Tax Court of Canada Judgments

Date: 20001228

Docket: 97-3094-IT-G; 97-3095-IT-G

BETWEEN:

MARION E. HALLATT, HERBERT E. HALLATT,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

Reasons for Judgment

Bowman, A.C.J.

[1]            These appeals were heard together. The notices of appeal raise a number of issues but at trial the sole issue was the value of the shares of Brantwood Manor Nursing Homes Limited ("Brantwood") on December 31, 1971 (V-day). It is agreed that Mr. Hallatt's appeal for 1986 is to be allowed without costs in accordance with a consent which, so far as I am aware, has not been filed. None of the other issues are being pursued.

[2]            In the result, the assessments for 1988 of both Mr. and Mrs. Hallatt are to be litigated. There may or may not be consequential adjustments to Mrs. Hallatt's assessment for 1989 in respect only of instalment interest as the result of any variation to her 1988 assessment that the court may order.

[3]            On December 31, 1971 Mr. and Mrs. Hallatt each owned 50% of all of the shares of Brantwood. In December 1988 they each sold their shares to 712101 Ontario Limited for $2,417,753. The total sales commission was $25,000. In filing their returns of income each appellant declared an adjusted cost base of $1,250,000 for their shares.

[4]            The respondent assessed the capital gain of each appellant on the disposition of their shares on the basis that their adjusted cost base was $250,000.

[5]            The appellants obtained from Campbell Valuation Partners Limited a valuation of the shares on V-day. That valuation put the value of all of the shares at between $1,650,000 and $1,900,000 for a median valuation of $1,775,000 or $887,500 for each appellant. It is this figure upon which the appellants now rely.

[6]            Mr. Alan Jones, an appraiser called by the respondent, put the V-day value of the Brantford shares within a range of $476,000 to $530,000, for a median amount of $503,000, or $251,500 for each appellant.

[7]            Mr. Wayne Eagle, a real estate appraiser employed by CCRA, appraised the real property owned by Brantwood at $610,000 as of December 31, 1971.

[8]            Mr. Gamble took the position that since Mr. Eagle and Mr. Jones were employees of CCRA their testimony as experts should not be accepted, because of the apparent lack of independence. I did not accept this contention. If a person who is otherwise qualified as an expert happens to be employed by the party who calls him or her, this is not a basis for excluding that person's evidence. If there is any ground for believing that their evidence may be tainted by bias or lack of independence, this is something that can be explored on cross-examination. Essentially I agree with the observations on this point of Bowie J. in Gilvesy Enterprises Inc. v. The Queen, 97 DTC 811 at 815.

[9]            On May 10, 1999, counsel for the appellants filed with the court a valuation report prepared by Nora V. Murrant. The certificate of counsel states that counsel is satisfied that the report of Nora Murrant represents the evidence that Howard Johnson is prepared to give.

[10]          Mr. Gamble explained that he was not able to call Ms. Murrant as a witness because she had left Campbell Valuation Partners Limited and was working for the Ontario Institute of Chartered Accountants. Under the terms of her employment she was absolutely prohibited from providing expert evidence and he was reluctant to subpoena her. Instead he attempted to put her report in by calling Mr. Howard Edward Johnson, an expert valuator with Campbell Valuation Partners Limited, who sought to introduce Ms. Murrant's report.

[11]          Obviously, I did not permit Ms. Murrant's report to go in through Mr. Johnson. One expert of course cannot put in another's report. I realized that in excluding the report I was totally cutting the ground out from under the appellants' case because there was otherwise no evidence to rebut the Minister's assumption that the V-day value of the shares was $500,000. Generally, the purpose of any litigious proceeding is to ensure that justice is done. I did not believe that the ends of justice would be served by simply dismissing the appellants' appeals on the basis of non-compliance with a rule. There was some attempt, albeit imperfect, to comply with the rule.

[12]          The resolution that I came up with was, on reflection, imperfect but it was preferable to the alternative of simply dismissing the appeals. I allowed Mr. Johnson to express his opinion orally and I ordered that the transcript of his testimony be prepared and given to the respondent at the expense of the appellants and that the hearing be adjourned to permit counsel for the respondent to prepare his cross-examination.

[13]          I turn now to the only issue, the V-day value of the shares of Brantwood.

[14]          Mr. and Mrs. Hallatt bought the shares of Brantwood in 1966. It was a private nursing home consisting of one building on a parcel of 1.6 acres, 350' x 200'. Exhibit A-1, a plan of the property, shows an extension to the building on the west side of the property cross-hatched in yellow. This extension was not constructed until long after V-day.

[15]          The portion of the building shown on Exhibit A-1 and described in evidence as the "central core" was used as a private nursing home. The construction of the portion to the east of the central portion was commenced in September 1971, although the plans for the addition were prepared in the fall of 1970. The plans were submitted to the Ministry of Health for approval. Ultimately the plans for a total of 140 beds were approved on October 26, 1971. However at the end of 1971 only 129 beds were operating.[1] Indeed this situation continued until 1980. In cross-examination counsel for the respondent put to Mr. Hallatt a letter that he wrote to the Honourable George Kerr on September 25, 1980. It reads as follows:

In 1972 we devised and had approved plans for the renovation of our 60 bed Nursing Home, together with the addition of a new 105 bed wing. The new wing together with the renovated existing facility had a total capacity of 140 beds, which were approved by the Ministry, who signed and stamped the finished working drawings.

Construction was commenced in the late fall of 1970 with the whole project being completed in March of 1972. The initial construction of the 105 bed wing was completed in August of 1972, and in order to bring the beds into active use as quickly as possible, we requested an inspection by the Ministry for approval at that time. Renovations on the existing Nursing Home had only just commenced. Accordingly, the Inspector approved the 105 new beds together with the existing 24 beds, giving us a total licenced capacity at that time of 129 beds. She (the Inspector) stated that when all renovations in the existing wing were completed the additional 11 beds would be approved for occupancy. We were to advise the Ministry accordingly and they would then carry out a supplementary inspection for the purpose of approving the additional 11 beds. On completion of renovations we requested the required inspection for the purpose of approving the 11 beds.

However, we were promptly advised of a freeze on the licencing of new Nursing Home beds – apparently for budgetary reasons – and our request was denied. We pointed out that we were not asking for new licenced beds, but simply confirmation of the Originally approved capacity of 140 beds. Up to the present time we have received no satisfaction, and feel that the Ministry's position is not only legally untenable but also sets a most dangerous precedent. That is the Ministry after formally agreeing to the construction of a definite number of beds on which the owner and financial people have related all feasibility studies, the Ministry on completion of the project can then arbitrarily abrogate its commitment thus endangering or possibly sabotaging the entire project.

For this reason we feel appropriate action should be taken even to the point of legal proceedings, and for this purpose we wish to retain your services.

[16]          Mr. Hallatt testified that the construction of the east wing was between 85% and 90% completed and that they began moving many patients into it in late February 1972. He also testified that there were no vacancies in the nursing home at this time.

[17]          Mrs. Hallatt is a professional long-term care administrator and she ran the nursing home. She was an impressive witness and her memory was excellent. She confirmed that there were no vacancies in Brantwood at the relevant time. Indeed there was a waiting list for people who wanted to be admitted.

[18]          Although the evidence on this point is not as clear as it might be, given that we are attempting to reconstruct a situation that prevailed almost 30 years ago, I think the better view is that on December 31, 1971, Brantwood had the potential capacity to operate 140 beds but legally it could operate only 129. It was at that time however reasonable to expect that the additional 11 beds would be licensed, even though that expectation had not materialized by 1980. I base this substantially on Mrs. Hallatt's testimony.

[19]          In 1972 the Nursing Homes Act, 1972 came into force. It replaced the earlier Nursing Homes Act and represented a substantial revision of the previous law. One significant change took into account the Health Insurance Act, 1972. Section 14 of the Nursing Homes Act, 1972 read as follows:

                Where a licensee provides services that are insured services under The Health Insurance Act, 1972, payment therefor under the said Act, together with such co-payment, if any, as is prescribed by the regulations, shall be deemed payment in full for the services.

[20]          Neither of these acts was in force on December 31, 1971. They came into force in 1972. Evidently their imminent passage was anticipated in 1971.

[21]          It would seem reasonable to conclude that a major overhaul of the health care system in Ontario effected by the Health Insurance Act, 1972 and the Nursing Homes Act, 1972 was anticipated and that expectation might have affected the price at which nursing homes were bought and sold. Mr. Jones, an appraiser called for the respondent, mentioned in his report that on April 26, 1971 the Province of Ontario announced that as of April 1, 1972 care in nursing homes would be an insured service and that on May 17, 1971 the Minister of Health announced that further expansion and approval of new nursing homes would be granted based on a guideline of 3.5 beds per 1,000 of population. Neither Mr. Jones nor any other witness commented on what effect, if any, these announcements might have had on the price of nursing homes in the province.

[22]          The result is that on December 31, 1971 Brantwood owned a substantially completed nursing home with a potential 140 beds of which 129 were legally operable.

[23]          Mr. Johnson was called as an expert for the appellants. He stated that he was satisfied that the shares of Brantwood had a value between $1,650,000 and $1,900,000. I shall attempt to summarize his basis for this conclusion. He used what may be described as the discretionary cash flow capitalization method as opposed to the earnings capitalization method used by Mr. Jones.

                Number of beds available    140

                Vacancy rate 5% 7

                                133

                Annual revenues based on a report

                                by Chambers & Company Limited[2]    $681,000

(The Chambers report was not put in evidence.)

                Operating expenses: 70% of revenues

                                $681,000 x 70% = $476,700 rounded to               $477,000

                Normalized operating cash flow

                                (earnings before interest, taxes and

                                depreciation and amortization based

                                on Chambers report)             $204,000

                Less income taxes (estimate)               $90,000

                                                $114,000

                Less sustaining capital

                                reinvestment          $14,000

                                less CCA                $5,000

                                                $9,000     $9,000

                Maintainable discretionary cash flow               $106,000[3]

[24]          Assume a 9.43% weighted average at the end of 1971 as the cost of a conventional mortgage. Since this cost is tax deductible the tax deduction must be factored in as follows:

                9.43 x [1-49%] = 4.8093 x .75 (ratio of debt to total capital) = 3.6%

3.6% is therefore the after tax cost of the debt component of the weighted average cost of capital.

[25]          The second part of the calculation is to determine the cost of equity, bearing in mind that 75% will represent debt and 25% equity. Mr. Johnson assumed a leveraged cost of equity of 23.4% (on the assumption that there is no debt). 25% of that amount (the debt to equity ratio) is 5.9%. This, added to the after tax cost of debt as calculated above of 3.6%, gives a total of 9.5%. From this one deducts inflation of 4.5% to arrive at a weighted cost of capital of 5%.

[26]          One then takes that as the capitalization rate of 5% and divides the $106,000 (the maintainable discretionary cash flow) by it to arrive at $2,120,000. To this certain adjustments are made:

(a)            add the $71,000 shareholder loan receivable;

(b)            deduct the interest bearing debt of $392,000 at the end of 1971;

(c)            deduct $400,000 estimated construction costs to complete the new wing, net of $98,000 being the present value of CCA on such capital expenditure;

(d)            add the present value of the CCA on the existing assets, in the amount of $72,000;

(e)            add the value of the excess land — about one-half acre (or 22,000 square feet) — at $8.66 per square foot, or about $190,000.

[27]          The result is the following:

$2,120,000 + $71,000 - $392,000 – [$400,000 - $98,000] + $72,000 + $190,000 = $1,759,000 rounded to $1,760,000.

[28]          Mr. Johnson concluded that the approximate mid point between $1.65 million and $1.9 million, or $1.76 million, is an appropriate fair market value for the shares of Brantwood.

[29]          Mr. Johnson spoke of "post-acquisition synergies" that might affect the value, but it is not clear to me, even assuming I know what they are, how such synergies — essentially possible administrative cost savings — could have a significant bearing on the price a purchaser would pay.

[30]          I have no particular difficulty in understanding the mathematical calculations provided by Mr. Johnson. It must however be borne in mind that what the court has to do in a valuation case of this type is to attempt to arrive at the price upon which willing and knowledgeable vendors and purchasers would settle.[4] This is a relatively mundane task in which common sense and commercial reality necessarily play a large part. In general the shares of a private closely held corporation must be valued on the assumption that the corporation will continue to carry on business as a going concern. In other words the breakup value is not an appropriate criterion where the company is carrying on an active business. Mr. Johnson's valuation is of course premised on the assumption that the company would continue to carry on the nursing home business.

[31]          The difference between Mr. Jones' appraisal and Mr. Johnson's appraisal is, to put it mildly, startling — $503,000 versus $1,760,000.

[32]          The respondent put in evidence two expert witness reports. Mr. Eagle valued the nursing home at $610,000 as real estate within an ongoing business. Mr. Jones used some of Mr. Eagle's conclusions in his report.

[33]          The following appears in the Jones report:

As at December 31, 1971 the company, in addition to the assets required for the operation of a 55 bed nursing home, owned adjacent land upon which construction had commenced for premises that would be capable of containing an additional 85 licensed beds. Application for the license had been made as at the valuation date and it was expected to be approved by the time the construction was completed.

A formal appraisal was obtained from an accredited Real Estate Appraiser to determine the value of the operating nursing home as well as the excess land owned by the corporation and the value of the uncompleted construction as at December 31, 1971.

Correlation of Methodologies

Comparative Market Approach                          $476,000

Capitalized Earnings Approach                          $530,000

Value indicated by "Rule of Thumb"                 $476,000

[34]          The comparative market approach figure of $476,000 is made up as follows:

Brantwood Manor Nursing Homes Limited

Share Valuation

As At December 31, 1971

Comparative Market Approach

Shareholder's equity             $41,509

                Value estimate of existing nursing home           341,000

                Cost to date of east wing addition     149,900

                Value estimate of land for addition    58,000

                Value estimate of surplus land            60,000

                                $650,409

                License application ($2,000 x 90% x 85)             153,000

Total        $803,409

Less:

                Book value of real property                 $317,206

                Book value of intangibles    9,804        327,010

Adjusted net book value                     $476,399

Rounded                                 $476,000

[35]          The $530,000 figure is arrived at as follows using the earnings capitalization approach.

Brantwood Manor Nursing Homes Limited

Share Valuation

As At December 31, 1971

Capitalized Earnings Approach

Estimated annual revenues

                55 beds @ $12.50 x 365         $250,938

                85 beds pending

                @ $12.50 x 365 x 90%          349,031

                                $599,969

*               Less: estimated vacancy rate (7.5%) 44,998      $554,971

*Projected expenses (70%)                                 388,480

Projected net income before tax                          $166,491

Income tax                              70,746

Estimated maintainable earnings                        $95,745

**            Capitalized @ 11%                                870,412

                Less: construction costs to be incurred                            400,000

                                                $470,412

                Add value estimate of surplus land                   60,000

Fair market value of shares                  $530,412

Rounded                                 $530,000

*               Estimations compiled by Ontario Ministry of Health

**            Capitalization rate based upon our review of

                economic indicators as at December 31, 1971.

[36]          I have difficulty in accepting either appraisal in its entirety. Mr. Johnson's opinion of value is based upon a number of unsubstantiated hypotheses. For example the annual revenues of $681,000, based on the Chambers report which was not put in evidence, is not supported. Indeed the revenue for the year ended December 31, 1971 was $241,616. This of course does not take into account the anticipated revenue from the additional beds. The total expenses before income tax were $226,985.73. If one removes from this figure the interest expense of $22,435 and depreciation of $18,056, the expenses before interest, depreciation and income tax become $186,494, or 77% of gross revenue, not 70% as assumed by both Mr. Jones and Mr. Johnson.

[37]          The deduction of inflation of 4.5% from the 9.5% as calculated above to arrive at a capitalization rate of 5% was not explained. Mr. Jones used a capitalization rate of 11%. His choice of this figure is not explained either and he deducts nothing for inflation. I assume that the difference in capitalization rates may be attributable in part to the fact that they were determining capitalization rates for the purposes of and within the context of different valuation methods.

[38]          One of the things about Mr. Johnson's opinion that I find particularly hard to accept is that he is of the view that an informed purchaser would on December 31, 1971, pay upwards of 1.7 million dollars for a company whose profit and loss statement for the year ended December 31, 1971 shows a net profit after tax of $11,318.27. This strikes me as unrealistic. It is true that it could reasonably be anticipated that once the new wing was completed and all the beds fully operational the revenues would increase, and a purchaser might very well consider the profit and loss statements to be of little significance. Nonetheless it would be surprising if a prospective purchaser were to be totally oblivious to the financial results in the year of acquisition. Moreover, although I have decided that the comparative market approach in this case is unreliable it does seem that the $1.7 million figure is very much out of line when one considers that a 51 bed home on Victoria Street in Hamilton (discussed below) sold in 1974 for $386,000.

[39]          One significant difference between Mr. Johnson and Mr. Jones is the deduction by Mr. Johnson of a 4.5% factor for inflation. Mr. Jones makes no such deduction. The problem is that I have no evidence in either direction that would justify the inclusion or exclusion of a factor for inflation. Mr. Johnson's computation of the capitalization rate is reasonably comprehensible right up to the deduction of the 4.5% component for inflation. The treatment of inflation in the valuation of a business is a complex matter. In some circumstances its exclusion may be justified and in others its inclusion may be appropriate. Whatever may be the treatment by a particular appraiser it requires a detailed and comprehensive explanation. No such explanation was provided.

[40]          Before I express my conclusion some preliminary explanations and observations are in order. The primary onus of proof is on the appellants. There is, however, an unfortunate tendency in income tax appeals to put an undue emphasis on onus of proof. We all know what was said in by Rand J. in Johnston v. Minister of National Revenue, [1948] S.C.R. 486 and Cattanach J. in M.N.R. v. Pillsbury Holdings Ltd., 64 DTC 5184. In the former case, Rand J. spoke of "demolishing" the basic fact upon which the taxation rested. The term "demolish" is somewhat infelicitous in that it connotes a wholesale annihilation of the factual underpinning of the assessment and a concomitantly high standard of proof.[5] The standard is a civil one and requires proof on a balance of probabilities. A prima facie case suffices if it is unrebutted. This view is supported by the judgment of Duff J. in the Supreme Court of Canada in Anderson Logging Co. v. The King, [1925] S.C.R. 45 at 50.

[41]          A recent and comprehensive exposition of onus of proof in tax cases is contained in Hickman Motors Ltd v. Canada, [1997] 2 S.C.R. 336 at 378 to 380, per L'Heureux-Dubé J., with whose general approach and conclusions McLachlin, LaForest and Major JJ. agreed. It is interesting to compare the statements in Hickman Motors with the statement in Communauté Urbaine de Québec et al v. Corp. Notre-Dame de Bon-Secours, [1994] 3 S.C.R. 3, where Gonthier J. said at p. 15:

The burden of proof thus rests with the tax department in the case of a provision imposing a tax obligation and with the taxpayer in the case of a provision creating a tax exemption.

He was of course considering an exemption provision of the Quebec Municipal Taxation Act.

[42]          The "demolition" of a simple fact is one thing. The demolition of an expert opinion on which an assessment is based is somewhat more complicated. The fair market value of a piece of property is a matter of expert opinion but it is ultimately a question of fact in which the court must derive such assistance as it can from the conflicting opinions of the experts, but in which the court must ultimately make its own decision on value. Grove Crest Farms Limited et al. v. The Queen, 96 DTC 1166; Western Securities Limited v. The Queen, 97 DTC 977; Erb et al. v. The Queen, 2000 DTC 1401; Bibby Estate v. The Queen, 83 DTC 5148 at 5157. In Western Securities I said at page 979:

                One further problem arises in valuation cases of this type. Typically both parties call expert witnesses. In many cases, these witnesses are not divided on any serious question of principle, although occasionally they may differ on the highest and best use of the property being appraised. The major difference usually lies in the choice of comparables used and the positive or negative adjustments to be made to particular comparables based on such factors as location, the timing of the sale, or other physical characteristics of the property. It frequently happens that the judge determines a value somewhere between the opposing positions of the experts, not because of any desire to reach a Solomonic compromise, but because of a recognition that the positions adopted by the experts represent the polarized extreme ends of value. There is a danger that experts, albeit in good faith, may become advocates and their positions may become adversarial. For this reason a disinterested arbiter must often conclude that it is unwise to adopt entirely the position of one or the other and that it is more likely that a fair — I hesitate to use words such as "right" or "correct" in the necessarily imprecise area of valuation — value is likely to be somewhere between the two extremes.

[43]          In cases where the determination involves questions of fact, law and opinion (as, for example, in scientific research cases such as Northwest Hydraulic Consultants Limited v. The Queen, 98 DTC 1839) the matter becomes even more complex. It is important to recognize what the role of the expert is. Robertson J.A. in RIS-Christie Ltd v. The Queen, 99 DTC 5087, put it as follows at p. 5089:

                [11]          As a preliminary matter, the parties raised the issue of the proper role of expert witnesses in interpreting the scientific research provisions of the Act. In light of Dr. Razaqpur's conclusion that repeatability is an essential element of scientific research, some guidance on this issue is required.

                [12]          What constitutes scientific research for the purposes of the Act is either a question of law or a question of mixed law and fact to be determined by the Tax Court of Canada, not expert witnesses, as is too frequently assumed by counsel for both taxpayers and the Minister. An expert may assist the court in evaluating technical evidence and seek to persuade it that the research objective did not or could not lead to a technological advancement. But, at the end of the day, the expert's role is limited to providing the court with a set of prescription glasses through which technical information may be viewed before being analyzed and weighed by the trial judge. Undoubtedly, each opposing expert witness will attempt to ensure that its focal specifications are adopted by the court. However, it is the prerogative of the trial judge to prefer one prescription over another.

[44]          From the foregoing it is clear that the court is not bound to accept any expert opinion. Indeed, since the function of the expert is to assist the court in arriving at its own conclusion, the expert's conclusion is frequently of less importance than the reasoning that lies behind the conclusion.

[45]          Mr. Jones mentioned three possible approaches: comparative market approach, capitalized earnings approach and the "rule of thumb approach". The last of these involved essentially multiplying the number of beds by a figure that ranged from $3,500 to $7,800 based on information obtained from the Ontario Nursing Home Association. The evidence of the accuracy of these figures is insufficient for me to find the approach useful.

[46]          The comparative market approach mentioned by Mr. Jones involved a comparison of the sales of four nursing homes. I discuss them briefly below but I do not find any of them sufficiently comparable to afford a meaningful basis of valuation. Three of them are in Hamilton and one is in Mount Forest.

7 Blake St., Hamilton: this was an 80 year old building with 8,900 square feet and 40 beds. It was sold in 1973 for $227,000 or $5,675 per bed. It appears to be an older residential building converted at some point to use as a nursing home.

176 Victoria St. North, Hamilton: this was a relatively new building with 9,700 square feet and 51 beds. It was sold in 1974 for $386,000 or $7,569 per bed. It is perhaps the most comparable, but the somewhat skimpy evidence would indicate that Brantwood's location and general amenities are superior.

57 Proctor Blvd, Hamilton: this was sold in 1975. It was a 50 year old converted residential house with 20 beds. The sale here was $102,000 or $5,100 per bed. I do not see it as in any way comparable.

465 Dublin St., Mount Forest: Mount Forest is about 2 hours north of Hamilton. The property was an 80 year old building with 77 beds and was sold in 1972 for $465,000 or $6,039 per bed.

[47]          Mr. Eagle concluded that the existing 55 bed nursing home had a value of $6,200 per bed or $341,000.

[48]          If I were to use this approach I would have taken the $7,569 per bed sale price of the Victoria Street, Hamilton property. There is no evidence upon which I could adjust this figure to take into account the fact it was sold in 1974. This would give a value for the existing 55 bed nursing home of $416,295.

[49]          Mr. Eagle concludes that the value of the 74 additional beds (a total of 129, not 140) was $207,900 (rounded to $207,000 by Mr. Jones), based on the cost of a land assembly for a nursing home in Hamilton. This is in my view a realistic albeit somewhat conservative figure. Roughly the same result would be achieved if one took the same per bed value of $7,569, to arrive at a value of $243,365: 85 x $7,569 = $643,365 less estimated construction costs of $400,000. If the calculation were premised on only 74 new beds the figure would be somewhat lower than that arrived at by Mr. Eagle. This approach would result in a figure of $719,660 ($416,295 (existing 55 beds) + $243,365 (85 bed addition) + $60,000 (vacant land)). This is about $109,000 higher than Mr. Eagle's figure of $610,000.

[50]          There is nothing the matter with the comparative market approach where there is sufficient data to warrant its use. On the evidence here, however, it is not reliable.

[51]          I am therefore left with a choice between Mr. Jones' capitalized earnings approach and Mr. Johnson's discretionary cash flow capitalization approach. Both appear to be accepted methods of valuing privately owned businesses. Why then should I choose one over the other? Clearly the two approaches result in vastly disparate conclusions. My common sense tells me that $1.7 million is unrealistic. If I were a prudent purchaser who wanted to buy Brantwood, and I consulted Mr. Jones who told me I should not pay more than $500,000 and Mr. Johnson who told me I could comfortably pay $1,700,000, whose advice would I accept? My instinctive reaction would be not to pay anywhere near $1,700,000 for a company whose real estate was not worth much more than $600,000.

[52]          It is for this reason that I am more inclined to accept Mr. Jones' report simply because it results in a figure that is more consistent with my common sense and idea of reality.

[53]          I am prepared to accept Mr. Jones' calculation of the annual revenues of $554,971, subject to one difference. I think his estimated vacancy rate of 7.5% is high, in light of the evidence of both Mr. and Mrs. Hallatt. To use a zero vacancy rate in valuing the business would be commercially unrealistic. Possibly 2.5% is more in accordance with reality, given the uncontradicted evidence that there were no vacancies at Brantwood. I think a conservative and careful purchaser would likely use 2.5%.

[54]          These adjustments would have the following results.

Annual gross revenues of $599,969

                less a 2.5% vacancy rate of                 $15,000

                                                $584,969

Less projected expenses of 70%

                (a percentage adopted by both appraisers)                      $409,478

Net income before tax                           $175,491

Less income tax at 42.5% (Mr. Jones' figure)                    $74,583

Estimated maintainable earnings                        $100,908

Capitalized at 11%[6]                               $917,345

Less construction costs to be incurred

                (both appraisers used this figure)                      $400,000

                                                $517,345

Add value of surplus land                   $60,000

                (This was Mr. Eagle's figure adopted by

                Mr. Jones. Mr. Johnson      assumed a figure of

                $8.66 per square foot, or $190,000, but the

                evidence does not support such a figure.)

                                                $577,345

Add shareholders' loan                        $71,000

                (Added by Mr. Johnson but not by Mr. Jones)

                                                $648,345

Rounded to                            $650,000

V-day value of all shares of Brantwood                            $650,000

Value of shares of each appellant                      $325,000

[55]          The appeals are allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment on the basis of the reasons for judgment.

[56]          Success is divided. There will be no order for costs.

[57]          The parties are directed to file the consent to judgment referred to at the beginning of these reasons in respect to the years and issues not dealt with in these reasons and to submit to the court a draft of the formal judgment.

Signed at Toronto, Canada, this 28th day of December 2000.

"D.G.H. Bowman"

A.C.J.

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