Docket: 2000-3460(GST)G

BETWEEN:

27 CARDIGAN INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard with the appeal of 33 Cardigan Inc. (2000-3463(GST)G

on April 22 and 23, 2003, at Toronto, Ontario,

By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellant:	David C. Nathanson, Q.C. and Adrienne K. Woodyard
Counsel for the Respondent:	Peter M. Kremer, Q.C. and Rosemary Fincham

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated February 22, 2000, and bears number 00000000771, for the period October 1, 1994 to September 30, 1997, is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is not liable for penalties under section 280 of the Act.

          The Respondent is entitled to one set of costs.

Signed at Ottawa, Canada, this 18th day of June, 2004.

"E.A. Bowie"

Bowie J.

Docket: 2000-3463(GST)G

BETWEEN:

33 CARDIGAN INC.,

Appellant,

and

HER MAJESTY THE QUEEN,

Respondent.

____________________________________________________________________

Appeal heard with the appeal of 27 Cardigan Inc.(2000-3460(GST)G)

on April 22 and 23, 2003, at Toronto, Ontario,

By: The Honourable Justice E.A. Bowie
Appearances:
Counsel for the Appellant:	David C. Nathanson, Q.C. and Adrienne K. Woodyard
Counsel for the Respondent:	Peter M. Kremer, Q.C. and Rosemary Fincham

____________________________________________________________________

JUDGMENT

          The appeal from the assessment of goods and services tax made under the Excise Tax Act, notice of which is dated February 23, 2000, and bears number 00000000782, for the period October 1, 1994 to September 30, 1997, is allowed and the assessment is referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the Appellant is not liable for penalties under section 280 of the Act.

          The Respondent is entitled to one set of costs.

Signed at Ottawa, Canada, this 18th day of June, 2004.

"E.A. Bowie"

Bowie J.

Citation: 2004TCC448

Date: 20040618

Docket: 2000-3460(GST)G 2000-3463(GST)G

BETWEEN:

27 CARDIGAN INC. and 33 CARDIGAN INC.,

Appellants,

and

HER MAJESTY THE QUEEN,

Respondent.

REASONS FOR JUDGMENT

Bowie J.

[1]      These two appeals concern the amount of goods and services tax (GST) that is exigible under the provisions of the Excise Tax Act, Part IX, (the Act) on the deemed self-supply of condominium units in an apartment building to the two Appellant corporations. The parties have entered into an agreement as to many of the facts of the case, and they agree that the issue to be decided is the fair market values of the units at the dates of the self-supply. There is also a subsidiary issue as to penalties. I shall reproduce their agreement in its entirety.

The Reassessments

1.          The Appellants appeal from Notices of Reassessment each dated February 23, 2000 for the period October 1, 1994 to September 30, 1997 (the "Reassessments"), which were issued by the Minister of National Revenue (the "Minister").

Background

2.          Each of the Appellants is a corporation which was incorporated under the laws of the Province of Ontario, the principal place of business of which is c/o Cornerstone Properties Inc., P.O. Box 3117, Terminal "A", London, Ontario, N6A 4J4 and the fiscal period and the taxation year of which at all material times ended on September 30.

3.          By agreement of purchase and sale dated September 1, 1994 (the "Agreement") the Appellants purchased from Richmill Development Corporation ("Richmill"), a corporation related to the Appellants, designated individually-titled units (the "Units") and their appurtenant interests in a 187-unit condominium project that Richmill was constructing at 675 Richmond Street, London, Ontario, (the "Richmond Property").

4.          As evidenced by Schedule 1.1 to the Agreement, entitled "Details of Purchase Price and Allocation", 33 Cardigan Inc. ("33 Cardigan") purchased 93 of the Units and 27 Cardigan Inc. ("27 Cardigan") purchased the remaining 94 Units in the Richmond Property for consideration totalling the amount of $10,544,000, of which $5,262,481 (49.9% of the purchase price) was paid by 33 Cardigan and $5,281,519 (50.1% of the purchase price) was paid by 27 Cardigan.

5.          The Agreement provided that the transfer of possession of the Richmond Property to the Appellants would be deemed to take effect as at October 1, 1994 (the "Effective Date") but that title to the Units would not be transferred until a date after the registration of the Richmond Property as a condominium project (the "Transfer Date")

6.          Under the Agreement Richmill was obliged, inter alia, to pay realty taxes and maintain insurance coverage with respect to the Richmond Property, to act as agent for the Appellants while carrying out the completion of the proposed condominium project and to account to the Appellants during the period between the Effective Date and the Transfer Date.

7.          As of the Effective Date, the construction of the condominium project at the Richmond Property was approximately 60% completed. The cost to complete the condominium project was $7,253,000. The total cost of the condominium project on the Richmond Property was $17,797,000, of which 96.2%, namely, $17,120,714, relates to the residential units.

8.          On June 30, 1995 a preliminary draft appraisal report authored by Tony Best of Lansink Best & McIver Limited was obtained and used to estimate the value of the Units that were leased to tenants after October 1, 1994.

9.          Between October 1, 1994 and September 30, 1997, the Units were leased to individuals who were the first to occupy the Units.

10.        Richmill estimated and remitted GST on the Units in its reporting periods ending July 31, 1995 to October 31, 1996, inclusive, and in its reporting period ending January 31, 1997, pursuant to subsection 191(1) of the Excise Tax Act, R.S.C. 1985, c.E-15, as amended (the "Act").

11.        On June 23, 1998 the Richmond Property was registered as condominium project M.C.C. No. 388.

12.        As the Appellants were the beneficial owners of the Units at the time that they were supplied, Richmill was not required to report GST pursuant to subsection 191(1) of the Act nor was it entitled to claim ITCs in respect of the Units. Therefore, by Notice of Assessment No. 00000000395 dated November 24, 1998 issued to Richmill for the period between October 1, 1994 and September 30, 1997 (the "Richmill Assessment"), the Minster disallowed the $596,167.30 of input tax credits claimed and refunded the $416,167.30 of GST reported by Richmill in respect of the Richmond Project. The Minister reassessed the Appellants to allow them $596,167.30 of ITCs which was set off against the amount of GST owing in respect of the Richmond Property.

13.        The Appellant obtained an appraisal report dated September 14, 1998 prepared by Lansink Best & McIver Limited (the "Lansink Appraisal Report") estimating the fair market value of the Richmond Property as of August 1, 1995 to have been $9,850,000 (the "Lansink Amount").

14.        On the basis of an appraisal report dated August 27, 1999 prepared by the London Tax Services Office of the Department of National Revenue and containing an estimate of the fair market value of each of the Rental Units as of their initial dates of occupancy, the Minister assumed in making the Reassessment that the fair market value of all of the Units was the aggregate amount of $16,693,000 (the "London T.S.O. Amount").

The Reassessments

15.        By the Reassessments the Minister assessed GST against the Appellants and penalty and interest thereon.

16.        The Appellants objected to the Reassessments by Notices of Objection dated May 17, 2000.

17.        The Minister confirmed the Reassessment by Notice of Decision dated July 27, 2000.

Penalties

18.        The Respondent concedes that no penalties ought to have been assessed against the Appellants for the period in which Richmill reported GST in respect of the Richmond Project except to the extent of the amount, if any, of GST underreported.

Issues in the Appeals

19.        The remaining issues to be decided in these appeals are:

(a)         what the fair market values of the Units were at the time of the "deemed self-supply"; and

(b)         in the event that the London T.S.O. Amount is established to reflect properly the fair market value of the Units at the relevant time, which the Appellants do not admit but deny, whether the Appellants are liable for the section 280 penalties on the amount of underreported and unremitted GST.

20.        The Appellants submit that the fair market values of the Units at the time of the "deemed self-supply" of the Units are as reflected in the report of Ben Lansink dated March 17, 2003.

21.        The Respondent submits that the fair market values of the Units at the time of the "deemed self-supply" of the Units are as reflected in the report of Warren Shannon dated March 5, 2003.

[2]      The London T.S.O. amount is said in paragraph 14 to be $16,693,000. That is pleaded in paragraph 12 of each Notice of Appeal, and admitted at paragraph 2 of each Reply. However, the actual amount is $16,963,000: See Exhibit A-2, Tabs 8, 13 and 14.

[3]      It is not in dispute that upon the first occupation of each of the 187 condominium units by a tenant there was a deemed self-supply of that unit from the Appellant that owned it to itself, giving rise to the imposition of GST at the rate of 7% based on the fair market value of the unit. The tax is deemed to have been collected by the Appellant, as a supplier, from itself as recipient of the supply.[1] As the various units were first occupied at various dates between October 1, 1994 and September 30, 1997, the determination of the aggregate liability for tax imposed on each of the Appellants becomes more complex than might at first blush appear. It is necessary to establish the fair market value of each individual unit at the date of its first occupation by a tenant. To this end, each party led the evidence of a professional real estate appraiser. For the reasons that follow, the evidence given by Mr. Ben Lansink for the Appellants roved to be much more useful than that of Mr. Warren Shannon for the Respondent.

[4]      The building at 675 Richmond Street is a 17-storey concrete and glass apartment building, containing the 187 apartments that are the subject of these appeals. There are 1, 2 and 3-bedroom apartments in 12 different configurations, ranging in size from 918 to 1,764 square feet. In addition, the building contains commercial, retail and office space on the main floor, parking below grade, and it shares a swimming pool with the adjacent building at 695 Richmond Street. None of these amenities are included in the GST assessment under appeal. They are relevant only to the extent that by their existence they may contribute some additional value to the apartments. The building was, of course, new at the relevant time, and so in excellent condition. The construction was of high quality. The building covers slightly less than 75% of the 0.413 hectare parcel of land on which it sits.

[5]      Mr. Ben Lansink gave evidence for the Appellants. He is a well-qualified appraiser, although his qualifications and experience are mainly theoretical. He does not appear to have recent experience in the marketplace, either as a principal or as an agent for buyers or sellers. He has been engaged in private practice as a fee appraiser since 1974, and has been accredited by the Appraisal Institute of Canada since 1982. In that time, he has acted for a wide variety of both government and private sector clients, including numerous financial institutions, first nations, national and international law firms and accounting firms. He has given evidence on a number of occasions before the Supreme Court of Ontario and the Ontario Municipal Board.

[6]      Mr. Lansink acknowledged that this case presents a novel problem for the appraiser, involving as it does 187 separate appraisals of 187 separate condominium units, each of which must be appraised as of the date that it was first occupied. Those dates are scattered over the period between November 1994 and September 1997. Mr. Lansink applied the direct comparison approach in estimating the value of these 187 units. To do so, he looked at six sales of units in a condominium apartment building at 155 Kent Street that took place between October 1994 and March 1995, six sales in a building at 600 Talbot Street between April 1994 and April 1995, and five sales in 695 Richmond Street between October 1994 and February 1995. He considered the sales at 695 Richmond to be the most comparable, because that building is adjacent to 675 Richmond, and in fact shares some amenities with it. 600 Talbot is in a better location, and so he made some downward adjustment to those sales. He was of the opinion, based on the average prices of single dwellings in London and St. Thomas, that there had been no appreciable change in values during the period from 1994 to 1997, and he therefore made no adjustments for time. From this data he estimated the value of apartments in the building at 675 Richmond Street to have been in the range of $70.00 to $80.00 per square foot throughout the period from November 1994 to September 1997, from which he derived an estimated value of $75.00 per square foot.

[7]      In a table found on page 21 of his report, Mr. Lansink then calculated the value for an apartment in each of the 12 different configurations, simply by multiplying the area of each, in square feet, by $75.00. That table goes on to establish the aggregate value of the 187 units to be $17,339,250, which Mr. Lansink then divides by 187, estimating the average value of an apartment in the building to be $92,723, which he rounds up to $95,000. The purpose of this exercise seems to be to enable him to use that average apartment value for purposes of the next part of his evidence.

[8]      Mr. Lansink then went on to hypothesize that the market for condominium apartments in central London could not absorb 187 apartments at a rate greater than 30 per year. He therefore concluded that, even with what he called aggressive marketing, they would not all be sold in less than six years. He then proceeded to compute a discount from the average value that he had previously established to be $95,000, designed to take this into account. He also estimated what he described as marketing expenses. These include such items as real estate agent's commissions, conveyancing costs, management fees and interest associated with the unsold units for an average of three years, together with a further 10% of the aggregate of these amounts for "contingencies". He then computed the present value of the total proceeds of sale of the 187 apartment units over a six-year period, net of the marketing expenses, to be $9,300,000 (rounded), or $40.23 per square foot. He proceeded from there to his final 187 estimates of value by the comparative approach by multiplying the area, in square feet, of each of the 187 apartments by $40.23. The results are set out in a table on pages 24 to 29 of his report.

[9]      Mr. Lansink also looked at value using the income approach, not, he said, in order to estimate the fair market value of the apartments, but to satisfy himself as to the highest and best use. At page 3 of his report he says this about highest and best use:

As Though Vacant: Construction and use of a building housing residential dwelling units together with complimentary retail, commercial and office uses and other site improvements as legally permitted by land use controls.

As Improved: Continuation of the existing use, as a building that houses 187 residential rental dwelling units, basement parking and main floor retail, commercial and office space. The value conclusion, assuming one owner of each of the Units, is estimated at $10,557,938 if each unit is rented. The value is $9,300,000, assuming there are 187 individual owners of the Units. Therefore, the highest and best use of each Unit is rental to a tenant for residential purposes.

I do not understand why he concerned himself with the highest and best use of the land as if it were vacant, or that of the entire building. He had earlier made it clear that he appreciated that the subject of the appraisal was not the land if vacant, or the building, but the individual residential units in the building. His opinion of value based upon the income approach, he said, was $44.00 to $46.00 per square foot. His opinion as to value based upon direct comparison to nearby sales, before discounting for the supposition that there would be 187 units placed on the market at one time, was $70.00 to $80.00 per square foot. I do not understand how his opinion based on the income approach could lead him to believe that renting one of these units to tenants was a higher and better use than selling it to a person who wished to reside in it. The only explanation is that instead of looking at the units individually, as he had acknowledged should be done, he estimated the value of the residential part of the building as a whole, and then ascribed that to the various apartments on a per square foot basis. His evidence did not make it clear that he had not included some expenses in his analysis that should properly have been excluded as applicable to the non-residential portions of the building. Nor does he take into account that the owner of a single condominium unit in the building would be required to pay substantial condominium fees, including reserves of the kind that he includes in his computation of the expenses. I have little doubt that these factors have the effect of considerably inflating the estimate of expenses properly chargeable against the income from an individual unit.

[10]     I also do not accept that for the purpose of applying the income approach to one condominium apartment, it is appropriate to derive a capitalization rate from the sales of entire apartment buildings that changed hands at prices between $1.75 million and $6.15 million. Such an investment cannot properly be compared to the purchase of one apartment for a price somewhere between $66,000 and $195,000.[2] As Mr. Lansink said more than once in his evidence that he did not rely on the result of his income approach to value except for the purpose of establishing the highest and best use, I do not intend to consider it further. I have no doubt that the highest and best use of each of these apartment units is to be used as a dwelling by the owner, or to be rented by the owner to a residential tenant.

[11]     I also have no doubt that the most appropriate method of valuation of the units is by direct comparison to sales of similar units in the same neighbourhood during the period between November 1994 and September 1997, at which time values of such units were quite stable. Indeed, Mr. Lansink made that very clear at the conclusion of his evidence in chief.

Q.         Would you just explain why you favoured the direct comparison approach to reach your final conclusion over the income approach? I know the differences aren't great but I would just like to know the reason why you favoured one over the other.

A.         Real estate appraisers like to joke with the statement that three approaches to value are market, market and market. And I think it's true, the market value is really the measuring of the individual actions of people in the marketplace. and the income approach in this particular example is really not applicable because it's - you would not use the income approach on one unit. Nobody would buy a single unit for the income it produces. You would only buy the building where the economies of scale would come into play such as property management and so on. But to buy one unit for the income it produces, you would be making very little return on your money.

Q.         Did you make the income approach as kind of a test check?

A.         It was a test check and it was also for me to be able to conclude my highest and best use.

            My highest and best use in my opinion is not selling the 187 units. The value in this building is greater if it's sold to one individual who then collects the rent and manages the building. That is the highest and best use and that's the highest value. That's really the purpose of the income approach, was to illustrate that.

Q.         But on the other hand it's not the value of each individual unit.

A.         No

            My job, according to your instructions and the way I've written my report, is 187 dwellings. It's individual. I'm doing 187 appraisals and I'm showing 187 individual values. And if I'm not, if it's just one deed, then I would re-look at that value. I would say the value is closer to my income approach as opposed to the direct conversion approach. I would rethink that if you were to instruct me differently.

I accept that the value of a condominium apartment in the 675 Richmond Street building, during the period from November 1994 to September 1997, if only one were on the market, would have been about $75.00 per square foot, as Mr. Lansink's evidence suggests.

[12]     I turn now to the discount from that figure that Mr. Lansink applied. For the reasons that follow, I do not accept his opinion that a discount of about 45% should be applied to that estimate of value because there are 187 units in the building.

[13]     First, there is the question whether any discount should be applied at all. Mr. Lansink's theory is that for the purpose of each of his 187 appraisals, he must assume not only a hypothetical sale by a willing vendor to a willing purchaser of the particular unit being appraised, but also that this hypothetical sale takes place not in the London market as it existed on the date at which each unit is being appraised, but as it would have existed if all 186 other units had been placed on the market that day. The Excise Tax Act imposes a tax on hypothetical transactions that the statute deems to have taken place, although they did not in fact take place at all. Each deemed supply and receipt of a unit is a separate one, and the determination of the fair market value of the unit on which it operates is unaffected by any other hypothetical transactions that may be deemed to take place at or about the same time. That is because those deemed sales and receipts of supplies never take place, and indeed the units are not offered for sale, and so they are not capable of affecting the market that exists in reality. It is in the context of that real market that value must be determined.

[14]     I emphasize that the present case bears no similarity to cases such as Henderson v. M.N.R.,[3] where the Minister's assessor discounted a block of shares from $10.78 to $8.00 to account for the effect on the market that would result from offering a very large holding for sale at one time. In that case, the statutory mandate was to ascertain the fair market value of one large block of shares on one specific date. Nor does it resemble Wosk's Ltd. v. British Columbia (Assessor of Area No. 16 - Chilliwack).[4] That case arose out of the valuation for municipal taxation purposes of 296 serviced lots in the Village of Harrison Hot Springs, B.C., a village of only 600 persons living in 233 homes. There a discount from value based on the absence of potential immediate buyers for all 296 lots was approved by the Court of Appeal. Both of these cases, however, deal with the actual market conditions existing on the date that all the shares, and all the lots, were to be valued. In Henderson, the appraisal was of one block of shares in its entirety. In Wosk's case, the Assessment Appeal Board effectively discounted the value of the lots from the estimated value of a single lot time 296 by finding that the highest and best use was to be purchased in bulk for future resale. Although the lots were not being actively marketed, they were all available for sale. In the case before me none of the condominium units were for sale at all. My task is to determine as of each of the many valuation dates between November 1994 and September 1997 what was the highest price that a willing vendor of the property could expect to receive from a willing purchaser, both well informed and acting at arm's length, on the basis of the market existing at that time, not on the basis of a hypothetical market that did not, and never would, exist. The deeming provision in subsection 191(2) of the Act operates independently in respect of each unit that is deemed to be supplied and deemed to be acquired by the builder. It does not deem every other unit in the building to be for sale on the market at the same time.

[15]     Even if I were to accept Mr. Lansink's theory that each appraisal must proceed on the assumption that all 187 units would be exposed for sale throughout the period from 1994 to 1997, I would not accept his methodology as being a reasonable one. There are a number of aspects to it that simply cannot be justified. First, I do not accept his opinion that only 30 units could be sold each year. When asked about the study of the market on which he based this opinion, he said that it was based on resales in the three buildings that he considered to be comparable, and on which he had formed his initial estimate of value. His evidence was that in 1995 there were a total of 54 units sold in those three buildings.[5] The charts at pages 19 and 20 of his report show the sales in those buildings on which he based his estimate of value. There are six sales at 155 Kent from October 1994 to March 1995, six sales in 600 Talbot between May 1994 and February 1995, and five sales between October 1994 and February 1995 in 695 Richmond. These are resales, and so did not result from aggressive marketing. In the Kent Street and Richmond Street buildings only one of those units was listed for significantly more than one month, and even it sold in less than two months. The average exposure time for the Talbot Street building was about 3.3 months, presumably because the prices in that building were considerably higher. This evidence, limited in scope though it is, suggests to me that the limit on the number of sales, particularly in the two most comparable buildings, is not caused by a lack of buyers but by a lack of units offered for sale. Mr. Lansink was asked in his direct examination how he arrived at his conclusion that six years would be required to sell 187 units. His answer was "Experience, judgment". His reliance on the resale evidence in cross-examination appears to have been an afterthought. Although he was cross-examined at some length on this point, he did not refer to any actual experience in connection with the marketing of condominiums. I find this part of his evidence to be at best speculative, and not at all objective. To adopt it would offend the principle stated by Mahoney J. as he then was, in National Systems of Baking of Alberta Ltd. v. The Queen[6] and specifically approved by the Federal Court of Appeal.[7]

The Court is not justified in jumping with an expert to a conclusion that is sustained only by the evidence of his expertise; it simply must have evidence as to facts so that it can both understand and evaluate the process leading to the conclusion and the validity of the conclusion itself.

[16]     Mr. Lansink testified that the discounting for volume should begin by removing more than one third of the value of the units to account for what he called "marketing expenses". I have described these above. On page 35 of his report he quotes the definition of market value as it appears in the Canadian Uniform Standards of Professional Appraisal Practice published by the Appraisal Institute of Canada for the guidance of its members.

Market Value is defined as "the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion."

This is not significantly different from the definition generally accepted by Canadian courts. The amount for which a property should exchange means the price at which it likely would be bought and sold; it does not mean the net proceeds to the seller after paying the costs of selling. Mr. Lansink sought to justify his departure from the classic definition by likening his approach to the development approach often applied to the valuation of raw land. The very significant difference is that a purchaser of a parcel of raw land will consider the costs associated with developing it in formulating the price that he is willing to pay. That makes the computation of both the costs of subdividing and the probable proceeds of sales of lots a relevant consideration when estimating the price at which the transaction is likely to take place. In considering the price for which a condominium residence will likely sell, no such considerations are relevant. To put it another way, Mr. Lansink's task was to estimate the price at which each unit was likely to sell on its particular date of first occupancy. Instead, he set out to estimate the present value of the likely net proceeds of sale of all the units at unspecified dates in the future. I appreciate that he did this in order to solve what he perceived to be a difficult appraisal problem, but that gives him no mandate to depart from the long established meaning of the statutory words "... the fair market value of the unit at [the date of first occupation]".

[17]     A further inconsistency in the discounting by Mr. Lansink is his failure to give credit for the rent that would have been paid by the tenants of the unsold units during his hypothetical six-year marketing period. He has been careful to include all the costs that he could think of, including the removal of tenants in order to be able to give vacant possession when the time came. He gave no good reason why the rents received during the period should not have been taken into account as well. Nor did he include any increment in the prices that would be achieved towards the end of his six-year period. There was evidence that prices did not rise between 1994 and 1997, but the evidence suggests that they would have risen somewhat after 1997.

[18]     It is noteworthy, too, that Mr. Lansink, although he discounted value by 45% on the basis of his notion that he had to take into account a hypothetical glut on the market, did not produce in his evidence any analysis of the dates of first occupation of the units. Had he done so he would have seen that July, August, September and October 1995 were the only months in which more than 10 of the units became occupied for the first time. If a glutting of the market were a relevant concern for him to take into account, which I do not accept, then the hypothetical glut was not nearly of the magnitude that he apparently thought. Rather than the 187 units being hypothetically exposed for sale in one day, as he seemed to suppose, they would have come onto the market quite gradually between November 1994 and June 1995, and again from November 1995 to September 1996. While I do not think it strictly relevant, I have appended to these reasons as Appendix "A" a chart showing the dates of first occupation of the 187 units month-by-month. When seen in its true light the hypothetical problem, if there were one at all, is much less than Mr Lansink would have us believe.

[19]     Indeed, it is only during the second half of 1995 that more than 30 units per year were occupied for the first time. Even on his evidence, the market could absorb all the units that hypothetically were sold during all of 1994, the first six months of 1995, all of 1996 and all of 1997. Mr. Lansink failed to consider the possibility that a modest discount from the $75.00 per square foot value otherwise ascertained would entice sufficient buyers to the market. There is no reason to believe that residential real estate is not a highly elastic commodity.

[20]     Mr. Warren Shannon was called by the Respondent to give evidence as to his opinion of the value of the 187 condominium units that make up the residential portion of 675 Richmond Street. Mr. Shannon has been a member of the Appraisal Institute of Canada for some 30 years. He was certified as a rural appraiser initially, in 1988 he was accredited by the Canadian Institute with the designation AACI, and he is presently so certified until October 2007. He worked as an appraiser for Central Mortgage and Housing Corporation from 1972 to 1977. Since then he has worked for Revenue Canada (now CCRA), first in Hamilton and St. Catharine's, then as a team leader in southwestern Ontario, and most recently as Regional Manager in that area. He has not, so far as I know, had any experience buying and selling in the real estate market, either on his own account or as an agent for others.

[21]     Mr. Shannon first formed an opinion as to value in relation to each of these apartment units in August 1999 when he was asked by the Chief of Appeals in the London Tax Services office of Revenue Canada to appraise each residential condominium unit in the building at 675 Richmond Street. At that time, he prepared a written appraisal report that is in evidence at Tab 8 of Exhibit A-1. In explaining his methodology, he said at page 20:

An income approach to value was not undertaken as it is not typically reflective of the motives of or value to owners wishing to copy the units as their principal residence.

A cost approach was not undertaken as it is not within the scope of this appraisal to value the complete building, only the individual units at their date of occupancy.

The direct comparison approach is considered applicable as there are numerous sales at the effective date of appraisal to compare to the subject and estimate a market value.

In that regard various sales were reviewed and analysed in comparison to the subject.

His reference to "the subject" was clearly meant to refer to all 187 subjects that he was appraising. He then went on to examine 43 sales of condominium apartments in the adjacent building that he considered to be comparable. Of these, 11 took place in 1995, 14 in 1996 and 18 in 1997. After making some adjustments for the relative ages of the buildings, and for time, he established values for various categories of apartments in 675 Richmond in each of the years 1995, 1996 and 1997 as follows:

	1995	1996	1997
1 bedroom	$75,000	$78,000	$82,000
2 bedroom	94,000	98,000	102,000
3 bedroom (1,624 sq. ft.)	114,000	118,000	125,000
3 bedroom (1,764 sq. ft.)	123,000	129,000	135,000

He applied these value estimates to the various apartments, and the aggregate of these opinions of value became what the parties referred to in the pleadings and in the agreed facts as the London T.S.O. Amount.[8]

[22]     Exhibit R-1 at the trial is Mr. Shannon's written appraisal report dated March 5, 2003 filed to comply with Rule 145. In it he estimated value by the cost approach, the income approach and the direct comparison approach. Quite clearly, he understood when he embarked on this that his task was to form 187 opinions of value; one for each apartment. He had done that in 1999. Now, however, he chose to estimate the value of the residential portion of the entire building by each of these three methods, and then apportion his final estimate of value for the building among the various apartments in proportion to the relative percentages of the total rental revenue for the building that each unit produced. In my view, this approach is fundamentally flawed for a number of reasons. First, there is no reason to believe that the value of the residential portion of the building, undivided would be equal to the sum of the values of the individual condominium units. No such assumption can be made, because the highest and best use of the building undivided is not necessarily the same as the highest and best use of each single condominium unit. In 1999, he had described the highest and best use as being "as an apartment condominium". In 2003, he described it as "Existing use 187 residential units". Neither of these is a useful observation. However, the fact that in 2003 he chose to value the entire residential portion of the building by comparison to sales of apartment buildings suggests to me that he was not appraising the apartments in the same use then as he had previously. Second, the dates at which values for the units must be established are spread over the period beginning in December 1994 and ending in August 1997. Mr. Shannon effectively ignored both these problems. With respect to the dates, when cross-examined, he took the position that values did not change significantly during this period. This is completely at odds with his August 1999 opinion where he stated that "Based on all the data however it is considered that values increase 5% from 1995 to 1996 and 10% from 1995 to 1997".[9] In Exhibit R-1 he simply said:

As a result of this analysis, it is the appraiser's opinion that the Fair Market Value of the subject property, as at the effective dates of the Appraisal was:

$17,356,000

This Value relates to the residential portion of the property only.

He acknowledged earlier in his report that the effective dates referred to here are between August 1994 and November 1997, but he simply proceeded as though there were no need to consider trends in the market at all.

[23]     Another serious flaw in Mr. Shannon's evidence is that in the final analysis he relies almost totally on the historical cost for his opinion as to value. Although his evidence contains sections devoted to estimating value by the income approach and by the comparative approach, he explained that the latter two were relied on simply as a check upon the value estimated by the cost approach. His cost approach estimate is based upon two numbers; one is what he called the building replacement cost new, and the other is the estimate of the value of the site as if it were vacant. As the building was new at the effective date of the appraisal, he did not consider there to be any physical, functional or economic depreciation. He derived the cost to build the residential part of the building at the effective dates from the total historical cost of the project, from which he subtracted the cost of the land ($630,000) and the 3.8% of construction costs that he was told was attributable to the non-residential part of the building, producing a replacement cost of $16,514,654. This number, of course, has nothing to do with any estimate of the cost that would be incurred to reproduce the building at the date on which it was completed, or any other date. It is essentially the historical cost of a disastrous construction project, to which he added his estimate of the current value of the land if vacant. Mr. Trent Krauel testified at some length about the construction project. He said that it was a financial disaster for various reasons, with substantial cost overruns, delays, and financing problems that drove the cost far beyond budget. His evidence satisfied me beyond any doubt that this building was completed only at a cost substantially beyond what it would have been worth if offered on the market at its completion.

[24]     Mr. Shannon said at page 13 of his report, in relation to this replacement cost:

... These costs have been reviewed and compared to other known costs and manuals. The costs are considered reasonable in the subject market area at the effective date of appraisal.

When asked about this comparative examination on cross-examination, Mr. Shannon was not able to give any information at all about it. I have serious doubt that he undertook any real review or comparison at all. His evidence on this point cannot be reconciled with that of Mr. Krauel. I accept Mr. Krauel's evidence that the project was, from the builder's point of view, a financial disaster.

[25]     All of this is simply to say that Mr. Shannon did not apply a high level of expertise to his estimate of value by the cost approach. But there is a more fundamental problem with his opinion, and that is that it is contrary to accepted appraisal practice to estimate value of a single residential dwelling by the cost approach if there is a market for the property being appraised, and comparable sales of similar property in the vicinity can be found. Mr. Shannon accepted this principle in giving his evidence, and he also accepted that in the present case, there was a market for the apartments at the relevant time. He went on to make an estimate of value by the direct comparison method, as well as by the income approach. He said, however, that these latter two were only intended to be a check on the accuracy of his estimate by the cost approach. His estimate by the direct comparison method however, was not based on sales of comparable condominium units, but on sales of buildings that he considered to be comparable to 675 Richmond.

[26]     Mr. Shannon's estimates of value by the income approach and by the direct comparison approach cannot be considered reliable. The income approach requires the appraiser to determine the net income producing potential of an investment property and apply to that an appropriate capitalization rate, thereby determining, at least in theory, how much a prudent investor would be willing to pay for the property. One could certainly quibble with the methodology by which Mr. Shannon arrived at the net income that he used. He apparently did not inquire into what inducements, if any, had been given to the tenants on entering into their leases. Such inducements are common in the industry, and certainly will have some effect on the real income realized. Mr. Shannon simply worked from the landlord's list of rents to be paid each month. His estimate of the operating costs to be deducted is largely based on the owner's cost experience for such things as utilities, repairs, maintenance and insurance, and he allowed 4% of effective gross income for management expense. He based this on his discussions with property management firms in the area. The greater difficulty, however, lies in his determination of the capitalization rate to be applied to the net income. He based this on two sales of apartment blocks, one consisting of three condominium buildings in London held by one owner who leased the apartments, and the other a complex in Kitchener, Ontario, consisting of two 18-storey buildings. At the bottom of page 15 of Exhibit R-1 he said this:

The capitalization rate was chosen from market sales. Those sales indicate:

ADDRESS	DATE	PRICE	NET INCOME	CAP RATE
1669/70/71 Jalna	05/98	$15,250,000	$1,180,350	7.74
305-315 Margaret Kitchener	03/97	$33,000,000	$2,435,400	8.17

From this data, he concluded that a capitalization rate of 8% was appropriate. The capitalization rate produced by the Kitchener property is in fact 7.38%, however, rather than 8.17% as calculated by Mr. Shannon. This error has the effect of decreasing the estimate of value by about $1 million, assuming that but for the error he would have chosen a rate of 7.5% rather than 8%. Such an error does not inspire confidence in Mr. Shannon's opinion. Nor does the fact that he was willing to base the capitalization rate on complexes significantly older than the subject building, one of which is in a city significantly closer to the Metropolitan Toronto Area without any consideration of the effect of these factors.

[27]     Mr. Shannon's estimate of value based on the direct comparison method is equally flawed. He based it on two sales of apartment buildings that he considered to be appropriate comparables. One of these was the sale of 675 Richmond Street itself to Daniel Drimmer in July, 2002 at a price of $17,976,123 for the residential portion alone, based on $96,129 per residential unit. The other was the sale of a 142-unit building at 55 William Street in Waterloo, Ontario in December, 2000 for $20,300,000. Both these sales took place significantly later than last of the relevant dates for the present case. It is not necessarily fatal that the sales are after the relevant dates, but in order to be probative they must be shown to be free from extraneous factors, and it must be shown that values have not changed materially during the period between the valuation date and the dates of the later sales: see Roberts and Bagwell v. The Queen.[10] Not only did the Respondent fail to establish that the market was stable from 1994 (or even 1996) until the times of these later sales, but Mr. Shannon accepted that it was a period of rising prices, both in his earlier report, and on cross-examination. I can find no assistance in the evidence of Mr. Shannon.

[28]     My conclusion as to value, then, is this. Each of the 187 units had a fair market value on the date of its first occupation of $75.00 per square foot of floor space. For the reasons that I have given at paragraphs 12 to 14 above, I make no adjustment to this amount for the hypothetical glut on the market that caused Mr. Lansink to discount this amount by about 45%. If I were persuaded that this is a proper factor to take into account, then the allowance that I would make would be to discount the values of those 96 apartments first occupied in the months of July, August, September and October, 1995 by 10%. I consider this to be sufficient to ensure that all the apartments would be absorbed by the market as they became available. The effect of such a discount would be to decrease the aggregate value of the units by $895,860, divided more or less evenly between the two Appellants.[11]

[29]     While the evidence is not entirely clear, it appears from the agreed facts and from admissions read in from the examination for discovery of an officer of the Crown that Richmill reported and paid GST on the basis of the draft appraisal report that it had obtained from Mr. Best in June 1995.[12] That report concluded at pages 51-52 that the aggregate value of the 187 suites making up the residential portion of 675 Richmond Street, was $12,000,000, as at August 1, 1995. Two things should be noted. First, the later appraisal furnished by Mr. Lansink in September 1998 was not completed until some time after the last reporting period that relates to these apartments. Second, Mr. Best's appraisal of the apartments was $2,150,000 higher than Mr. Lansink's 1998 appraisal. The Respondent has conceded that no penalties should have been assessed against the Appellants for the period prior to January 31, 1997,[13] except to the extent that the GST was underreported by Richmill. The remaining issue with respect to the penalty under section 280 of the Act, then, is whether the requirement of due diligence has been met, even though Richmill (until January 31, 1997), and the Appellants (from February to September 30, 1997) reported and paid GST on the basis of estimates of value that were less than the Minister's estimate, and less than the values that I have arrived at.

[30]     Did Richmill (in the period prior to January 31, 1996) and the two Appellants (in the period after January 31, 1996) exercise due diligence in reporting and remitting GST in respect of the deemed self-supply of these 187 apartment units? In my view they did. They were confronted with a difficult valuation issue and, quite properly, they turned to an accredited member of the Appraisal Institute of Canada for an opinion as to the values of the various units. Having obtained that opinion, they based their reporting and remittances of tax on it. Counsel for the Respondent suggested in argument that they deliberately minimized the values of the units and thereby under-reported and under-remitted tax in order to alleviate the corporate group's cash flow problems. This theory was not put to Mr. Krauel on cross-examination, nor is there anything in the evidence that gives any support to it. I have no reason to believe that Mr. Best gave, or was asked to give, anything other than his honest opinion as to value. Richmill and the Appellants did all that is reasonable to require of them to establish the fair market values.

[31]     As the aggregate fair market value of the units owned by each of the Appellants, as determined at paragraph 27 above, is greater than the aggregates determined by the Minister for the purpose of the reassessments, the appeal must fail insofar as the tax exigible is concerned. However, the appeals will be allowed and the reassessments referred back to the Minister for reconsideration and reassessment on the basis that the Appellants are not liable to a penalty under section 280 of the Act. The Respondent has been successful on the issue which occupied almost all the time at trial, and is therefore entitled to one set of costs.

Signed at Ottawa, Canada, this 18th day of June, 2004.

"E.A. Bowie"

Bowie J.

APPENDIX "A"

DATES OF FIRST OCCUPATION

1994		1995
November	1	January	5
December Total	2 3	February March	10
		April May	2 1
		June	8
		July	21
		August	19
		September	41
		October	15
		November	9
		December Total	6 137
1996		1997
January	3	January	1
February		February
March April	4	March April	2 1
May June July	2 1 2	May June July	3 6
August September	3 9	August September	3 5
October	1	Total	21
November	1
December Total	26

APPENDIX "B"

Effect of applying a 10% discount to sales from July 1995 to October 1995

The 10% abatement to value for four months in 1995 would reduce the aggregate values according to the table below:

Type	No. of Unit	Area (sq.ft.)
1A	8	x              918    =	7,344
1B	16	x              920    =	14,720
2A	35	x           1,325    =	46,375
2B	31	x           1,435    =	44,485
2D	3	x           1,270    =	3,810
4A-L	1	x           1,624    =	1,624
5A-U	1	x           1,090    = Total sq. ft.	1,090 119,449

               119,449 sq. ft. x $75 = $8,958,600 x 10% = $895,860

CITATION:

2004TCC448

COURT FILE NO.:

2000-3460(GST)G and 2000-3463(GST)G

STYLE OF CAUSE:

27 Cardigan Inc. and 33 Cardigan Inc. and Her Majesty the Queen

PLACE OF HEARING:

Toronto, Ontario

DATE OF HEARING:

April 22 and 23, 2003

REASONS FOR JUDGMENT BY:

The Honourable Justice E.A. Bowie

DATE OF JUDGMENT:

June 18, 2004

APPEARANCES:

Counsel for the Appellant:

David C. Nathanson, Q.C. and Adrienne K. Woodyard

Counsel for the Respondent:

Peter M. Kremer, Q.C. and Rosemary Fincham

COUNSEL OF RECORD:

For the Appellant:

Name:

David C. Nathanson, Q.C.

Firm:

McDonald & Hayden

For the Respondent:

Morris Rosenberg Deputy Attorney General of Canada Ottawa, Canada

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