire City of Calgary. I cannot accept the statement that the planning authorities viewed the appellants’ lands, or lands in the immediate area of the appellants’ farm, as necessarily having subdivision potential, at least in the near term.

Mr Zuzulka had done a market analysis. He gave some details of 8 transactions which he described as “benchmarks”. In addition, he reviewed 31 other transactions. The sizes of the parcels sold in the eight benchmark transactions varied between 25 and 309 acres and values per acre ranged from $513 to $1,000 per acre. The eight transactions all took place in 1971 and 1972, save for one in 1973. It appears from the cross-examination that Mr Zezulka gave little weight to any of the eight transactions, save for one (“the Prairie Schooner transaction’’) which he described as follows:

Ptn S 1/2 29-23-28-W 4

An approximate 104 acre parcel, located opposite Glenmore Trail from the subject, was acquired by a Calgary developer for the purpose of country residential subdivision. This property was subsequently developed as the Prairie Schooner Estates. The offer to purchase was made and accepted on May 12,1972. The total consideration was $104,000, payable as follows: ‘Fourteen Thousand cash on approval of overall plan of subdivision—on or before July 1, 1972—and the remainder by Agreement for Sale. $3,000 to be paid from the proceeds of each lot by way of mortgage assignment when developed. Interest at the rate of 8 per cent per annum would be paid by the purchaser on any monies still owing after three years from date of approval of subdivision.

Under the terms of the offer, the purchaser was to pay all development costs.

As nearly as could be ascertained, all of the lots were developed and sold within a matter of two years. Assuming an average time of two years to collect all the proceeds, the sale price could be discounted as follows—using the specified 8 per cent interest rate.

$104,000 x .8548 = $88,899

or — assuming three years:

$104,000 x .7903

$83,191

Per acre — $855, $790

I have difficulty in attributing to this transaction the same weight as was attributed to it by Mr Zezulka. The offer to purchase was conditional on the purchaser obtaining approval of a plan of subdivision before July 1, 1972. It will be seen that the vendor could not insist on payment of anything more than $17,000 until one or more of the lots were sold or mortgaged. Thus, the vendor was dependant on the promotional skill of the purchaser or developer. It seems reasonable to assume that in such circumstances a vendor would expect to receive an amount in excess of the price which the land would fetch if sold for cash.

Mr Zuzulka extrapolated on the results of that sale in his report as follows:

But, simply by virtue of the amount of land involved in the subject, a total absorption period of two or three years would likely have been optimistic. Still, there appeared to be a ready market, and something in the order of five of six years—or even shorter—would probably not have seemed out of the question. By applying an eight per cent discount rate to the Prairie Schooner purchase price, assuming an average of five years to market a residential estate subdivision of the magnitude of the subject acreage, a value in the order of $675 per acre appears.

($104,000 x .6755).

104 acres

An additional reduction of about 10 to 15 percent, for lead-up time, and risk, results in a value indication in the order of $600 per acre. This amount seems reasonably well substantiated by the market evidence, and was therefore adopted as final.

For the SW 1/4 of section 21, a value of $250 per acre was adopted. This parcel—due to its location and topography—would likely not have been developed as readily as those fronting Glenmore Trail. As such, its future was deemed to be more agricultural, than as a potential subdivision site.

529.76 acres @ $600	= $317,856
160.00 acres @ $250	40,000
TOTAL -	$357,856
	Rounded to — $360,000

NOTE: Admittedly, the subject property has still to date not been subdivided.

However, the outlook in 1971 appeared quite different, and country estate subdivisions, at least for the land fronting Glenmore Trail, were a distinct probability.

The analysis is based on the assumption of a five-year marketing period and on the assertion that the “outlook” in 1971 was as stated. Nothing in the evidence indicated that such an assumption was made in 1971 by persons active in the market place in the area of the appellants’ lands. Nothing in the evidence indicated that Mr Zezulka was qualified to make any assertion as to the outlook in 1971 for country estate subdivision development. In the period from 1969 to 1972 Mr Zezulka was engaged by CMHC in the valuation of residential properties for mortgage purposes in Calgary, Lethbridge and Halifax. From 1972 to 1977 he was engaged in appraisal work in Lethbridge.

As to the other seven benchmarks, Mr Zezulka attempted to make no adjustments for points of similarity or dissimilarity to the Barker farm. Mr Zezulka did not apparently take the value of the buildings or other improvements into account in calculating value per acre as revealed by the transactions. His rationale was:

With the rising speculative land prices, the contributive value of the buildings appears to have been nominal. Through the vagaries of the market, it sometimes happens that equal agricultural land with buildings, sells for the same or even less than unimproved holdings.

In my view sales, even to developers, may well reflect the value of improvements where the improvements can be expected to make the property revenue producing during any substantial period expected to occur between the time of the sale to the developer and the time of the redevelopment. As noted above, some of the sales were of parcels substantially smaller than the Barker farm. On cross-examination Mr Zezulka admitted that unit values of smaller parcels are generally higher than those of larger parcels. Further, one of the other supposed benchmarks was a Sale of a parcel located immediately adjacent to the Calgary City Limits and having approximately one mile of frontage on the Trans-Canada Highway. Mr Zezulka admitted that the two factors would make that land more valuable than the Barker farm, although he did not say how much more. In yet another case, a sale in December of 1973 for a price of $95,000 of a parcel adjacent to the Prairie Schooner lands, Mr Zezulka stated on cross- examination that he attributed a 30 to 50% reduction for a two-year time lapse. He did not elaborate on the basis for the selection of the 30 to 50% range.

The respondent called L W Bechthold, a qualified real estate appraiser. He had analyzed the value of the farm and concluded that on V-Day it was $275,000, approximately $22,800 of which was attributable to buildings. His view was that the highest and best use of the appellants’ farm was “for agricultural purposes in transition to greater land use density as is reflected in property sales”. It is plain that Mr Bechthold placed substantially more emphasis on value as influenced by agricultural potential than as influenced by development potential.

Mr Bechthold’s approach to value involved determining bare land values by a comparative market analysis and adding the depreciated value of improvements. Mr Bechthold analyzed six sales which took place between March of 1971 and January of 1973. The areas of the parcels involved ranged from 80 acres to 640 acres. The values per acre indicated by the sales ranged from $255 to $400. Mr Bechthold made adjustments where appropriate for buildings, time lapse, soil quality and location. The conclusion reached by Mr Bechthold was as follows:

The estimated FMV for Subject property, adjacent to what is now known as the Glenmore Trail,

Pt of N /2 19 & N / 20—23—28—W4, as at December 31, 1971 is

It is very difficult to reconcile the conclusions reached by Mr Zezulka and by Mr Bechthold, save for the value placed on the parcel without road frontage. On the one hand there was the Prairie Schooner sale which Mr Zezulka relied on to the virtual exclusion of all others. On the other hand Mr Bechthold relied, though not exclusively, on a sale of a parcel of 488 acres laying across Glenmore Trail from the appellant’s farm and to the west of the Prairie Schooner property. That parcel was sold in October of 1971 for approximately $250 an acre. Mr Zezulka stated that he was not aware of the sale when he did his appraisal, but that he would not have taken it into account because the transferees were two persons who took as trustees. He stated that transfers to trustees were not reliable indicators of value, at least in the absence of an inquiry whether the transaction was in fact at arm’s length. He did not attempt to make any inquiries. It appears that Mr Bechthold did not make any inquiries either. The 488 acre parcel was traversed by a railway line, a fact which Mr Bechthold admitted was a potential deterrent to a developer. He does not appear to have attempted an adjustment for this factor.

Mr Bechthold rejected the Prairie Schooner transaction on the basis that in light of the small deposit it ought not to be regarded as a binding sale. While I do not agree with that analysis for the reasons given previously, I suspect from Mr Bechthold’s rejection of the transaction that he tended to give insufficient weight to the sale as an indicator of the influence of development potential on value in the immediate area of the farm.

Mr Bechthold did not take into account the sale in December of 1973 for $921 per acre of a 103.15 acre parcel located across the Glenmore Trail from the appellant’s farm.

I might add that Mr Bechthold expressed the view that the supply of land for subdivision purposes exceeded demand. This opinion was, he stated, based on his own personal knowledge of activity in the area. At the relevant time Mr Bechthold operated his own real estate business and did fee appraisals. He had a number of years experience before that as an appraiser for Farm Credit Corporation. I am inclined to give more weight to the opinion of an appraiser who has personal knowledge of transactions in the immediate area during the relevant period. I am therefore inclined to accept Mr Bechthold’s view that demand was well below the supply of land available for subdivision.

Parties to litigation involving questions of value should, in my view, have regard to the comments made by Jackett, P, (as he then was) in National Capital Commission v Benjamin Marcus, [1969] 1 Ex CR 327 (affirmed [1970] SCR 39) at 338. There His Lordship said:

Indeed, and this comment applies to all witnesses put forward as experts on value, his evidence left me almost completely in the dark as to how “Those sales . . . were analyzed and interpreted” and as to how “adjustments were made for various factors influencing value”. I cannot accept a valuation that appears to be based on one sale only if I do not understand the reasoning by which a conclusion has been reached to base the market value on that sale alone (to the exclusion of all the other sales), and I cannot accept a valuation based on many sales if I cannot appreciate how it was derived from those sales so that I may form my own conclusion as to the weight of the reasoning on which the valuation was based.

His Lordship added in a footnote:

lf Mr Whelan had qualified as a person who had a personal knowledge of the real estate market in the area in question by reason of participation in it as broker or principal over a long period of time, and had expressed an opinion, simply based on such experience, that the subject property would have fetched $5,000 per acre in June, 1961, I should have felt bound to pay some heed to that opinion even though he could not explain by some logical process how he reached it. It think it is fair to say, however, that, while Mr Whelan and Mr Crawford each had considerable actual experience in buying and selling land, in this case, all three of the ‘expert’ witnesses made it clear that they were basing their opinions on their training and experience as ‘appraisers’ rather than upon practical experience in the particular market.

I will deal briefly with the evidence of William Carroll, a qualified real estate appraiser called to give evidence on behalf of the respondent. His view was that highest and best use of the farm-was:

. similar to the uses which took place in adjacent parcels, and also throughout the entire Township and Range. That is, for country residential living, either in small parcels such as illustrated Prairie Schooner Estates directly across the road from the Subject Property, or other parcels up to 20 acres.

It is our opinion that at 1971, the Highest and Best Use of the Subject Land was for Country Residential Subdivision Use.

In order to estimate bare land values Mr Carroll analyzed a large number of sales in Township 23, Ranges 27 and 28. He considered transactions which took place over a period from 1964 to 1974. He analyzed the transactions statistically and conceded that bare land value of the farm on V-Day was $325 per acre. Mr Carroll was, as he said, “taking an historical view”. His appraoch did not, in my view, attribute sufficient weight to the advantages and disadvantages of individual properties, whether as farms or as farms having some potential for subdivision. He did not have regard to such factors as location and accessibility or, at least, he paid insufficient weight to such factors in taking into account, without analysis of differences, transactions involving land spread over such a vast area. He was at odds with the other two appraisers in attributing the same value per acre to the quarter section of the farm having no road access as that part fronting on Glenmore Trail. Such an approach strikes me as illogical.

On all of the evidence I am of the opinion that Mr Bechthold was closest to the mark. However, because as indicated above I have concluded that Mr Bechthold failed to give sufficient weight to the subdivision potential of the lands fronting on Glenmore Trail, some upward adjustment in the rate per acre which he applied is indicated. Mr Bechthold valued the part of the farm fronting on Glenmore Trail at $400 per acre, the upper limit of value indicated by the transactions which he surveyed. The sale giving rise to that upper limit was of land located several miles further from the City Limits than the appellants’ farm. So far as I can tell from the maps put in evidence, that land was less readily accessible to the City by road than was the appellants’ land. Thus, a small upward adjustment for location appears to be warranted. I have concluded that the value of the land fronting on Glenmore Trail was $460 per acre. I do not think any greater adjustment is warranted because Mr Bechthold did attribute value on the basis of a transaction at the upper end of the sales which he surveyed.

In the result, I conclude that the V-Day value of the farm was as follows:

A. Lands fronting on Glenmore Trail

The appeals are therefore allowed and the reassessments referred back to the respondent for reconsideration and reassessment accordingly.

Appeal dismissed.