Kenneth a Brown v. Minister of National Revenue, [1978] CTC 2447, [1978] DTC 1333

The Assistant Chairman:—The appellant appealed to this Board from a reassessment for income tax for each of the years 1971, 1972 and 1973. When the appeal was called for hearing, the Board was advised that, with respect to the appeal relating to the 1971 taxation year, that appeal was to be dismissed. The Minister, by his reply to the notice of appeal, agreed with the position taken by the appellant as to one item, but he maintained his assessments were correct in all other respects. Counsel for the appellant advised that, because of the admission made, he was abandoning his client’s appeal in all other respects save one. The result is that the appeal for the 1972 and 1973 taxation years will be allowed and the assessments remitted to the respondent for variation to make the allowance to reflect the admission in the reply to the notice of appeal. There remains only one item under appeal with respect to the 1973 taxation year and the issue to be resolved is, what the value of a certain parcel of land was on Valuation Day.

About 1954 the appellant acquired from his father, either by purchase or inheritance, a farm consisting of about 300 acres. The farm was southwest of, and a short distance from, the outskirts of the Town of Sussex, in the Province of New Brunswick. When he acquired the farm, it was divided into two parts by the Canadian National Railway tracks, the northern portion containing about 100 acres and the southern portion about 200 acres. The property was described as a strip property with its north to south dimension several times longer than its east to west dimension. Its northern limit was the Kennebecasis River. Along the eastern limit of the appellant’s property was property owned by a person named Webb. East of the Webb property was that owned by Parlee, and east of that was the Robinson property. The southern limit of all lots was a common line. I believe all lots ran to the Kennebecasis River and all were cut by the CNR tracks. According to the appellant, the Parlee property had about 30 acres north of the tracks. The appellant’s property north of the tracks had no bush. The southern portion was and still is used as a farm. The Parlee property north of the tracks was only half cleared and it was used for pasture and hay. In mid-1960 it was understood that a provincial highway was going to go through the Brown property north of the CNR tracks, and around 1969 it did. The highway is now known as Highway #1. It divided the northern portion into two segments, the more northerly one containing about 70 acres, and the southerly one containing about 28 acres.

In 1967 the appellant sold a 2-acre parcel of the more northerly portion on the eastern boundary contiguous to the highway, to Timberland Holdings Limited for $6,000. In 1968 he sold about 25 acres, also on the north portion, to the Town of Sussex for a sewage lagoon. The property was expropriated and the purchase price was settled by arbitration. In 1969 he sold a further parcel of 2 acres to Timberland Holdings Limited. That parcel was also north of the highway and contiguous to the previous portion sold to the same company. Also in 1969 the appellant sold over 5 acres to the provincial government for the highway. The appellant retained the balance of his farm until 1973 when he sold all land he still owned north of the CNR tracks to Timberland Holdings Limited or a company associated with it for the price of $69,000, being at the rate of $1,000 per acre. This portion of his: farm, at the time of sale, consisted of about 69 acres.

Both parties proceeded on the premise that it was necessary to find the value of the property on Valuation Day. It was apparently obvious to them that, if the appellant had purchased his farm from his father in 1954, the property was more valuable at the end of 1971 than it was in 1954. No reference was made to the appellant’s income tax return and there was no indication as to whether he had reported a taxable gain or a deductible loss as a result of the transaction. His notice of appeal clearly states that no gain accrued to the appellant because of the sale since the adjusted cost base at December 31, 1971 equalled the selling price. The respondent, by his pleadings, stated that the property had a valuation of $34,000 on Valuation Day which, with a sale price of $69,000, produced a gain of $35,000 and a resultant taxable gain of $17,500. Since approximately 69 acres were sold, the appellant gave the land a valuation of $1,000 an acre on Valuation Day, while the respondent put the figure at $500.

Each party called a person whom the other party accepted as an expert on real estate values. Both filed with the Board the written appraisal report they had prepared for their client. The appellant’s appraiser, Mr Otty S Sherwood, discussed the possibility of an appraisal in 1976 with the appellant, but only made his appraisal ‘in June 1977, a few weeks before the hearing of the appeal. In his report, Mr Sherwood described the land as to its size, its location, any encumbrances, the attraction of the land from a value point of view, the effect the building of Highway #1 had on the value of the property, and a number of sales and options. Five sales were considered, all of them sales of property by Mr Brown including the sale giving rise to the issue in this appeal. There was a sale in 1967 of 2 acres at the southeast corner of the portion north of Highway #1 at the rate of $3,000 per acre; a sale of 5.6 acres to the Province of New Brunswick for Highway #1 in 1969 at the rate of $614 per acre; a sale in 1969 of 25 acres of backland in the northern portion to the Town of Sussex for a sewage lagoon at the rate of $480 per acre— Mr Sherwood did agree that this value was settled. with the town by arbitration and did include a small allowance for damage to the remaining property because of the sewage lagoon; and a sale in 1969 of 2 acres to the same purchaser as the first sale of 2 acres, contiguous to the first 2-acre sale and also on Highway #1, for $5,000 per acre. The options were granted in 1971 covering the same land as the appellant sold in 1973. Obviously the options were not exercised. They were at the rate of $1,000 per acre. One option covered his remaining property north of the highway, and the other the portion south of the highway. There was no requirement that the optionee, if he wished to exercise one option, had to exercise both. The options were for 60 days and each cost the optionee $100 which was to be applied to the purchase price if the option was exercised. Mr Sherwood used the options as an indication of value as he spoke to the optionee at the time of making his appraisal (long after the options had lapsed) and was informed that, at the time he obtained the options, he thought the property was worth the $1,000 per acre. Mr Sherwood did state on cross-examination that, if an optionee thought he would acquire property which he had the right to acquire under an option, he would, a few days before the option expired, endeavour to get a new contract with the owner at a lower price. Mr Sherwood concluded from some of the sales that the value of the land increased because of the construction of the highway. It appears that all sales referred to, as well as the options, took place after the highway was a reality even though, in all cases, it might not have been opened. In reaching his value of $1,000 per acre in 1971, Mr Sherwood used the development approach supported by the market comparable approach. As to the development approach, he mentioned dividing the property and selling it off in small lots from say 2 acres up to 10 or 15 acres over the next five years. He also mentioned that he was aware at that time that there was an industrial park in the Town of Sussex and he was of the view that it would not affect a commercial development outside the town. Sussex, at this time. was a community of 4,500 to 5,000 people.

The expert witness for the Crown was Douglas G Wort. Mr Wort made his appraisal of the property in question in the spring of 1975 and, in his view, its value on Valuation Day was $34,000. In making his valuation he proceeded on comparatives rather than development as he believed the former was what investors used and the latter, in the circumstances, was not feasible. Another feature which he noted was the control lines with respect to the highway, which he understood affected the erection of buildings on land and even access. A consideration as well was the industrial park in the Town of Sussex which was assisted by federal grants and offered services which were ‘not available elsewhere at comparable prices. For his’ comparative sales, he considered three sales, namely, Parlee (which Mr Brown mentioned, but which was not mentioned as a base by Mr Sherwood), Erb, and Morrow. Parlee was a nearby property while the other two were at least a mile and a half away. I will mention this transaction in more'detail later as considerable time was spent on it in cross- examination. It is to be noted that Mr Wort rejected all the sales and the options relied on by Mr Sherwood. The two 2-acre sales were discounted in part because of their small acreage compared to the property in question and the fact that the first purchase was not subject to the highway controls. The second 2-acre transaction was rejected because he believed it too was- not subject to control and was to expand the area of the first purchase—he was a special purchaser. As to the sale to the town of the property for the sewage lagoon, he understood that the payment of about $350 an acre included about $100 per acre for additional compensation for damage to the farm, interest, and payment for a right of way along the eastern limits of the land to Highway #1. As to the options, he also saw Bernstein and, according to his (Mr Wort’s) evidence, he was told that the options had little reflection of fair value—about the reverse of that which Mr Sherwood was told.

It will be recalled that Mr Brown stated that the Parlee property consisted of about 30 acres north of the CNR tracks. Mr Wort stated that the Parlee farm, consisting of about 118 acres, was sold in October 1972 for $35,000. About 10 acres of the 118 were in the Town of Sussex. Mr Wort continued and stated that the portion between the tracks and the river is similar to Mr Brown’s property but Mr Brown said that that portion of the Parlee property was partly brush. The back portion of the Parlee farm, according to Mr Wort, was clearly inferior to that of Mr Brown’s land. He then estimated that there were 43 acres in this back portion and he considered a reasonable value for it to be $50 per acre or $2,150. The result was, after adjusting for time and the back acreage, he came to an adjusted sale price of $30,050 for an adjusted acreage of 75, or a sale price of $400 per acre. Considerable discussion arose in cross-examination as to the acreage of the Parlee property north of the tracks. Mr Wort unequivocally stated that his acreage figures came from the provincial records. Mr Brown estimated the acreage at about 30, as there was a- survey of that property and his (Brown’s) total property north of the tracks was about three times the Parlee property in size. No survey of the Parlee property was produced. I was invited to estimate the acreage based on the map filed as an exhibit. Mr Wort did, after looking at the map, agree that possibly there were about 58 acres north of the tracks and 65 south of them. The price per acre, with this adjustment, accordingly would be about $546, rather than the $400 previously used.

Mr Sherwood used as comparable only transactions by Mr Brown. He made no mention of any other comparable sales. He did say he clearly adjusted the selling price of those sales when he arrived at his valuation figure for the size of the lots involved. While he did not say so, I am satisfied that some acreage of the Brown property he valued more highly than other portions, but the net result was that he valued it all at the rate per acre of $1,000. No mention was made by anyone to the portion between the tracks and Highway #1 which consisted of about 28 acres. There is a considerable acreage remote from the highway on both sides of the highway whose value would consequently be lower, and I think that to value the property around the sewage lagoon even at $350 per acre is too generous. I believe Mr Sherwood’s valuation is too high. He mentioned his valuation was on a development basis over the next five years, yet no development was shown in the general area of Sussex in the late 1960’s or early 1970’s.

Mr Wort, in his report, noted the range in value of his three comparable sales was $400 to $578 and he chose the figure of $500. He seemed to agree that the acreage figures he received from the provincial offices for the Parlee property were incorrect and so he adjusted that adjusted sale price to $546 per acre. Cross-examination did bring out that possibly his other comparables were not as comparable as he believed.

I now have to do that which the parties together could not do, namely, reach a valuation of this property on Valuation Day. Whether or not these valuation reports were exchanged by the parties before the hearing of the appeal 'I do not know. However, I do believe that, if they were exchanged, the parties might have reached an agreement as to the value of the property or at the least the exchange -would have permitted each side to accentuate their points of difference.

Mr Wort’s value of $500 per acre was 25% above his lowest adjusted sale price—about the same as a second one and substantially below the third of $578. All things considered, I do believe, since he felt the Parlee property was most comparable and after agreeing to adjustment reached a figure of $546, 1 should proceed from that figure to get my valuation. If-that figure were increased as he increased his original Parlee figure (by 25%), the price would be $684, or say $700 per acre. I also believe the other comparables were, as a result of the cross-examination, not as supportive of Mr Wort’s position as he first believed. I would thus hold that the value of the property on Valuation Day should be determined at $750 per acre.

The result is, the appeal with respect to the 1973 taxation year is allowed and the assessment remitted to the respondent for variation in accordance with these reasons.

Appeal allowed.