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Docket: 2000-3081(IT)G |
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BETWEEN: |
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WONSCH CONSTRUCTION COMPANY LIMITED, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
____________________________________________________________________
Appeal heard on April 28, 29 and May 1, 2003 at Windsor, Ontario
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Before: The Honourable Judge L.M. Little |
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Appearances: |
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Counsel for the Appellant: |
Roland Peter Schwalm |
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Counsel for the Respondent: |
Ifeanyichukwu Nwachukwu |
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JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1996 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 21st day of May 2003.
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"L.M. Little" |
J.T.C.C.
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Citation: 2003TCC341 |
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Date: 20030521 |
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Docket: 2000-3081(IT)G |
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BETWEEN: |
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WONSCH CONSTRUCTION COMPANY LIMITED, |
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Appellant, |
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and |
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HER MAJESTY THE QUEEN, |
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Respondent. |
REASONS FOR JUDGMENT
Little, J.
A. FACTS
[1] The appeal was heard in Windsor, Ontario on April 28 and 29, 2003 and concluded on May 1, 2003.
[2] At the commencement of the hearing the parties filed a Partial Agreed Statement of Facts. The Agreed Statement of Facts provided as follows:
The Appellant and the Respondent, by their solicitors agree to the following facts provided:
a) such admissions are made for the purpose of this proceeding; and
b) the parties are permitted to adduce additional evidence to supplement, but not to contradict, the facts herein stated.
1) The Appellant is a registered corporation pursuant to the laws of Ontario, having its principal place of business at 345 Taylor Drive, Tecumseh, Ontario and after December 31, 1990 has been principally in the business of property development and sales.
2) On October 23, 1968, the Appellant purchased a parcel of land, legally described as Part of Farm Lots 88, 89 and 90, in the Third Concession and extending through to the Fourth Concession, Windsor, Ontario (hereinafter "the Subject Property"). (Tab 1 of Joint book of Documents)
3) The Subject Property occupied approximately 60 acres of land and was zoned Planned Development 1 ("PD.1") by the City of Windsor denoting that the only permissible use of the property was the construction of a single dwelling on the entire Subject Property.
4) From the date of acquisition to December 31, 1990, ("V-day") the Subject Property was held by the Appellant on account of capital, and farmed by the Appellant and/or leased to third parties for farming activities ("Farming Activities").
5) After V-day, the Subject Property was held by the Appellant as inventory with the primary intention of developing the property for resale, but Farming Activities continued on the Subject Property into the 1996 taxation year.
6) In April 1992, the Department of Public Works of the City of Windsor invited the Appellant to develop part of the Subject Property fronting on a municipal highway, known as Cabana Road East and proposed to service the frontage portion of the Subject Property with sanitary sewers the cost of which would be shared with the City under the Local Improvement Act. The Appellant agreed. (Tabs 2 and 3 of Joint Book of Documents)
7) Later in 1992, the Appellant applied to the City of Windsor to rezone the frontage portion consisting of an area of 4 acres of the Subject Property from PD.1 to R1.13, a multiple residential category. The Appellant also sought approval from the Committee of Adjustments of the City of Windsor for the severance of 19 lots, permitting the development of single unit dwellings, duplex dwellings and semi-detached dwellings fronting on Cabana Road East ("Phase 1"). (Tab 4 of Joint Book of Documents)
8) The application was appealed to the Ontario Municipal Board, which in January 1994 approved the rezoning of, and severance plan for Phase 1, but approved the development of 17 lots instead of the 19 lots proposed by the Appellant for Phase 1.
9) The opportunity for the Appellant to development Phase 1 of the Subject Property was established in February 1996 with the final approval from the City of Windsor and building permits became issuable.
10) In March 1995, the City accepted the offer of the Appellant to retain Prince Silani and Associates, Urban and Rural Planning Consultants, to prepare a detailed plan policy document for the further development of the Subject Property and environs known as the Howard-Cabana Planning Area. (Tab 5 of Joint Book of Documents)
11) In February 1996, the Development Plan for the Howard - Cabana Planning Area was completed. Later that year the City of Windsor approved the Development Plan with some modifications. This provided the opportunity for zoning to be amended and the necessary approval of a plan of subdivision for the balance of the Subject Property to commence. (Tab 6 of Joint Book of Documents)
12) In 1996, the Appellant applied to the City of Windsor to rezone the balance of the Subject Property being Phase 2 and Phase 3, from PD.1 to R1.13. (Tab 7 of Joint Book of Documents)
13) In that year the Appellant also applied for approval of a draft plan of subdivision for Phase 2 and Phase 3 permitting the development of single unit dwellings, semi-detached dwellings and a public park. (Tab 8 of Joint Book of Documents)
14) In August 1996, the City of Windsor approved the rezoning of Phase 2 and Phase 3 of the Subject Property from PD.1 to R1.13 and concomitantly the Plan of Subdivision received draft plan approval both subject to certain conditions. (Tabs 9 and 10 of Joint Book of Documents)
15) In June 1997 and February 1998 the City of Windsor gave final approval to the Plan of Subdivision for Phase 2 and Phase 3, respectively.
16) In the 1996 taxation year, 11 of the 17 lots of Phase 1 were sold. The balance of the lots in Phase 1 was sold in subsequent taxation years.
17) In the Appellant's financial statement for its 1996 fiscal year, it reported a total gain on the sale of the 11 lots in the amount of $468,274. (Tab 11 of Joint Book of Documents)
18) Based on a change in use as of December 31, 1994 and a valuation of the Subject Property in the amount of $4.2 million, the Appellant in computing income for the 1996 taxation year reported the total gain of $468,274 on the sale of the 11 lots in the following manner:
a) The amount of $282,926 represented the gain on the sale of the 11 lots on account of income;
b) the amount of $185,348 represented the gain on the sale of the 11 lots on account of capital;
c) the amount of $139,011 represented the taxable portion on the sale of 11 lots; and
d) the amount of $46,337 represented the non-taxable portion on the sale of the 11 lots. (Tab 12 of Joint Book of Documents)
19) The Minister of National Revenue (the "Minister") reassessed the Appellant for the 1996 taxation year by Notice of Reassessment dated May 5, 1999 to include the amount of $46,337 in income on the basis that the entire profit from the sale of the 11 lots was on income account. (Tab 13 of Joint Book of Documents)
20) By letters dated April 8, 2002, the parties agreed that as of December 31, 1990, the Appellant first formed a trading intention with respect to the Subject Property and any appreciation in the value of the land after the effective date to the date of the disposition of the 11 lots of the Subject Property in the 1996 taxation year was on account of income.
21) The parties further agreed to have the Subject Property independently appraised as of the effective date and that the only outstanding issue to be determined by this Court is the fair market value of the Subject Property as of V-day.
22) In order to determine the amount to be included in the Appellant's income on the sale of the 11 lots, the value of the Subject Property on V-day should be reduced to a per lot value.
23) The Appraisal Report, prepared by Ray Bower of the firm of Ray Bower Appraisal Services Inc. on behalf of the Appellant, valued the Subject Property at $3 million to $3.3 million on V-day. (Tab 14 of Joint Book of Documents)
24) The Appraisal Report, prepared by the Wayne Pyke, of the Canada Customs and Revenue Agency on behalf of the Respondent valued the Subject Property at $2 million on V-day. (Tab 15 of Joint Book of Documents)
25) The Appraisal Report of Mr. Bower and Mr. Pyke both employed the direct comparison approach to the valuation of the Subject Property on V-Day with Mr. Bower also utilizing the development approach to valuation.
26) To assist the Court, a graphic representation of the geographic location of the comparables used by both appraisers in valuing in the Subject Property has been included in the Joint Book of Documents. (Tab 16 and Tab 17 of Joint Book of Documents)
27) The parties agree that the comparative sales amounts as reflected in the report of Mr. Pyke are accurate. The comparative sales amounts as reflected in the report of Mr. Bower are accurate where reference is made or obtained in respect to registry instrument numbers.
28) True copies of the Appraisal Reports prepared by the parties were served and filed by the parties in accordance with Rule 145 of the Tax Court of Canada Rules (General Procedure).
29) The parties agree that both Mr. Bower and Mr. Pyke are qualified real estate valuators whose evidence ought to be considered as expert opinion by the Court in determining the fair market value of the Subject Property on V-day. (Tabs 18 and 19 of Joint Book of Documents)
B. ISSUE
[3] The issue to be decided is the fair market value of the Subject Property as of December 31, 1990 (December 31, 1990 is hereinafter referred to as"V-Day").
[4] The value on V-Day of the Subject Property will establish the cost base of the 11 lots that were sold in 1996 in order for the Minister of National Revenue (the "Minister"), to determine the income gain realized by the Appellant on the disposition of the 11 lots in the 1996 taxation year and the income gain realized by the Appellant on the sale of the additional lots created from the Subject Property in subsequent taxation years.
C. ANALYSIS
[5] As noted in the Agreed Statement of Facts the Minister determined that the V-Day value of the Subject Property was $2,000,000.00 and the Appellant determined that the V-Day value of the Subject Property was between $3,000,000.00 and $3,300,000.00.
[6] In support of its position that the V-Day value of the Subject Property was $2,000,000.00 the Respondent appointed Mr. Wayne Pyke to serve as an expert witness. Mr. Pyke provided the Court with an appraisal report on the V-Day value of the Subject Property (the "Pyke Report").
[7] In reviewing the Pyke Report, I concluded that Mr. Pyke had under-valued the value of the Subject Property. I came to the conclusion that Mr. Pyke had under-valued the Subject Property for the following reasons:
1. Mr. Pyke was living in the Toronto area in December 1990 and he admitted on cross-examination that he was not personally familiar with the economic conditions in Windsor in December 1990;
2. Mr. Pyke said that when he prepared the Pyke Report in May 2002 he did not realize that the unemployment rate in the Windsor area had changed dramatically between December 1990 and 1994 when he moved to Windsor. Mr. Pyke said that he was employed by the Canada Customs and Revenue Agency (then known as Revenue Canada) in 1994 and that he moved from the Toronto area to Windsor in 1994.
[8] The relevant unemployment rates for the Windsor area in the 1990-1994 period were:
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1990 |
1991 |
1992 |
1993 |
1994
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Unemployment Rates |
8.8% |
12.4% |
12.6% |
11.6% |
9% |
(See Marchand Report, p. 11 (Exhibit R-2).)
[9] In preparing his Retrospective Report on May 24, 2002 to determine the value of the Subject Property on December 31, 1990 Mr. Pyke used the Comparative Approach and he referred to three comparable sales. (See page 11 of Pyke Report.)
[10] Comparable #1 was a sale of 33.74 acres in the Municipality of Lasalle in October 1992 for $1,240,000.00 or $36,752.00 per acre.
[11] During the hearing evidence was introduced by Mr. Bower (the expert witness for the Appellant) that the selling price of this property would be reduced because the property had a very difficult access from the highway, i.e. it was very difficult to make a left hand turn into the property. Furthermore, it was established by Mr. Bower that Comparable #1 was sold three years after October 1992, i.e. in 1995 for $410,000.00. For these reasons, I reject Comparable #1 as a comparable sale that can be relied upon in determining the V-Day value of the Subject Property.
[12] Comparable #2 was an 8.4-acre property located on Lakeview Avenue in Windsor. Comparable #2 was sold in March 1993 for $300,000.00 or $35,714.00 per acre.
[13] Mr. Bower testified that in the 1970s and 1980s flooding occurred in the springtime in the area where Comparable #2 was located. To prevent flooding a berm (3-4 miles long) was constructed in the area and restrictive development restraints were established for the area. Mr. Bower said in Rebuttal Evidence that the development restraints in the area provided for storm water management and the construction of lagoons and retention ponds. Mr. Bower said that as a result of the potential for flooding the cost of developing land in the area of Comparable #2 would be higher and this cost factor would have a bearing on the price paid for property in the area.
[14] Mr. Pyke said that he was not aware of the flooding problems in the area of Comparable #2 when he prepared the Pyke Report.
[15] I have concluded that because of the risk of flooding the price paid for Comparable #2 was probably lower than the price that would be paid for properties where there was no risk of flooding.
[16] Comparable #3 was a 31.78-acre parcel that was sold in June 1995 for $500,000.00 or $15,733.00 per acre.
[17] In commenting on the Comparables used by Mr. Pyke, Mr. Bower said that in preparing an appraisal it was acceptable to refer to sales that occurred after the valuation date as long as the appraiser commented upon the economic conditions at the time of the later sales and the economic conditions at the valuation date.
[18] Mr. Bower also testified that the economic conditions in Windsor were reasonably strong in 1989 and 1990 but due to the economic conditions, as illustrated by the high unemployment in the Windsor area referred to above, the economic conditions in Windsor declined in 1991, 1992 and 1993.
[19] As is noted above Mr. Pyke did not move to Windsor until 1994 and Mr. Pyke said that he had no personal knowledge of the economic conditions in the Windsor area in December 1990.
[20] In referring to Comparable #3 in his Report, Mr. Pyke said at page 13:
The rate per acre ($15,733.00) may reflect to a degree a somewhat flatter market experienced in the mid-nineties.
Note: In rebuttal evidence Mr. Bower referred to Mr. Pyke's Report and the Statement quoted above and said at page 6:
Again, Mr. Pyke failed to include the economic attributes as it affects the value of the subject property. He's merely commented on the economic attributes as it affected the sale price of one comparable property.
[21] In my opinion a sale that occurred in June 1995 (i.e. 4½ years after V-Day) cannot be relied upon. Furthermore, in using a sale that occurred in 1995 as a comparable, Mr. Pyke should have made detailed reference to the economic conditions in Windsor in December 1990 and the economic conditions in Windsor in June 1995.
[22] Mr. Ray Bower testified as a witness for the Appellant.
[23] Mr. Ray Bower has lived in the Windsor area all of his professional life and he is personally familiar with the economic conditions of Windsor. Mr. Bower has acted as a real estate appraiser for many years. In answer to a question from counsel for the Respondent, Mr. Bower estimated that his firm has prepared in excess of 40,000 residential appraisals and 15,000 - 20,000 commercial real estate appraisals.
[24] Mr. Bower provided the Court with a copy of an appraisal report on the V-Day value of the Subject Property (the "Bower Report").
[25] In determining the fair market value of the Subject Property on December 31, 1990 Mr. Bower referred to comparable sales. In the Bower Report Mr. Bower said at page 24:
The overall average and median sale price of the 12 sales considered is $60,506/acre and $54,965/acre. The 3 largest site sales considered averaged $46,314/acre. The 3 site sales located in the City of Windsor average $70,520/acre.
[26] Mr. Bower said at page 24:
CONCLUSIONS
Based upon the foregoing observations, it is my opinion that as of December 31, 1990, the subject site had a unit value range between $50,000 and $60,000 per acre. Applying this range to the subject site results in a value estimate by the Comparative Sales Method as follows:
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LOWER LIMIT |
UPPER LIMIT |
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Subject Site-58.5 acres |
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(@ $50,000, @ $60,000) |
$2,925,000 to |
$3,510,000 |
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SAY |
$2,900,000 to |
$3,500,000 |
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[27] Page 34 of the Bower Report contains the following statement:
- that the final estimate of value range as of December 31, 1990 is: $3,000,000 to $3,300,000.
[28] In his argument counsel for the Respondent placed great reliance on the fact that the development of the Subject Property was not imminent and therefore Mr. Bower's analysis of value was not acceptable. Counsel for the Respondent also emphasized this point in dealing with the Development Approach contained in the Bower Report.
[29] In analysing the facts before me I have not relied upon the Development Approach used in the Bower Report. However, as Mr. Pyke said, the use of the Development Approach is acceptable as a check and therefore, I conclude that Mr. Bower's use of the Development Approach as a check is acceptable.
[30] In terms of the argument that the Subject Property was not ready for imminent development on December 31, 1991, I believe it is useful to refer to the comments made by Cindy Prince, a witness subpoenaed by counsel for the Respondent.
[31] Cindy Prince is a land use planner who has practiced in the Essex County and Windsor area for approximately 23 years. During the hearing the following exchanges occurred:
By Mr. Nwachukwu (counsel for the Respondent):
Q. Okay. So from a land use perspective was the property developable at December 31st of 1990?
A. Not in terms of -- the servicing was not in front of the property. There would have to have been an agreement with the City to extend those services by Wonsch Construction.
(Transcript, p. 20)
In answer to a question from the Court regarding the development of a sanitary sewer system to the Subject Property Ms. Prince said:
So that's not an unusually long service extension. That wouldn't have been cost prohibitive if someone wanted to purchase the land and undertake its development.
(Transcript, p. 23-24)
By counsel for the Appellant:
Q. -- I'm going to suggest that there really were no regulatory or planning bars as of December 31st, 1990 to developing this land?
Ms. Prince replied:
A. Prior to development actually occurring you would have had to, first of all, complete the development plan, and that's the document we're looking at right now.
...
But all of those things are developer driven. They're at - they're at the option of the developer. When the developer is ready and has the money, the developer can proceed as long as they're in agreement with the City.
(Transcript, p. 24-25)
Counsel for the Respondent then referred to the time it would take to commence development of the Subject Property and asked the following question of Mr. Prince:
Q. ... How much time, typically?
A. Well, again, a lot of that is based on the motivation of the City and the developer. ... I think realistically that would take ten months to a year to get all of those things completed, if you were - if you were pushing and motivated to get it done.
(Transcript, p. 27)
[32] I have carefully reviewed the testimony of Mr. Bower and I have concluded that Mr. Bower over-valued the Subject Property because he had concluded that the Subject Property was ready for imminent development on December 31, 1990. (Note: As is noted above a Development Plan for Phase 1 of the Subject Property was not approved until 1996. In June 1997 and February 1998 the City of Windsor gave final approval to the Plan of Subdivision for Phase 2 and Phase 3 respectively). Furthermore, I note that several of Mr. Bower's comparables were located some distance from the Subject Property (#2, #4, #5, #7 and #12). In addition several of the comparables had high density potential. For these reasons I believe that the higher range of $3,300,000.00 as suggested by Mr. Bower is not acceptable. I also believe that there should be some reduction in the value as determined in the Bower Report because the Subject Property was not ready for imminent development on December 31, 1990.
[33] In my opinion the fair market value of the Subject Property was $2,900,000.00 on December 31, 1990.
[34] The appeal is allowed, and the assessment is referred back to the Minister for reconsideration and reassessment on the basis outlined above.
[35] At the conclusion of the hearing counsel for both parties requested that a conference call be held to discuss costs. Since success has been divided, I am not inclined to award costs in this situation.
Signed at Ottawa, Canada, this 21st day of May 2003.
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"L.M. Little" |
J.T.C.C.
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CITATION: |
2003TCC341 |
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COURT FILE NO.: |
2000-3081(IT)G |
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STYLE OF CAUSE: |
Wonsch Construction Company Limited and Her Majesty the Queen |
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PLACE OF HEARING: |
Windsor, Ontario |
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DATES OF HEARING: |
April 28, 29 and May 1, 2003 |
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REASONS FOR JUDGMENT BY: |
The Honourable Judge L.M. Little |
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DATE OF JUDGMENT: |
May 21, 2003 |
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APPEARANCES: |
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Counsel for the Appellant: |
Roland Peter Schwalm |
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Counsel for the Respondent: |
Ifeanyichukwu Nwachukwu |
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COUNSEL OF RECORD: |
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For the Appellant: |
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Name: |
Roland Peter Schwalm |
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Firm: |
Windsor, Ontario |
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For the Respondent: |
Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada |