Date: 20010328
Docket: 1999-3446-IT-I
BETWEEN:
YVAN TURMEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Lamarre Proulx, J.T.C.C.
[1] This is an appeal under the informal procedure in respect of the 1994 taxation year. The issue concerns the fair market value on February 22, 1994, of land held by Club Les Garrots Inc. (hereinafter referred to as the "Club" or the "corporation"). The appellant is one of the Club's four shareholders and holds 25 per cent of its shares.
[2] The appellant was not present at the hearing.
[3] In his 1994 tax return, the appellant made an election under subsection 110.6(19) of the Income Tax Act (the "Act") with respect to his share in the Club. He reported the fair market value of that share, on February 22, 1994, as $102,873. Since the adjusted cost base was $14,535 and since the deemed proceeds of disposition were $102,873, the capital gain to which the election applied was $88,338. The taxable capital gain-75 per cent of $88,338-and the capital gains deduction claimed were each in the amount of $66,253.
[4] At the time of the assessment, the Minister of National Revenue (the "Minister") established the value of the land at $160,000 and the value of the appellant's share at $40,000. According to the Notice of Confirmation, since the amount designated as proceeds of disposition exceeded 11/10 of the fair market value, the election under subsection 110.6(19) of the Act could not, by virtue of subsection 110.6(28) of the Act, be revoked or amended. The deemed capital gain resulting from the deemed disposition was determined to be $18,873 in accordance with subsection 40(3) and paragraphs 39(1)(a) and 53(2)(v) of the Act. A taxable capital gain of $14,155 was computed pursuant to paragraph 38(a) and included in the computation of income under section 3 of the Act.
[5] The computation of the tax consequences appears in the schedule to the Reply to the Notice of Appeal, as follows:
[TRANSLATION]
FMV of the property at the end of the day on February 22, 1994: $40,000 (A)
Proceeds of disposition designated by T/P: $102,873 (B)
Amount from line (A) x 1.1: $44,000 (C)
Line (B) minus line (C): $58,873 $58,873 (D)
Line (A) minus line (D): ($18,873) (E)
Line (E) = the new adjusted cost base, and if negative, the cost base is zero.
The negative amount becomes a capital gain for 1994, and you may not claim a capital gains deduction to reduce this gain.
New adjusted cost base: $0
Additional capital gain: $18,873
Taxable capital gain: $14,155
[6] The appellant's position as set out in the Notice of Appeal is as follows:
[TRANSLATION]
1.3 After reviewing the above-mentioned election, Revenue Canada determined the value of the land to be $160,000 and the value of the taxpayer's shares in the corporation to be $40,000.
1.4 In the course of the review conducted by Revenue Canada, the taxpayer instructed his own firm of accredited appraisers (Jean-Jacques Verreault & Associés) to determine the fair market value of the land. After a number of meetings and discussions with Revenue Canada's appraiser, Verreault & Associés determined that $364,300 was the minimum fair market value of the land, excluding the hunting and fishing rights owned by the corporation (see attached documents).
Taking this appraisal into account, the fair market value of the taxpayer's shares in the corporation is thus at least $90,000.
1.5 In view of the difference between Revenue Canada's appraisal and the appraisal of Jean-Jacques Verreault & Associés, the taxpayer instructed Pierre Roy of the Roy Mercier law firm to determine which appraisal was more accurate.
. . .
According to Mr. Roy's report, a copy of which is attached hereto, the fair market value of the land should be at least $0.05 per square foot, resulting in a total minimum market value of $442,000.
. . .
2.1 Based on the various comments referred to above and the documents provided, the fair market value of the land should be at least $360,000. Considering the 10% difference in fair market value allowed in the case of the election under subsection 110.6(19) of the Income Tax Act and given the fact that the appraisal in question represents a minimum price, the said election should be accepted as filed.
[7] Each of the parties called an expert witness to testify regarding the fair market value of the land. The respondent also called an expert with respect to the value of the appellant's share in the corporation.
[8] The appellant's expert was Jean-Jacques Verreault. In his opinion, the Club's market value was $364,300 : $360,000 for the building and $4,300 for the rowboats and the camp.
[9] The respondent's expert was Yvon Ouellet. In his view, the value of the property was $115,000.
[10] The corporation owns a hunting and fishing club on 8,853,350 sq. ft. of land in the municipality of Château-Richer in Quebec. This land is situated south of Ste-Anne Boulevard. The property consists of three parcels, two of which are located approximately 125 meters from Ste-Anne Boulevard while the other is on Ste-Anne Boulevard. This parcel has a six-meter frontage on the boulevard. The total area is composed of 6,869 sq. ft. of land along the riverbank, that is, between Ste-Anne Boulevard and the high-water mark, and 8,846,481 sq. ft. of shore, that is, land between the high-water and low-water marks. The riverbank area of 6,869 sq. ft. is actually a 20-foot-wide access road that links the shorefront land to Ste-Anne Boulevard.
[11] There are 13 duck breeding ponds, seven of which were developed by Ducks Unlimited and the others by the Club. No document was submitted concerning the agreements with Ducks Unlimited.
[12] The land was purchased in 1981 and 1982 for a total price of $33,000. However, according to page 8 of the report of the appraiser Verreault, when Club Les Garrots Inc. purchased most of the land in March 1981, the owner, Club de Chasse les Ilets Inc., belonged to [TRANSLATION] elderly people who no longer hunted. The land had been abandoned for a number of years. It was overgrown and there was no duck pond any more. The sale price was a liquidation price because the vendors were eager to sell. In the years after the purchase, the Club invested a great deal of time and money to restore the land to a condition more suitable for duck breeding and hunting. Ducks Unlimited also developed breeding ponds to enable ducks to breed more easily. . . . There is a peninsula (at low tide) that becomes an island at high tide. When we visited the site, the tide was low and coming in.
[13] The municipal assessment for 1995, 1996 and 1997 was $82,400. As regards municipal zoning, the land is located in a zone in which only hunting, fishing or ornithological uses are permitted. No permanent construction is allowed in that zone.
[14] On the land, there are four rowboats. The 12' x 14' camp is located on the property of Serge Rhéaume, another member of the Club.
[15] The two appraisers believe that the highest and best use of the land is for a hunting and fishing club. The direct comparison approach was chosen by both. However, the appellant's appraiser based his appraisal on surface area. He took the depth of the property into account using the square root method. As for the respondent's appraiser, his analysis of the market with regard to such properties shows that he considered only the linear measurement of the frontage.
[16] The appraiser Verreault noted sales of vacant land within the municipality of Château-Richer from 1990 to the date of the appraisal. The sales noted were of properties located south of Ste-Anne Boulevard. Of the 17 sales so noted, the appraiser chose eight. These sales had apparently also been chosen by the Minister's first appraiser. In view of the great depth of the property, Mr. Verreault used the square root method to arrive at a value of $0.04 per sq. ft. for the shorefront portion, for a total of $353,859. He assessed the riverbank portion at $0.91 per sq. ft., or $6,250 altogether, which gives a combined of $360,109.
[17] The unit of comparison used by the Minister's appraiser was the linear metre of frontage. This unit was chosen, according to the appraiser, because his analysis of the market showed that the depth of the shore was of less importance than access to the river with the rights associated with such access.
[18] The previous appraiser, with whom the appellant's appraisers had talked and whose report was not produced in evidence but had served as the basis of the assessment, had arrived at a value for the land of $160,000. His appraisal apparently took property depth into account.
[19] According to the Minister's appraiser, it makes no difference whether the depth was 300 metres or 700 metres; all that has to be considered is linear meters of shoreline. The depth of the properties whose purchase was analysed by the Minister's appraiser was at least half of that of the properties in question in this case. According to the appraiser, when purchasing vacation property, such as lakefront property, it is the amount of frontage that determines the value. In his view, the same method had to be used for the purposes of the appraisal involved here, with no adjustment for the depth of the property. He used a unit rate of $100 per linear metre. As the frontage was 1,150 metres, he arrived at a total of $115,000, even though the property's depth was 715 metres.
[20] He also took into account the fact that the Town of Beaupré, with the collaboration of public agencies, including the Fondation de la faune du Québec, had recently purchased four properties. He included in his report a letter from the lawyer for the Fondation de la faune du Québec, dated June 20, 2000, regarding the unit rates paid for various purchases south of the boulevard in the parish of Ste-Anne de Beaupré. The lawyer referred to a unit rate of $100 per linear metre for three properties and $154 for a fourth property.
Conclusion
[21] It does not seem plausible to me to accept the linear metre method as being superior to the square root method when it comes to appraising very deep properties, even when located along the shore. The Minister's appraiser maintains that it was his analysis of the local market for shorefront properties that prompted him to use this method, and that the validity of this choice was confirmed by the letter from the Fondation de la faune.
[22] The statement by the Fondation de la faune could have been useful if that organization had been the purchaser, but it was not; the Town of Beaupré was. The statement may have been a tool in negotiations between the Fondation de la faune and the town in order to determine the extent of the former's financial involvement. It is not known which method was used by the Town of Beaupré, which was the purchaser. In those circumstances, the information provided by the Fondation de la faune, which is moreover very brief, is not useful.
[23] Furthermore, I would have liked to have been referred to some authors who confirm the appropriateness of not taking depth into account in appraising waterfront property. I was referred to no authors regarding the method to be used. The Minister's appraiser might object that the appellant's appraiser did not provide me with any authors on the subject of his square root method either. That is true. With respect, however, it seems to me, based on my knowledge of the reactions of a normal purchaser, that the approach taken by the appellant's appraiser is more in keeping with the norm than that used by the Minister's appraiser.
[24] One method appears strange, while the other seems to result in a very high value if one takes into account the municipal assessment and even certain land purchases. However, it is my opinion that the method used by the appellant's appraiser is more logical, especially when one considers the highest and best use of the land in question, which is as a hunting and fishing club. That is accordingly the method I must follow. Counsel for the respondent suggested that I might make certain allowances, but I would find that difficult since the errors in the appellant's appraisal, if his method were accepted, have not been specifically pointed out to me.
[25] Therefore, the appeal is allowed, with costs.
Signed at Ottawa, Canada, this 28th day of March 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]
1999-3446(IT)I
BETWEEN:
YVAN TURMEL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on January 9, 2001, at Montreal, Quebec, by
the Honourable Judge Louise Lamarre Proulx
Appearances
Counsel for the appellant: Pierre Roy
Counsel for the respondent: Valérie Tardif
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1994 taxation year is allowed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 28th day of March 2001.
|
"Louise Lamarre Proulx" |
J.T.C.C.
[OFFICIAL ENGLISH TRANSLATION]