Dupont c. La Reine

Dupont c. La Reine Court (s) Database Tax Court of Canada Judgments Date 2003-03-03 Neutral citation 2003 TCC 99 File numbers 2001-204(IT)G Judges and Taxing Officers Pierre R. Dussault Subjects Income Tax Act Decision Content Docket: 2001-204(IT)G BETWEEN: JEAN-YVES DUPONT, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] _______________________________________________________________ Appeal heard on August 13, 2002, at Québec, Quebec Before: The Honourable Judge P. R. Dussault Appearances: Counsel for the Appellant: Richard Laflamme Counsel for the Respondent: Marie-Andrée Legault _______________________________________________________________ JUDGMENT The appeals from the assessments made under the Income Tax Act concerning the 1998 and 1999 taxation years are allowed, and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the fair market value of the building located at 75, rue de Hambourg, St-Augustin-de-Desmaures, which the appellant disposed of on December 8, 1998, was $3,146,500 on that date. Each party shall be responsible for its own costs. The whole in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 3rd day of March 2003. "P. R. Dussault" J.T.C.C. Translation certified true on this 15th day of April 2004. Sophie Debbané, Revisor Citation: 2003TCC99 Date: 20030303 Docket: 2001-204(IT)G BETWEEN: JEAN-YVES DUPONT, Appellant, and HER MAJESTY THE QUEEN, Respondent. [OFFICIAL ENGLISH TRANSLATION] REASONS FOR JUDGMENT Dussault, J.T.C.C. [1] These appeals are from assessments made concerning the 1998 and 1999 taxation years. [2] On December 8, 1998, the appellant disposed of a property located at 75, rue de Hambourg, St-Augustin-de-Desmaures, Quebec, in favour of five trusts benefiting his grandchildren, for the price of $2,240,000. [3] The appellant retained the services of the firm of appraisers Dorion, Noël and Hallissey Inc.; in its report, signed by André Côté and dated December 28, 1998, the firm determined that the fair market value of the property at December 1, 1998, was $2,225,000. [4] The Minister of National Revenue ("the Minister") obtained a valuation from Yvon Ouellet, an accredited appraiser, determining that the fair market value of the property on December 8, 1998, was $3,650,000. On the basis of that valuation, the Minister determined the deemed proceeds of disposition of the building to be $3,553,736 and reduced the terminal loss claimed by the appellant for the 1998 taxation year from $1,799,683 to $389,683. As a result, the tax instalments the appellant was to make for the 1999 taxation year were adjusted and related interest and a penalty were assessed. [5] Since the appellant disposed of property in favour of persons with whom he was not dealing at arm's length, at issue is whether the assessment based on the application of paragraph 69(1)(b) of the Income Tax Act ("the Act") and the hypothetical fair market value of $3,650,000 at December 8, 1998, is justified. [6] The property of which the valuation is at issue is located in the industrial park of St-Augustin-de-Desmaures, at the western edge of the Communauté urbaine de Québec, approximately 20 kilometres from downtown Québec. The industrial park is accessible from one direction by autoroute de la Rive-Nord (highway 40) and autoroute Charest (highway 440), and from the other direction by highway 138. The lot, 32,720 square metres in area, is located on the northwest corner of the intersection of rue de Hambourg and rue de Liverpool. The main use of the one-storey industrial building is storage. The building measures 105 metres by 120 metres, has a ground-level area of 14,052.4 square metres, and has an average height of 7.3 metres. At the time of the transaction, its leased areas were made up of 13,400 square metres of document storage space and 624 square metres of office space. The ground-level slab is of concrete, the structure is of steel and concrete, the exterior walls are of steel sheet and concrete, and the roof is of steel sheet. In the storage space the ceiling is unfinished; in the office space the ceiling is finished using acoustic tiles. In the storage space the flooring is concrete; in the office space the flooring is vinyl tiles and carpeting. [7] In December 1998, the building was leased to the federal government, (Public Works and Government Services Canada) for the National Archives, and to the Quebec government [for the Société immobilière du Québec ("the SIQ")], also for the storage of documents of various government departments. [8] The 10-year lease with the federal government, covering the period from October 1, 1989 (from April 1 for one part) to September 30, 1999, and renewable for two five-year periods on six months' notice prior to expiry, was for a total area of 8,136.27 square metres: 456.51 square metres of office space and 7,679.76 square metres of storage space. The annual lease payment was $499,687, indexed for taxes and energy. In case of renewal, provision was made for adjustment of the amount of the lease payment depending on the market mortgage rate in comparison with the 11 per cent rate applicable on October 1, 1989. [9] The five-year lease with the SIQ, covering the period from November 1, 1995, to October 31, 2000,[1] and renewable each year on 12 months' notice prior to expiry, was for a total area of 5,636.25 square metres: 167.13 square metres of office space and 5,469.12 square metres of storage space. A clause in the lease provided for the possibility of retroceding 40 per cent of the leased space with six months' prior notice. The lease payment was $244,798, that is, a basic lease payment of $117,707, plus taxes of $51,602, plus operating charges of $75,489. The taxes were charged at the actual cost and the operating charges were indexed. [10] At page 37 of his report, Yvon Ouellet, the appraiser for the respondent, calculated the gross rental income as follows: [TRANSLATION] The total rental income received for the 1998 taxation year is therefore $744,485 plus expense adjustments of $41,670, for a total income of $786,155, that is, gross rental income of $57.08 per square metre. [11] Each of the experts determined a fair market value on the basis of an analysis using the three classic methods: the cost method, the parity method, and the income method. [12] The expert for the appellant made the following valuations using the three methods: - cost method: $3,000,000 - parity method: $2,550,000 - income method: $2,225,000 The expert for the appellant considered the $2,225,000 valuation made using the income method to be the most representative. [13] The expert for the respondent made the following valuations using the three methods: - cost method: $7,666,000 - parity method: $3,650,000 - income method: $3,859,000 The expert for the respondent considered the $3,650,000 valuation made using the parity method to be the most representative. [14] In disputes over fair market value, one often has the impression that the outcomes reflect initial hypotheses rather than the findings of serious analyses of objective data. In some cases, the choice of hypotheses, the use of certain data and the use of adjustments are highly disputable and help reinforce the impression of more or less deliberate manipulation of the figures in order to arrive at a predetermined outcome. The present case is no exception. From the outset, it is important to state that the reports by the two experts contain not only a number of errors, but also significant flaws, some of which were noted by counsel for the parties at the hearing and even in their written comments. [15] I shall first point out that the expert for the appellant used mainly the Imperial system of measurement, while the expert for the respondent used mainly the metric system of measurement. That said, in both reports, the experts occasionally used measurements from the other system, which cannot help but affect the rigour of the analysis. The use of different data to represent the same things, as well as a number of statements that are inconsistent if not contradictory, also cast doubt on the seriousness of the exercise and the reliability of the reports submitted. [16] The expert for the appellant begins his report by setting out a definition of market value, which in his view must be [TRANSLATION] "considered from the buyer's perspective", a view that runs counter to the generally accepted definition that market value is the price that a willing seller could obtain from a willing buyer in an arm's-length transaction on the open market. [17] The expert for the appellant valued the lot at $105,658 on the basis of the rate of $0.30 per square foot set by the municipality of St-Augustin-de-Desmaures for lots in the industrial park not located along highway 40 or the railway. However, he then rounded this valuation down to $100,000 for no reason. The expert for the respondent valued the lot at $106,340, rounded down to $106,000, using a rate of $3.25 per square metre, also on the basis of the rate set by the municipality. I shall re-examine the valuation of the lot, practically the only valuation on which the two experts are not in complete disagreement. [18] On the basis of an analysis using the cost method, the expert for the appellant then determined that the replacement value of the building was $2,879,776, applying physical depreciation of 15 per cent and operational and economic obsolescence of 50 per cent, and applying to the building at issue data obtained for two buildings considered comparable: one located at 95, rue de Rotterdam, St-Augustin-de-Desmaures; the other at 650, avenue Godin, Vanier. The building located at 95, rue de Rotterdam was sold for $1,800,000 on October 12, 1995; the building located at 650, avenue Godin was sold for $4,650,000 on July 2, 1998. The $2,879,776 valuation thus made by the expert for the appellant, plus the $25,000 valuation of the ground-level improvements and the $100,000 valuation of the lot brings the valuation to $3,004,776, which the expert for the appellant rounded down to $3,000,000. [19] However, the expert for the appellant set aside the valuation made using the replacement cost method because it represented the replacement cost of a building of greater quality that was justifiable for the initial owner (the Michelin corporation) but not for the building's current use (document storage), for which [TRANSLATION] "a more standard building would be equally adequate" (report, at page 20). [20] In his description of the building, the expert for the respondent first noted that the ground-level area of the building is 14,052.4 square metres and that 13,400 square metres were used as document storage space and 456 square metres as office space, overlooking the fact that an additional 167.13 square metres were also used as office space by the SIQ (report, at page 14). [21] On the basis of an analysis using the replacement cost of a building of comparable construction quality, the expert for the respondent first calculated a rate of $640.04 per square foot, an erroneous figure, which he then changed to the correct figure of $640.04 per square metre (report, at page 19). In arriving at this rate, the expert for the respondent used four buildings that he considered of comparable construction quality; however, the respective areas of these buildings are 1,337.8 square metres, 935.7 square metres, 1,790.2 square metres and 1,964.7 square metres, while the area of the building at issue is 14,052.4 square metres. In addition, the heights of the walls of the buildings of so-called comparable construction quality used are 10.0584, 7.9248, 9.4488 and 9.1440 metres, while the height of the walls of the building at issue is only 7.3152 metres, a height the expert for the respondent already considered excessive. However, the expert for the respondent considered this height at times as an indication of obsolescence (although no related adjustments were made) and at times as an advantage, as will be seen. These points were also noted by counsel for the appellant at page 10 of his written comments. [22] At page 20 of his report, the expert for the respondent first used a new building replacement cost rate of $542 per square metre to calculate a depreciated replacement cost of $6,261,915. There is little indication where this rate of $542 per square metre comes from, except that it was taken from elsewhere. However, correcting the error and applying the rate of $640 per square metre determined on the previous page, physical depreciation of 16 per cent, and no operational and economic obsolescence increases the depreciated replacement cost from $6,261,915 to $7,560,000, a difference of $1,298,085 above the cost initially calculated. After adding the $106,000 valuation of the lot to arrive at a $7,666,000 maximum valuation of the property, the expert for the respondent then set aside this valuation with no further explanation. [23] Although both experts set aside the valuation made using the cost method, it will nevertheless be noted that the valuation made by the expert for the respondent is more than twice as much as the valuation made by the expert for the appellant; this difference can be largely explained by the fact that the expert for the respondent did not consider it appropriate to apply any operational or economic obsolescence, while the expert for the appellant applied operational and economic obsolescence of 50 per cent. [24] Both experts also carried out an analysis using the parity method, but only the expert for the respondent considered the valuation made using this method to be the most representative of the fair market value. [25] In his analysis using the parity method, the expert for the appellant determined that there were only two buildings of comparable area, the same two buildings from which data were used to measure physical depreciation and operational and economic obsolescence in the analysis using the cost method. The expert for the appellant set aside the $2,550,000 valuation made using the parity method because, despite some similarities, the use of this method [TRANSLATION] "is complicated by the small number of transactions involving large warehouses" (report, at page 20). [26] It should be noted that, in applying physical depreciation and operational and economic obsolescence for the purposes of the analysis using the cost method, concerning the $1,800,000 sale of the building located at 95, rue de Rotterdam, the expert for the appellant indicated a $350,000 valuation for the lot and the improvements and a $1,450,000 valuation for the building. Concerning the $4,650,000 sale of the building located at 650, avenue Godin, Vanier, he indicated a $720,000 valuation for the lot and the improvements and a $3,930,000 valuation for the building (report, at page 10). However, in making adjustments for the purposes of this analysis using the parity method, he used different valuations: concerning the $1,800,000 sale of the building located at 95, rue de Rotterdam, he indicated a $326,000 valuation for the lot and a $1,474,000 valuation for the building. Concerning the $4,650,000 sale of the building located at 650, avenue Godin, Vanier, he indicated a $670,000 valuation for the lot and a $3,980,000 valuation for the building (report, at page 13). Furthermore, in his written comments, counsel for the appellant proposed applying to the building at issue the data obtained from the sale of the building located at 650, avenue Godin (which is very similar to the building at issue) but making a single adjustment in order to take into account the difference in the prices of the two lots. As proposed, the valuation of the lot portion is no longer $670,000 or $720,000, as indicated in the report by the appellant's own expert, but is now $787,500. The balance or building portion of the valuation is indicated as $3,862,500, or a rate of $209.98 per square metre. Counsel for the appellant then applied this rate to the building at issue to produce a $2,950,638 valuation, which, added to the $106,000 valuation of the lot, brings the total valuation to $3,056,638. This compromise position proposed by counsel for the appellant shall be re-examined later. [27] The expert for the respondent, on the other hand, used the parity method and determined that the fair market value of the property at issue was $3,650,000. He considered this valuation to be the most representative because he identified 11 different transactions involving industrial warehouse-type buildings in the greater Québec area between October 1995 and January 1999. However, two of these transactions (sale No. 5 and sale No. 7) were set aside because they were liquidation sales. According to the report, the unit rates by area for the various buildings range from $165.55 per square metre to $413.01 per square metre. Apparently this rate of $413.01 per square metre was taken for no reason from a study commissioned by the federal government, since the highest rate shown in the transactions is actually $374.39 per square metre. In his report, the expert for the respondent indicates that his first observation leads him to conclude that [TRANSLATION] "the age of the buildings is an important factor in valuation" and that it can be [TRANSLATION] "observed that the three sales with the highest unit rates involve the most recently constructed buildings" (report, at page 35). Concerning apparent age, in the nine sales from which data were used, the construction dates of the buildings ranged from 1967 to 1988. [28] For the nine buildings from which data were used, the expert for the respondent calculated an average rate of $263.73 per square metre. However, he then compared the property at issue with the property located at 650, avenue Godin and identified as "sale No. 10" as follows, at page 35 of his report: [TRANSLATION] However, sale No. 10 is of greater interest to us since it is the building with the floor area closest to that of the property under consideration (18,394 square metres compared with 14,052.4 square metres). Although we consider the site of sale No. 10 of higher quality than that of the property under consideration, we believe that other factors are of higher quality in the property under consideration, for example: the apparent age (a construction date of 1967 compared with a construction date of 1986); the average height of the walls (+ 4.9 metres compared with + 7.3 metres), which offers better storage possibilities; and the general condition of the building sold, which is of lower quality than the general condition of the property being considered. As well, at the time of sale that property was leased to the SIQ and the lease was to expire on December 31, 2001, approximately 2.5 years following the date of the sale. [29] At page 36 of his report, the expert for the respondent concludes as follows: [TRANSLATION] The comparison unit used is the sale price per square metre of floor area. According to the analysis of the sales set out on the previous pages, the unit rate for sale No. 10 is $252.80 per square metre, for a building of lower quality with a construction date of 1967. As well, as indicated above, the average unit rate is $263.73 per square metre. We therefore consider that the unit rate applicable to the property being considered is $260.00 $ per square metre including the lot, as follows: Valuation of the property: 14,052.4 square metres @ $260.00 = $3,653,624 Accordingly, on the basis of the analysis of the sales, we consider that the sales are highly significant and that the results obtained are reliable and representative. For this reason, we estimate the fair market value of the property, using the parity method, as follows: VALUATION, USING THE PARITY METHOD, ROUNDED DOWN: $3,650,000 [30] This analysis and conclusion have given rise to a number of comments, which also reiterate the criticisms expressed by counsel for the appellant at pages 11 to 14 of his written comments. [31] A first comment by the expert for the respondent deals with operational obsolescence, particularly, in this case, obsolescence resulting from the excessive height of the walls of the building; this comment is made at page 16 of his report, as follows: [TRANSLATION] Operational obsolescence means a loss in value resulting from a poor arrangement of part of the property that reduces its usefulness. The abnormal height of the rooms and the excessive foundations are examples of operational obsolescence. As well, operational obsolescence can be rectifiable or non-rectifiable. In this case we consider that there is operational obsolescence caused by an excessive height of 7.3 metres, whereas the useful height for the current principal tenant is estimated at approximately 5 metres. [32] However, at page 20 of his report, in calculating the depreciated replacement cost, the expert for the respondent indicates the amount of operational and economic obsolescence as "Nil". The operational obsolescence resulting from the excessive height is nevertheless identified but not taken into account in the analysis using the cost method; in the analysis using the parity method, it is changed into an advantage in relation to the property located at 650, avenue Godin. The explanation provided was that the building's height, which is excessive for its current use as document storage, might be an advantage for an owner-occupant if the property were offered for sale on the open market. That may be but it could just as well be said that the excessive height might be a disadvantage for such an owner. [33] A second comment also concerns the comparison with the building located at 650, avenue Godin. In the last sentence of the excerpt reproduced in paragraph 28 of these Reasons, the expert for the respondent, considering the "general condition" of the building located on avenue Godin to be "of lower quality" than the general condition of the property at issue, states that [TRANSLATION] "at the time of sale that property was leased to the SIQ and the lease was to expire on December 31, 2001, approximately 2.5 years following the date of the sale". The property located on avenue Godin was sold on July 2, 1998, and therefore the lease would have expired in three and a half years, not two and a half years. If the expert for the respondent was instead referring to the time of the sale of the building at issue, he should have indicated three years, not two and a half years. In any case, it is difficult to see how this point constitutes a condition of lower quality with respect to the leases of the building at issue, which at the time the building was sold were to expire in 10 months (with the federal government) and in 22 months (with the SIQ). As well, the evidence adduced by the expert for the appellant has established that the lease rate for the building located on avenue Godin was considerably higher than the rates for the building at issue, an element I shall return to later. [34] A third comment has to do with the area of the nine buildings of which the sales were considered comparable. Four of these buildings (sale No. 2, sale No. 8, sale No. 9, and sale No. 11) have areas of less than 3,000 square metres; two others (sale No. 4 and sale No. 6) have areas of less than 4,000 square metres; and one (sale No. 3) has an area of less than 6,000 square metres. One may rightly wonder whether these buildings are comparable from the outset when it is known that the area of the building at issue is 14,052.4 square metres. The market for industrial buildings with small areas is certainly not the same as the market for much larger buildings. The two remaining buildings from which data were considered comparable (sale No. 1 and sale No. 10) are the building located at 95, rue de Rotterdam, with an area of 8,393.0 square metres and the building located at 650, avenue Godin, with an area of 18,394.0 square metres, which are discussed above. [35] A fourth comment has to do with location. At the hearing, it was established that most of the properties that the expert for the respondent considered comparable were not located in the same industrial park as the building at issue, in St-Augustin-de-Desmaures where the municipality controls the price of lots, but in other industrial parks closer to downtown Québec where the price of lots is much higher. It was therefore acknowledged that, while the lot of the building at issue was valued at $106,000 or approximately $3.25 per square metre, a lot in Vanier such as the lot located at 650, avenue Godin might be valued at $20 or more per square metre, not less than six times as much. However, the expert for the respondent made no adjustment for this fact, even though he placed particular emphasis on the comparison with the building located at 650, avenue Godin in determining the fair market value of the building at issue using the parity method. As well, an examination of the nine comparable sales used in fact shows that the two buildings located at 95 and 45, rue de Rotterdam, St-Augustin-de-Desmaures (sale No. 1 and sale No. 2) have the lowest rates per square metre (with the exception of sale No. 6): $214.46 per square metre and $208.07 per square metre respectively. It seems to me that this fact is one more indication that location may have been just as important a factor in valuation as the apparent age of the buildings, which the expert for the respondent gave as the primary indicator of price variation. [36] All the points raised certainly do not enable me to conclude that the analysis using the parity method made by the expert for the respondent is reliable. [37] Both experts also valued the building on the basis of the income method. Here again, the valuations made differ considerably because of completely different hypotheses used, particularly concerning renewal of the lease with the federal government that was to expire on September 30, 1999. [38] At page 38 of his report, the expert for the respondent notes that there was [TRANSLATION] "some uncertainty concerning renewal of the leases" on the valuation date, even though an April 1, 1999, study prepared for Public Works and Government Services Canada by the firm of certified appraisers Drouin, Des Rochers & Associés states that on the valuation date no other available building in the Québec area could meet the federal government's needs for archival storage space and even that it was known that the federal government needed additional space. The expert for the respondent then continues, as follows: [TRANSLATION] Thus it was likely that the current lease would be at least extended and possibly improved in terms of the area and the amount of the lease payment. In this regard, the above-mentioned study concludes at page 51 that the amount of the gross lease payment for a used building with an area of 14,515 square metres and a useful height of 4.87 metres would tend to be $81.29 per square metre. We attach as Appendix IV the conclusions of the study prepared by the firm of certified appraisers Drouin, Des Rochers & Associés. After analysing this information, we consider that an owner with normal knowledge of the leasing conditions and the likelihood of extension of the leases existing on the valuation date, who wished to sell the building but was not obliged in any way to sell it, would not lease the building at a price estimated on the basis of a vacant building. Similarly, no purchaser with the same information would purchase a building at a price estimated on the basis of a maximum potential lease payment. In this valuation, we consider that the economic valuation (the valuation estimated using the income method) must be estimated using the amount of the lease payment provided for in the current contract and the 1997 operating expenses. In order to take into account the risk of loss of the lease payment, we estimate the reserve for vacancies and bad debts at 15 per cent. We consider that there is no need to index operating expenses since these expenses are reimbursed by the tenants. [39] On the basis of these considerations, the expert for the respondent made a valuation of $3,859,000 using the income method. Although it was considered likely that the current lease with the federal government would be at least extended and possibly improved, the expert for the respondent nevertheless considered the uncertainty concerning the lease sufficient enough to set aside the valuation made using the income method on the ground that it was less significant, as he explains at page 42 of his report: [TRANSLATION] The income method is also of great interest in the present valuation: what is involved is an income property, and income is the main concern of any knowledgeable investor; we have available the 1997 financial statements, which minimize the risk of possible errors caused by certain estimates. Nevertheless, since there is some uncertainty concerning future income receivable, we consider the valuation made using the income method less significant. That said, the valuation made using the income method at least tends to confirm the valuation made using the parity method. [40] I do not intend to spend time on this part of the report by the expert for the respondent since he did not use the valuation made using the income method. However, I do want to point out an error that counsel for the respondent endeavoured to correct as follows, at page 7 of her written arguments: [TRANSLATION] From the outset, the respondent would like to state that, following the evidence adduced at the hearing, the appraiser Mr. Ouellet has revised downward the fair market value (F.M.V.) determined using the income method. At the hearing, it became apparent that the amount of municipal taxes paid on the property located on rue de Hambourg, which Mr. Ouellet had used to estimate the net income from the property (see his report, Exhibit I-8, at page 39), was erroneous. After the file was checked, it appears that the amount of taxes actually paid was not $68,042 but $99,208. As a result, once all the recalculations are done, the F.M.V. determined by Mr. Ouellet using the income method is reduced from $3,859,000 to $3,560,000. [41] This time, the error amounts to $299,000; I shall say no more on this point. [42] The expert for the appellant ultimately used the $2,225,000 valuation made using the income method. Essentially, the hypotheses underlying this valuation have to do with the uncertainty of renewal of the lease with the federal government, which, however, was changed into certainty of non-renewal and which the expert for the appellant describes as follows, at pages 15 and 16 of his report: [TRANSLATION] In fact, as noted in the definition of the income method, valuation represents actualization of net income that the investor anticipates receiving in future. Thus the measurement of gross income is a decisive factor in the valuation process. This fact is particularly true in the present case, given the upcoming expiry of the lease with Public Works. If the lease is to be renewed, this tenant must give notice of its intent six months before expiry of the lease, that is, by March 31, 1999, four months from now. According to the information obtained at the time of our visit, apparently there are rumours that the government wants to centralize storage of documents of this type in the Montréal area. Uncertainty about the likelihood of renewal of the lease notwithstanding, it is certain that, if the tenant remains, the amount of the lease payment will be adjusted downward given the fact that interest rates have decreased since 1989. This downward adjustment could amount to $1.00 per square foot. The same problem will arise in October 2000 when the lease with the SIQ will expire. Renewal of this lease is just as uncertain, given the government's intention to put all income tax returns on microfiche in order to reduce storage space. In these circumstances, unless privileged information is obtained and because these agreements often involve political considerations, the investor will act in a rational and prudent manner in assuming any eventuality. It would be very optimistic to claim that the current income will remain fixed indefinitely; it is similarly unlikely that both tenants will leave one after the other. For the purposes of this analysis and because, in any case, the lease with the federal government will be changed, we shall rely on the following hypotheses. - The federal government will not renew its lease and will vacate the premises in 10 months (on September 30, 1999). This space will remain vacant for the last two months of the first year of the projection period. - During the subsequent year, part (36,378 square feet) of the space "formerly" occupied by the federal government will be leased again at the market rate ($2.25 per square foot). - During the third year, another part (36,378 square feet) will be leased, so that at the end of this period 90 per cent of the building will be occupied. - We are assuming that the SIQ will have renewed its lease on October 30, 2000, and will not have retroceded any space to the owner. Without lapsing into science fiction, we believe that this hypothesis accurately reflects the current situation because it takes into account not only the aspect of the more recent lease with the SIQ, the different clauses on reduction of the amount of the lease payment or the space, and the possibility of losing one tenant in the short term, but also a relatively prompt absorption of the space that might be vacated, without any consideration for readapting the building to the needs of new occupants. [43] The expert for the appellant then continues his calculations by reducing the valuation of the amount of the lease payment for the space [TRANSLATION] "assumed vacated by the federal government" to $2.25 per square foot. He also estimates a stabilized vacancy rate at 10 per cent. He then calculates the operating expenses by taking the actual amounts for the year ending December 31, 1997, and indexing them at 1.5 per cent per year from 1997 to 2001. By updating the amount of net income over three years and the amount of net proceeds of disposition on the basis of the stabilized net income, he arrives at a valuation of $2,225,000. [44] The determination of fair market value made using the income method by Mr. Côté, the expert for the appellant, was severely criticized by counsel for the respondent on a number of points. From the outset, she challenged the hypothesis of non-renewal of the lease with the federal government relied on by Mr. Côté, arguing that the evidence adduced does not justify reliance on that hypothesis. [45] This evidence was adduced by Michel Dupont, son of the appellant and director of the family business; Claude Malenfant, a manager and leasing officer for the federal government; Michel Ouellette, vice-president of development and acquisitions for the Cominar corporation; and Mr. Côté, the expert for the appellant. The transcript of the examination for discovery of Michel Dupont on May 28, 2002, was also adduced in evidence (Exhibit I-3). [46] The Cominar corporation has an impressive real estate portfolio of some 90 properties, of which approximately one-third are office buildings, one-third commercial buildings, and one-third multiple-use buildings including warehouses. It was the Cominar corporation that, on July 2, 1998, purchased the building located at 650, avenue Godin, Vanier, to which the experts made frequent reference in their respective reports. Mr. Ouellette testified concerning the location and certain characteristics of that building. [47] In their respective capacities, Michel Dupont, Mr. Malenfant and Mr. Côté testified concerning their perception of the situation in December 1998 regarding renewal or non-renewal of the lease with the federal government for part of the building at issue; as we know, this lease was initially to expire on September 30, 1999. [48] Since I fully agree with the criticisms expressed by counsel for the respondent, particularly concerning the hypotheses relied on by Mr. Côté in his analysis using the income method, I shall take the liberty of referring to her comments, set out at pages 2 to 5 of her written arguments, as follows: [TRANSLATION] In the respondent's opinion, the valuation by the appellant, as set out in the report by the appraiser André Côté, is based solely on the assumption that Public Works Canada, the tenant of approximately two-thirds of the building owned by the appellant, will not renew its lease, which was theoretically to expire on September 30, 1999. This pessimistic view (in fact, the worst-case scenario in the circumstances) is used as a basic premise and affects the entire valuation, whether the parity method or the income method is used.1 Using the parity method (see his report, Exhibit A-3B, at pages 12 and 13), Mr. Côté makes an unfavourable comparison of the property at issue with the property located at 650, avenue Godin, Vanier ("the Godin building"), on the assumption that the lease with Public Works will not be renewed. On the basis of this assumption alone, Mr. Côté is making an adjustment, unfavourable to the property at issue, of at least 25 per cent in comparison with the Godin building. Moreover, in his analysis using the income method (see his report, at pages 14 to 16), Mr. Côté assumes that the lease with Public Works will not be renewed but that, if it is renewed, the amount of the lease payment will necessarily be readjusted downward. However, Mr. Côté has not provided any justification whatsoever for this "certain" downward adjustment, which he considers could amount to $1 per square foot. Still according to the appraiser Mr. Côté, new leasing will occur slowly, in stages, an assumption that fails to take into account all the evidence indicating that, in the Québec area at the time, there was a shortage of large-area space for lease (see the testimony by Michel Ouellette, at pages 44 to 46; the market analysis adduced as Exhibit I-9, indicating at pages 51 and 52 that no space is available according to scenarios A and B, which are described at page 13 of that Exhibit; and the testimony by Claude Malenfant, at page 15). Mr. Côté not only fails to consider the possibility that the space will be leased again promptly, but also considers that new leasing of this space will be at a lower market rate, which he determines is $2.25 per square foot (or $24.21 per square metre) on the basis of two indicators, of which the underlying data cannot be verified.2 The respondent questions whether this amount actually represents the market rate since, only a few months after Mr. Côté made his valuation, the market study prepared by the firm Drouin, Desrochers et Associés (Exhibit I-9) indicates net lease payment amounts for large-area buildings of not less than $4.55 per square foot (or $49 per square metre), that is, twice as much (see Exhibit I-9, at page 51). To cap everything, Mr. Côté anticipates that ultimately there will be a permanent vacancy rate of 10 per cent, as if his hypotheses were not already gloomy enough. In determining whether this pessimistic assumption by Mr. Côté is justified, we must consider the factors he took into account in relying on that hypothesis instead of another. In his valuation report, he refers to rumours that the archives will be moved to Montréal that he apparently heard at the time of his visit to the property. In his testimony, however, Mr. Côté admitted, first, that it was actually Michel Dupont who apparently relayed to him these rumours from the main party concerned, Public Works. Mr. Côté's report therefore loses some of its impartiality since he took into account only his client's interpretation. What about Michel Dupont's sources of information concerning these rumours? Michel Dupont was somewhat less categorical at his examination for discovery than he was at the hearing concerning the likelihood of non-renewal of the lease. He told us that he had heard of the rumours from National Archives employees, brokers, or competitors (see the transcript of the examination, adduced in evidence as Exhibit I-3, at page 20). It appears that the only indication he had about renewal or non-renewal of the lease with Public Works consisted in [TRANSLATION] "the rumours of what people heard here and there on the market, but no more than that" (see the transcript of the examination, at page 20). Moreover, Michel Dupont said that he contacted Mr. Malenfant around the end of 1998 in order to ascertain the federal government's intentions concerning renewal of the lease; Mr. Malenfant stated that he did not recall that contact, especially since he always placed notes in the files when he had contacts with parties concerned but that in this instance he had no note to that effect (see the testimony by Mr. Malenfant, at pages 8, 9, 11 and 12). If Michel Dupont actually did contact Mr. Malenfant, we see no reason why Mr. Malenfant, even if he had not yet received specific instructions concerning renewal of the lease, could not have told Michel Dupont that the rumours of centralization affected only premises in Montréal or, at most, affected increases in needs for archival storage space in Québec (see the testimony by Mr. Malenfant, at pages 7, 8, 15 and 16). In fact, when we take into account the testimony by Public Works representative Mr. Malenfant and the market experience of Michel Dupont (as he described it at the hearing and at his examination, at pages 21 and 22), it is not difficult to conclude that in December 1998 Michel Dupont knew or should have known that it was unlikely that the lease with Public Works would not be renewed. Indeed, Mr. Malenfant explained to us that the process of issuing calls for bids for space to lease could take not less than one year (see the testimony by Mr. Malenfant, at pages 6 and 29), and that in such situations the practice was to obtain from the building owner a six-month extension of the lease (see the testimony by Mr. Malenfant, at pages 12, 13, 15 and 19), particularly in a case like this one where the tenant occupied a large area. Here again, given Michel Dupont's experience, it is difficult to believe that he was not aware of the points noted above and, in December 1998, in the absence of any indication that the lease would not be renewed, could seriously have thought that the National Archives would have moved by September 30, 1999. At the very least, Michel Dupont could hope for an extension of the lease, which would leave him an opportunity to find a new tenant as soon as the premises were vacated, thus reducing the lost lease payments on which the appraiser Mr. Côté placed such great emphasis in determining a lower F.M.V. for the building located on rue de Hambourg. In light of the points noted above, in the respondent's opinion, on December 8, 1998, there was a greater likelihood that the lease with Public Works would be renewed, if only for a short time, than the reverse. At worst, there was uncertainty about renewal of the lease. In fact, we may suppose that Michel Dupont hastened to complete the sale before this uncertainty ceased to exist, since his avowed intention was to maximize the loss on disposition of this building in light of the high cost paid on its acquisition in 1989. He therefore wanted to take advantage of the uncertainty in order to obtain the lowest possible price (see the transcript of the examination for discovery of Michel Dupont, at pages 17 and 24). Receiving a notice of intent to renew the lease or actually checking the situation with the persons concerned at Public Works would certainly have stood in the way of fulfilling that objective. This intention of minimizing as much as possible the price of the transaction appears to have been transmitted from Michel Dupont to the appraiser Mr. Côté, which would explain why Mr. Côté, after stating at page 15 of his report that the rumours of centralization of the archives created uncertainty concerning renewal of the lease, in his analysis later changes this uncertainty to certainty of non-renewal. We may also wonder whether the F.M.V. determined in Mr. Côté's report was determined with all due independence, when it was adduced in evidence that, even before requesting a valuation and solely on the basis of his experience, Michel Dupont had already "guesstimated" a F.M.V. of between $2 million and $2.4 million (see the transcript of the examination for discovery of Michel Dupont, at page 21 and his testimony at the hearing) and that Mr. Côté made a valuation almost exactly in the middle of that estimate. We must also bear in mind that, according to the time sheets adduced by Mr. Côté (contained in Exhibit A-3A), he apparently received his instructions on November 30, 1998, visited the property on December 1, and submitted a valuation report on December 5 or 6, when only a small part of the work had been performed. According to these work sheets, apparently no research using the parity method was done before December 15, 1998, that is, after the date of the transaction.3 This fact may explain why Mr. Côté did not use the F.M.V. determined using the parity method, even though he wrote, [TRANSLATION]"That is the best known and most often used method, and the one that is best understood" (see his report, Exhibit A-3B, at page 12). 1 We shall not comment on the analysis using the cost method contained in either valuation report, since both the appraiser for the appellant and the appraiser for the respondent agree that in the circumstances the cost method is not representative of the F.M.V. 2 We are assuming that this lease payment amount is net, that is, that it does not include operating costs of the leased space, which, if added to the net lease payment amount, would produce an approximate gross lease payment amount. 3 In fact, although the letter submitting the valuation report to the client is dated December 28, 1999, the written valuation report was completed only on January 19, 1999, when it was signed. [49] As will have been noted, the reports produced by the experts both have significant shortcomings. Some hypotheses are highly disputable, as are the use and application of specific factors and data from one method or another in determining the fair market value of the building at issue. [50] In my opinion, neither the market value determined by the expert for the respondent using the parity method nor the market value determined by the expert for the appellant using the income method is the result of a rigorous, reliable and convincing analysis. [51] As is noted above, in his written comments counsel for the appellant proposes a compromise: applying to the building at issue the data obtained from the July 2, 1998 sale of the building located at 650, avenue Godin, Vanier, but taking into account the difference in the valuations of the two lots. Indeed, both experts valued the lot forming part of the property at issue at $106,000 (although the expert for the appellant rounded this amount down to $100,000), that is, a rate of $3.25 per square metre. As well, in his testimony the expert for the respondent admitted that the price of lots in Vanier was $20 or more per square metre, not less than six times as much. [52] In comparing the advantages and disadvantages of one building with those of another building that both experts considered comparable in a number of respects, the experts each found points they considered important in supporting their respective hypotheses. Generally speaking, the expert for the appellant preferred the building located on avenue Godin (at pages 10, 11, 12 and 13 of his report), specifically because of a lease rate at least $2.80 per square foot higher than that of the building at issue, and a lease expiring in 2001. The expert for the respondent preferred the building at issue, specifically because of the more recent construction and the height of the walls (at page 35 of his report). Overall, these conclusions about the respective advantages of the two buildings cannot readily be reconciled, and the evidence adduced has not provided me with any data on which I can rely with confidence in making adjustments to them. [53] Despite everything, the most significant difference appears to lie in the respective valuations of the lots. Unfortunately, here again, inconsistencies persist. In his proposal that data from the sale of the building located at 650, avenue Godin be applied to the building at issue, counsel for the appellant values the building located on avenue Godin at $25 per square metre and the lot at $787,500. Given that the sale price of the building located on avenue Godin was $4,650,000, applying the remaining amount of $3,862,500 to that building, which has an area of 18,394 square metres, produces a rate of $209.98 per square metre. Applying this rate to the building at issue, which has 14,052 square metres, then produces a valuation of $2,950,638. Adding the $106,000 valuation of the lot produces a total valuation of $3,056,638 (appellant's notes and authorities, at page 12 and table). This proposal is based in part on an admission made during the cross-examination of Mr. Ouellet, the expert for the respondent, who apparently said that the valuation of the lots in the industrial park in Vanier "might be some $2 to $3 per square foot, or $20 to $30 per square metre" (appellant's notes and authorities, at page 12). [54] That said, as I have noted earlier, the expert for the appellant himself valued the lot located on avenue Godin in Vanier at times at $720,000 (report, at page 10), at times at $670,000 (report, at page 13), not $787,500 as counsel for the appellant would have it; this represents rates of $23.19 per square metre and $21.58 per square metre respectively, and not the rate of $25 per square metre applied by counsel for the appellant. [55] Indeed, I consider it necessary to make an adjustment that will take into account the location, specifically the significant difference in the valuations of the lots. However, the onus is still on the appellant to establish that the valuation relied on by the Minister is erroneous and to determine, on a balance of probabilities, the fair market value of the building at issue. Although I consider the evidence adduced by both experts inconclusive, in the circumstances I am prepared to agree that the comparison with the building located on avenue Godin is acceptable, with the exception of the rate of $25 per square metre applied to the lot by counsel for the appellant. There is no balance of evidence that the value of this lot exceeded $23.19 per square metre or even $21.58 per square metre as determined by the expert for the appellant himself. Even if mathematical certainty in this regard is impossible, there is still a need to demonstrate some consistency of approach in establishing the most likely valuation. [56] Applying the rate of $21.58 per square metre produces a valuation of $670,000 for the lot located on avenue Godin. Given that the sale price of that building was $4,650,000, applying the remaining amount of $3,980,000 to that building produces a rate of $216.37 per square metre. Applying this rate to the building at issue produces a valuation of $3,040,518 (14,052.4 square metres ´ $216.37 per square metre). Adding the $106,000 valuation of the lot produces a total valuation of $3,146,518, rounded down to $3,146,500, or a total rate of $223.91 per square metre. [57] Having regard to the foregoing, the appeals are allowed and the assessments are referred back to the Minister for reconsideration and reassessment on the basis that the fair market value of the building located at 75, rue de Hambourg, St-Augustin-de-Desmaures, which the appellant disposed of on December 8, 1998, was $3,146,500 at that date. Each party shall be responsible for its own costs. Signed at Ottawa, Canada, this 3rd day of March 2003. "P. R. Dussault" J.T.C.C. Translation certified true on this 15th day of April 2004. Sophie Debbané, Revisor [1] At page 37 of his report, the expert for the respondent indicates that this lease expired on January 31, 2000, which is inaccurate.