The Estate of the Late Horace J.B. Gough v. The Queen

The Estate of the Late Horace J.B. Gough v. The Queen Court (s) Database Tax Court of Canada Judgments Date 2004-11-25 Neutral citation 2004 TCC 756 File numbers 2001-1339(IT)G Judges and Taxing Officers Diane Campbell Subjects Income Tax Act Decision Content Docket: 2001-1339(IT)G BETWEEN: THE ESTATE OF THE LATE HORACE J.B. GOUGH, Appellant, and HER MAJESTY THE QUEEN, Respondent. ____________________________________________________________________ Appeal heard on October 4, 2004 at St. John's Newfoundland Before: The Honourable Justice Diane Campbell Appearances: Counsel for the Appellant: Melanie Del Rizzo Jim Smyth Counsel for the Respondent: V. Lynn W. Gillis ____________________________________________________________________ JUDGMENT The appeal from the assessment made under the Income Tax Act for the 1994 taxation year is allowed, without costs, and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment. Signed at Ottawa, Canada, this 25th day of November 2004. "Diane Campbell" Campbell J. Citation: 2004TCC756 Date: 20041125 Docket: 2001-1339(IT)G BETWEEN: THE ESTATE OF THE LATE HORACE J.B. GOUGH, Appellant, and HER MAJESTY THE QUEEN, Respondent. REASONS FOR JUDGMENT Campbell J. [1] This is an appeal from a reassessment made under the Income Tax Act (the "Act") for the 1994 taxation year. [2] The only issue to be decided is the fair market value of seven rental properties ("the properties") that were owned by the late Horace J.B. Gough on December 31, 1971 ("Valuation Day" or "V-Day"). Horace Gough died on July 16, 1994. His Estate is now responsible for any capital gains that may result from the deemed disposition of the properties on July 16, 1994 pursuant to subsection 70(5) of the Act. The Appellant's cost of acquisition of the properties is deemed to be the fair market value of the properties on Valuation Day. The Minister of National Revenue (the "Minister") disagreed with the fair market valuations placed on the properties by the Appellant and consequently reassessed. As a result of the reassessment the Appellant's taxable capital gain increased in the amount of $101,627.00 and interest was assessed in the amount of $13,003.00. This increase in capital gains resulted from a reduction in V-Day values of the properties from $326,000.00, as filed by the Appellant, to $208,000.00, as reassessed by the Minister. [3] The expert report submitted by the Respondent has valued the properties at $223,000.00. [4] The following table depicts the respective valuation positions of the Appellant, the Respondent (based on initial appraisals by Glenn Todd at the audit stage) and the expert report in respect to each of the seven properties: ADDRESS APPELLANT'S (ESTATE) VALUATIONS MINISTER'S (TODD) VALUATIONS EXPERT'S (BENNETT) VALUATIONS 22 Chestnut Place $50,000 $30,000 $31,500 76 Viking Road $47,000 $30,000 $33,000 77 Viking Road $47,000 $30,000 $33,000 13 Simms Street $45,000 $30,000 $30,500 2 Ordnance Street $45,000 $26,000 $29,500 13 Argyle Street $47,000 $30,000 $31,500 15 Exmouth Street $45,000 $32,000 $34,000 Total $326,000 $208,000 $223,000 The Appellant's Evidence: [5] The Appellant called two witnesses: Dr. David Gough, Administrator of the Estate and son of the late Horace Gough, and Robert William Clouter. The Appellant did not call an expert witness. [6] Dr. Gough testified that in filing the estate's original tax return, he used his own experience in the real estate market to calculate the values of the properties. He assisted his father and his brother in choosing the lots, constructing the houses and in the eventual renting of these seven properties. In addition Dr. Gough maintained personal real estate rentals apart from his father's rental business. He stated that he purchased his first rental property around 1965 and at one time owned as many as 81 properties. Some of these properties were in the subdivisions where his father owned his seven properties. He sold most of his 81 properties in 1979. Dr. Gough explained that he arrived at the valuations based on his intimate knowledge of the properties and on his background in real estate. He stated: "I knew what it cost, I knew what went into them, I knew the market and I just have the knowledge that is required to come up with the figures" (Transcript, pg. 30-31). [7] Dr. Gough explained why corner lots were preferable in newer subdivisions, the tenant parking arrangements and generally the construction of the three-unit apartment complexes in relation to six of the properties. He stated that St. John's city council approved a by-law in 1968 which prohibited the construction of three-unit apartment houses in the subdivisions in which these six properties were located. He stated there were no other properties in these subdivisions that were similar to the six properties and that this made them unique and more valuable within the subdivisions where they were built. The seventh property, a four-apartment unit located on Ordnance Street, was purchased and renovated. [8] Dr. Gough attempted to assess the expert's valuations by viewing the comparables used by him. According to Dr. Gough, the comparable properties were located in a less desirable area in the older section of the city and were not structurally similar to the properties. Dr. Gough felt there really were no comparable properties in these subdivisions. [9] In addition a graph was prepared by Dr. Gough which, according to him, showed a valuation figure in respect to a virtually identical rate of appreciation before and after V-Day. Dr. Gough stated that because the Minister utilized inappropriate comparable properties in reaching its determination, placing the Respondent's figures on the graph results in a low rate of appreciation prior to V-Day and a high rate of appreciation subsequent to V-Day. [10] Lastly, Dr. Gough reviewed how he compared 47 of the properties he owned, which were located in the same subdivisions, with the estate properties. He looked at the acquisition costs, his assigned V-Day values and the price he received when he sold the properties. He argued that the valuation figures he determined for his own properties were accepted by the Minister. [11] The second witness, Robert William Clouter, was called to speak to correspondence he had authored in 1974 in his capacity as an appraiser and loans officer with the Royal Trust Company. The letter contains Mr. Clouter's opinion as to the value of the property located at 15 Exmouth Street as of September 24, 1974. He did not recall specifically why he was asked to provide this correspondence but stated that he arrived at a fair market value for this property by assessing various data such as real estate information and property advertisements. [12] On cross-examination, Mr. Clouter stated that, although he had prior appraisal training and experience, he did not actually receive his designation through the Appraisal Institute of Canada until 1975. Respondent's Evidence: [13] The Respondent called one witness, Greg Bennett, an employee of Canada Revenue Agency ("CRA"), who was qualified as an accredited property appraiser in 1998. He was accepted as an expert witness. Mr. Bennett's evidence related to the contents of his report (Exhibit R-1). He reviewed the three accepted methods of valuation: the Cost Approach, the Direct Comparison Approach and the Income Approach. Mr. Bennett employed the latter two approaches in preparing his report and completing his retrospective appraisal. Mr. Bennett explained that in applying the Direct Comparison Approach three properties were selected which sold around Valuation Day, and which he felt were similar to each of the subject properties. Based on factors such as age, condition, size and utilization, Mr. Bennett then selected one of these three properties as being most similar to the subject property ("Best Comparable") being reviewed. According to this Approach, the fair market value of a property is the sale price of its Best Comparable. [14] In utilizing the Income Approach, Mr. Bennett divided the sale price of the Best Comparable (the same one used in the Direct Comparison Approach) by the gross annual rent, collected in respect to the property, to arrive at a figure called the "gross income multiplier". He then took the gross annual rent of the subject property and multiplied it by the gross income multiplier figure to arrive at the property's fair market value according to the Income Approach. He testified that he reviewed the City's archives, which contained the actual rental rolls for rental properties during this period together with the list of tenants and amounts of rent. These figures were used as the basis for his analysis according to the Income Approach. In addition, Mr. Bennett's investigation involved a search of CRA's internal Valuation Day data bank, the local Registry office, the assessment records and archives and an external viewing of the comparable sales properties. [15] Mr. Bennett's conclusion as to the fair market value of each of the properties on December 31, 1971 was obtained by averaging the results of the Direct Comparison Approach and the Income Approach. Analysis: [16] Case law has clearly established that the determination of fair market value is a question of fact. The term "fair market value" has been defined in Côté v. R., [2001] 4 C.T.C. 54 at para. 14 (F.C.A.), by Létourneau J.A.: ...Fair market value" means the value obtained in a normal market, that is, a market which is not disturbed by unusual economic factors and where vendors, ready but not too anxious to sell, meet with purchasers ready and able to purchase: Withycombe Estate, Re, [1945] S.C.R. 267 (S.C.C.), at page 288. ... The meaning of "fair market value" was also dealt with in Duguayv. R., [2002] 1 C.T.C. 8 at para. 14 (F.C.A.), by Létourneau J.A.: ...Fair market value" means that obtained in the ordinary market, namely a market not distorted by special economic factors, in which sellers ready but not too anxious to sell deal with purchasers ready and able to purchase: Withycombe Estate, Re, [1945] S.C.R. 267 (S.C.C.), at 288. ... [17] The expert report contains the following reference to a definition of fair market value: The highest price, expressed in terms of money or money's worth obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact. Minister of Finance v. Mann Estate, [1972] 5 W.W.R. 23, 27 per McIntyre, J. (B.C.S.C.); affirmed [1973] C.T.C. 561 (B.C.C.A.); affirmed [1974] C.T.C. 222 (S.C.C.). [18] This latter definition, although worded differently, respects the basic principles established by case law. It was therefore properly utilized as a background to Mr. Bennett's valuation analysis. [19] In many cases where the taxpayer does not produce an expert report to rebut the Minister's assessment respecting the fair market value, this Court is forced to dismiss the appeal because the taxpayer has not met the onus which is upon him. However, there are those few cases where a taxpayer has been able to meet the onus where no expert is produced. The question of determining fair market value where only one side presents an expert was considered by Bowman, A.C.J.T.C. in Klotz v. Canada, [2004] T.C.J. No. 52 at para. 33 where he states: ...To call no expert witnesses in a valuation case can be a risky manoeuvre. Nonetheless, the court is not bound to accept any expert's opinion and ultimately the court must make its own determination of value based on all of the evidence. [20] In the present case, the Appellant did not engage an expert and chose to rely on Dr. Gough's own valuations of the properties. Dr. Gough's primary expertise is in the field of medicine, although he has had extensive real estate holdings. He valued the properties primarily by reference to his experience with his own rentals and to the assistance he provided his father with his seven rental units over the years. Although recognition is given to the substantial participation of Dr. Gough in the real estate market, I must reject his approach to the valuation of these properties. The method to be employed in determining fair market value of a property may vary with the circumstances of a case, but the general practice is to evaluate using one or more of the three recognized valuation methods. In initially filing the estate return, Dr. Gough simply relied on his own knowledge and experience in the real estate field to compile the valuations. After the assessment, he compiled data obtained from the Registry office respecting other sales in this period and he also drafted a graph-analysis. However, the graph does not represent a recognized method of valuation. Even if I did accept the graph, the rates of appreciation were not substantiated in any way and it was these rates upon which the graph was based. [21] In addition I must reject the evidence of Mr. Clouter as it relates to one of the seven properties. The valuation completed by Mr. Clouter was for 1974. However, I am concerned with a fair market value on December 31, 1971. His evidence did not in any way reference this crucial date. His testimony simply added nothing in support of the valuation chosen by Dr. Gough in respect to the property at 15 Exmouth Street. [22] In accepting Mr. Bennett's report, I conclude that the numbers he utilized were derived from objective and reliable sources and that he employed two recognized and accepted valuation methods. I do, however, have some reservations concerning this expert report. With respect to the Income Approach, it was not clear from the evidence that Mr. Bennett fully applied the four steps to be taken in using this approach, as referenced by Tremblay J. in Club de Courses Saguenay Ltée et al v. MNR (TRB), [1979] C.T.C. 3022 at page 3025. However, the Appellant did not question the Income Approach as advanced by Mr. Bennett. [23] With respect to the Direct Comparison Approach, several of the comparables utilized were older than the subject properties to which they were being compared. Other physical characteristics such as size and location also varied, although not significantly in every instance. According to Dr. Gough, many of the comparables were located in older less desirable neighbourhoods, an assertion not refutted by Mr. Bennett. In addition, Mr. Bennett had not seen the interior of all of the buildings, as they had been substantially renovated. The Appellant also argued that the expert report did not take into consideration that the City had passed a by-law restricting three apartment complexes in 1968. However, it is clear from Mr. Bennett's testimony that he was aware of the 1968 by-law change and considered it in his analysis (pp. 130-131 of the transcript). [24] The Appellant has failed to discharge the onus which is upon him. He did not employ objective data, use a recognized method of evaluation, offer an expert report or opinion, or provide evidence as to how the discrepancies in the age and location of the comparables could potentially affect the valuation conclusions provided in the expert report. The best evidence before me is Mr. Bennett's report and his testimony. [25] Because there are some discrepancies in Mr. Bennett's report, I reject his more conservative approach of averaging the valuations from each of the two methods and then accepting the result for each of the seven properties. Valuation is not a strict science and in this regard, I believe the more appropriate and fair conclusion is reached by accepting the generally higher figures provided by the Income Approach as follows: Address 22 Chestnut Place $32,000.00 76 Viking Road $33,000.00 77 Viking Road $33,000.00 13 Simms Street $29,000.00 2 Ordnance Street $32,500.00 13 Argyle Street $31,000.00 15 Exmouth Street $36,000.00 Total $226,500.00 The appeal is allowed, without costs, based on a fair market value of the properties on Valuation Day of $226,500.00. Signed at Ottawa, Canada, this 25th day of November 2004. "Diane Campbell" Campbell J. CITATION: 2004TCC756 COURT FILE NO.: 2001-1339(IT)G STYLE OF CAUSE: The Estate of the Late Her Majesty the Queen Horace J.B. Gough and PLACE OF HEARING St. John's, Newfoundland DATE OF HEARING October 4, 2004 REASONS FOR JUDGMENT BY: The Honourable Justice Diane Campbell DATE OF JUDGMENT November 25, 2004 APPEARANCES: Counsel for the Appellant: Melanie Del Rizzo, Jim Smyth Counsel for the Respondent: V. Lynn W. Gillis COUNSEL OF RECORD: For the Appellant: Name: Melanie Del Rizzo Firm: Smyth, Woodland & Del Rizzo St. John's, Newfoundland For the Respondent: Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada