[OFFICIAL ENGLISH TRANSLATION]
2000-381(IT)G
BETWEEN:
DENIS GAGNÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on October 9, 2001, at Sherbrooke, Quebec, by
the Honourable Judge Alain Tardif
Appearances
Counsel for the Appellant: Richard Généreux
Counsel for the Respondent: Nathalie Labbé
JUDGMENT
The appeal from the assessment made under the Income Tax Act for the 1994 taxation year is allowed, with costs, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 29th day of January 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 2nd day of May 2003.
Erich Klein, Revisor
[OFFICIAL ENGLISH TRANSLATION]
Date: 20020129
Docket: 2000-381(IT)G
BETWEEN:
DENIS GAGNÉ,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Tardif, J.T.C.C.
[1] This is an appeal for the 1994 taxation year.
[2] The issues are as follows:
· Could the appellant be assessed after the normal reassessment period for the 1994 taxation year as a result of his waiver?
· What was the fair market value on February 22, 1994, of the lots located at 100, 142, 150 and 158 Rue Des Lilas in Victoriaville?
· What was the amount of the capital gain realized by the appellant on the deemed disposition of the aforementioned lots on February 22, 1994?
[3] The respondent informed the appellant in July 1998 of his intention to proceed with a general tax audit of his file relating to the operation of the bar doing business under the trade name Bar Tabou, for the period from January 1, 1995 to December 31, 1997.
[4] At or around the same time, on an undetermined date, the auditor responsible was questioning his personal file with regard to the fair market value of the immovables, that is, the lots at 100, 142, 150 and 158 Rue Des Lilas in Victoriaville. The lots were part of the larger whole that was lot 85 in the parish of St-Victoire, and the appellant had filed the election form (T664) in order to have a deemed capital gain in respect of the said lots on February 22, 1994.
[5] The appellant explained the circumstances of the audit, saying that he had relied on his accountant. The audit was in fact conducted from his accountant's place of business.
[6] Some time after the audit commenced, the appellant says, he received a call asking him to go to his accountant's office to sign the document which proved to be a waiver.
[7] Knowing nothing of the content or consequences of such a waiver, he candidly asked his accountant for advice before signing, and did so before the auditor, who was present at the time.
[8] The auditor then asked him whether he was convinced that the value he had attributed to his lots was the actual fair value.
[9] The appellant answered that he was, spontaneously giving the source and origin of the criteria used to determine the attributed value, thus confirming that that value was the fair market value. He then agreed to sign the waiver without any further explanation.
[10] After signing the waiver, he learned from those present that it was now extremely important that the attributed value correspond to the actual value of the lots in February 1994. To demonstrate that it did, he was told, he would eventually have to rely on experts to prove it before the Court. Overwhelmed and shaken at the prospect of all the unknowns that lay before him, he then severely reprimanded his accountant for not explaining everything to him before he had signed.
[11] He explained how he had determined the value of his lots. Having received two unsolicited offers from major real estate developers known in the Victoriaville region, namely an offer for $150,000 and another for $180,000, he had calculated the average and considered that that was the actual fair value of those lots. The evidence revealed that the developers were shrewd businessmen who regularly purchased lots in order to build residences on them.
[12] Having acquired the lots at issue in order to build a pension fund for himself, he had turned down the offers, thinking that, if the lots were worth that much to real estate developers, they were worth the same to him. In addition, discussions with one of the two developers had led him to believe that there was still a good possibility that the same lots would appreciate even more in value, in view of the announcement of future extensive development projects in the region.
[13] The auditor, Pierre Drapeau, who handled the file for the respondent, relied on one of the experts at his office, Alain Lortie, an appraiser, who was thus brought in and was involved in analyzing the file from the outset. His contribution was also required in reviewing the file.
[14] Before going forward with the analysis of the case from the standpoint of the value of the immovables, I should first dispose of a preliminary point, namely whether the Minister could assess the appellant after the normal reassessment period for the 1994 taxation year had expired. The relevant evidence on this point was scant. First, there was the content of the waiver that was signed and that was worded as follows (Exhibit A-1, Tab 17):
[TRANSLATION]
WAIVER IN RESPECT OF THE
NORMAL REASSESSMENT PERIOD
|
Waiver The normal reassessment period referred to in subsection 152(4) of the Income Tax Act, within which the Minister may reassess or make additional assessments or assess tax, interest or penalties under Part I of the Act is hereby waived for the taxation year indicated above, in respect of:
All the tax implications arising from the revision of the capital gain and all the tax implications arising from the revision of the business investment loss.
Indicate applicable part |
|
Signature of taxpayer Date Pierre Gagné September 10, 1998 |
|
Position or Office
|
[15] The evidence revealed that the wording regarding the object of the waiver was inserted in the appellant's absence. However, the appellant signed in the presence of his accountant and the respondent's agent following summary explanations. According to the appellant, the consequences were not explained to him more clearly until after he had signed.
[16] The appellant stated that he had very little education and no knowledge of or experience in tax matters, and he had thus relied on his accountant.
[17] The evidence showed that the discussions prior to the signing had taken place in the presence of all the persons concerned, the number of whom, however, remains uncertain. The appellant said that he remembered that the Minister of National Revenue (the "Minister") had had two representatives there, whereas the auditor stated that he was alone at that time.
[18] The appellant's accountant apparently did not think it appropriate to withdraw with the appellant in order to inform him of the extent of his rights and obligations, the number of which, however, remained uncertain. In those circumstances, was the waiver signed by the appellant valid, and, in particular, did it allow the Minister to assess after the normal reassessment period for the 1994 taxation year?
[19] The object of a waiver must be expressly stated and the scope of the specified field of application must also be interpreted restrictively. In case of doubt as to the scope and extent of the waiver, that doubt must be resolved in favour of the taxpayer.
[20] That being the case, was the waiver signed by the appellant sufficiently detailed and clear to permit the reassessment? Of course, for a layman, the wording of the waiver was not very clear as to either its object or its consequences. In light of that, did the respondent have an obligation to express all the consequences of the waiver in layman's terms so that the consent sought from the appellant would be more informed?
[21] Despite the accountant's presence and notwithstanding the fact that ignorance of the law is never a valid excuse, the respondent could have been more clear. However, the respondent was entitled to assume that providing clarification, details or explanations concerning the effects of the waiver and necessary to obtaining fully informed consent, was the responsibility of the appellant's accountant, who was on the spot at the time the appellant gave his consent.
[22] Did the accountant fail to discharge his professional obligations? That is a question which it is not within my jurisdiction to answer. If there was such a failure or if professional misconduct was committed, that cannot be attributed to the respondent. The same is true of the consequences, no matter how serious and far-reaching they might be. The appellant submitted that the consequences of the waiver were far-reaching, indeed even disproportionate, and suggested that the requirements with respect to the waiver should have been stricter or more rigid.
[23] The severity and gravity of the consequences of the application of the provisions of the Act do not reduce or affect the rigour of the conditions of application; in other words, the extent of the tax consequences resulting from an overstatement of fair market value must not be an issue or a relevant factor in assessing the quality of a waiver. A waiver has its full effect and is unassailable if the essential conditions for the validity of a contract have been met, which was the case in this instance. The waiver signed by the appellant was thus legal, and all the consequences thereof apply to the appellant.
[24] I shall therefore move on to the question of the valuation of the lots.
[25] The evidence mainly concerned the fair market value of the lots at 100, 142, 150 and 158 Rue Des Lilas in Victoriaville. The appellant's evidence consisted of various elements. First of all, he explained the method he had used to establish the value reported at the time the election was made. He explained that he had received two unsolicited offers from real estate developers-one for $150,000, the other for $180,000-for all the lots he owned. He had used the two offers to establish an average, which he attributed to the lots as their fair market value in 1994.
[26] To support and confirm the accuracy of his valuation, he added to his evidence three notarial deeds by which certain lots belonging to the whole were given in guarantee of debts of $4,500 and $6,300 owed following work performed by Services de chauffage Victoriaville and by Hamel et Hamel Inc. The third guarantee was given so that he could obtain a line of credit. The deeds show the following:
|
Lot dimensions |
Amount of debt guaranteed |
Nature of obligation |
Creditor's name |
|
100' x 100' |
$4,500 |
account for goods and for services rendered |
Services de chauffage Victoriaville |
|
100' x l40' |
$6,300 |
same |
Hamel et Hamel Inc. |
|
200' x 200' |
$18,000 |
in 1983 as a guarantee in order to obtain revolving credit |
Caisse populaire |
[27] The appellant also filed various contracts: a contract entered into between the estate of Clément Pépin and Les Constructions André Jacques Inc. on March 2, 1988, another contract between Clément Pépin (1978) Ltée and Les Constructions André Jacques Inc. dated August 23, 1989, and, lastly, a contract of sale between the estate of Clément Pépin and Les Constructions André Jacques Inc. entered into on September 11, 1992.
[28] In support of his valuation, the appellant also referred to various appraisal sheets for immovable properties located in various places in the city of Victoriaville.
[29] He also called as a witness André Jacques, the son of the man who had made the offer of $180,000, himself a developer with experience in acquiring lots. Mr. Jacques explained that he generally purchased a limited number of lots for the purpose of quickly erecting buildings on them. Being often required to absorb infrastructure costs, he did not have enough capital to acquire a very large number of lots at one time as part of a long-term development plan.
[30] Lastly, André Capistran, a real estate agent and a municipal councillor in Victoriaville, explained that he had a good knowledge of the location in question and the relevant experience to be able to make comments and observations on the value of the lots. As a real estate agent and municipal councillor whose duties were related to the assessment roll, he had obtained a number of listings for the sale of comparable lots. Based on listings obtained in the area in question, the witness Capistran estimated that the value attributed to the lots at issue was entirely justified and reasonable.
[31] In substance, the appellant's evidence consisted of a set of data and facts and of testimony by persons with experience and roots in the area concerned.
[32] The respondent called as a witness an expert with all the appropriate academic training and qualifications required to prepare the appraisal which he filed and explained. He had extensive practical experience with respect to the entire territory served by the office of the Sherbrooke division, of which the Victoriaville area is a part. Alain Lortie testified at length. His appraisal report was prepared and submitted in accordance with good practice in the field. The report filed is a substantial document, containing a long list of comparables, some of which were described as more relevant than others.
[33] Mr. Lortie had all the qualifications and expertise needed to determine the value of an immovable property. In his capacity as an expert appraiser, he explained and supported his appraisal report. Highly articulate and very familiar with good practice in his field, he submitted a substantial file to support his conclusion as to the fair market value on February 22, 1994.
[34] The evidence also revealed that Mr. Lortie had been involved in the handling of the appellant's file from the very beginning of the audit. He had participated and collaborated at all stages of the case.
[35] Mr. Lortie's testimony as an expert definitely raises an ethical problem. I believe his contribution went beyond the acceptable bounds of an expert's role in that he had taken sides in the case long before his mandate to act as an expert for the Court.
[36] In his testimony, Mr. Lortie showed that he had a particular interest in supporting his appraisal. That is understandable and may be explained by the fact that he had been called upon to work in the case from the outset. Mr. Lortie took a position in the first stage, that is to say, during the audit. He subsequently stuck to his appraisal, which formed the basis of the reassessment. He furthermore confirmed his position at the revision stage, and did so without doing as exhaustive a study or analysis as that conducted for his appraisal report. In other words, Mr. Lortie probably did not take all the steps described to the Court when he determined the value of the land the first time, during the audit. The research and analysis came later, when he prepared his case for the Court. This is a rather curious way of going about it.
[37] Similarly, the fair market value must not be determined on the basis of a vendor who is forced to sell or a purchaser who is obliged to buy. It seems to me that the minimum, indeed fundamental, qualification of an appraiser is that he have no interest in either the process or the result. Yet, Mr. Lortie submitted at the very outset an initial evaluation that was certainly not supported by numerous comparables. Fate would appear to have been on Mr. Lortie's side as his extensive research merely confirmed his first appraisal resulting from what was likely rather summary work.
[38] With a perfect mastery of good appraisal practice, Mr. Lortie proceeded in accordance with a methodology entirely consistent with the requirements. Nevertheless, I believe that the comparables used were selected in a less than perfectly transparent manner. I am referring in particular to the deliberate exclusion of certain transactions on the strength of utterly inadequate explanations.
[39] Furthermore, I did not understand why the lots appraised were analyzed in the context of an immense whole, when all the data and information called instead for an individual approach. The explanations as to why everything was appraised in the context of the entire area were neither reasonable nor acceptable, based on the expert's own arguments that the quality of the soil was highly variable in that location, that access was a problem and infrastructure costs prohibitive.
[40] A number of factors called for an individual approach. Three in particular required that sort of approach:
- the appellant had acquired individual lots separated from one another;
- the municipality had appraised them separately;
- a look at the background of the lots showed that they had been considered as separate entities; that was particularly apparent from the fact that the appellant had given mortgage guarantees affecting the lots separately.
[41] Mr. Lortie even admitted that the larger the area, the greater the downward effect on value; in other words, the price per square foot of a very large area was considerably less than that of a small area. He thus acknowledged at the outset that he had artificially adopted an approach unfavourable to the appellant.
[42] Mr. Lortie regularly referred to the approach he himself had ruled out, namely the subdivision method, stating that it was not appropriate. Even if the lots could not be built upon quickly, they could be the subject of a transaction since they were very precisely identifiable and defined.
[43] Mr. Lortie took into consideration all sorts of assumptions with negative impact on the value of the immovables at issue; I refer in particular to the following:
(1) the lack of interest in the site;
(2) the possibility of a very high water table;
(3) problem soil: clay and sand;
(4) the servitude prohibiting access;
(5) the prohibitive infrastructure costs;
(6) the difficulty of developing due to the fact that there were a number of owners, thus making it difficult to achieve any consensus on establishing and respecting infrastructure;
(7) the numerous by-law restrictions.
[44] There was no basis in the evidence adduced for attributing these defects, faults or shortcomings to the appellant's lots. These were aspects of the larger area as a whole. It would have been helpful for Mr. Lortie to speak at somewhat greater length on the shortcomings of the appellant's lots rather than those of the whole area in which they were located.
[45] A number of defects simply did not affect the lots owned by the appellant, and certain deficiencies cannot be attributed to the lots at issue. I refer in particular to the soil quality, the servitude prohibiting access, the proximity of access routes and the prohibitive infrastructure costs.
[46] The appellant's lots had obvious good qualities which were not considered at all. I refer to the fact that they were identifiable, that they were near access routes, that, as a result of their location, they were more likely to be developed than lots at the extremities of the area considered.
[47] The expert Lortie dismissed out of hand some undeniable facts, namely that certain lots had been the subject of mortgage guarantees. He contended that these were irrelevant factors.
[48] The work required in preparing a real estate appraisal is an exercise that must meet certain objective requirements. Determining actual value involves research that must lead to a conclusion that must stem from the consideration of all available elements. Disregarding, for no valid reason, factors that affect directly the value of an immovable property definitely contributes to the discrediting of the results or, at least, to the tainting of the essential transparency of the process leading to the determination of the value.
[49] There are a number of definitions of actual value. Although they may vary or differ, the variations and distinctions are much more a matter of language than content, which always remains appreciably the same.
[50] There are various objective approaches and methods in determining the actual value of an immovable, such as the economic approach, the replacement cost approach, the assessed value approach and the comparable value approach. Having regard to the particular characteristics of the property to be appraised, experts often favour one method over another. In some cases, they take the average of the results obtained through the application of the various methods. Choosing one method over another is an entirely subjective decision.
[51] In the instant case, the available methods or formulas were limited in that unbuilt spaces or lots were involved, thus giving the comparables formula particularly great weight.
[52] The quality and quantity of information, particularly in the comparables approach, are also essentially subjective matters, especially when it comes to explaining the relevance of information used or disregarded.
[53] For an expert thoroughly familiar with good practice in his field, it is possible, and indeed very easy, to submit a piece of work that is consistent with the various applicable guidelines and constraints.
[54] Knowledge of good practice and compliance therewith in preparing an appraisal are not, however, the only characteristics that must be present in quality work. It is equally important that the expert called upon to conduct such an appraisal be independent of the interests involved.
[55] An expert given a mandate to determine the value of an immovable must have no connection with the interests of the person who orders the appraisal, otherwise he risks considerably diluting the objective value of his work.
[56] Did the expert Lortie have such detachment and independence? I do not believe so. Quite the contrary, he was, rather, in a situation in which he was both judge and party. His involvement in the case from the start of the audits disqualified him or, at the very least, discredited the value of his work.
[57] Appraisal work is extremely difficult. Experts very often obtain results that meet their mandators' expectations although using the same methods and procedures and doing so with the greatest regard for good practice. The difference between results obtained concerning value is essentially determined by the comparables used. The Court must therefore focus its energy on identifying those comparables.
[58] In that regard, the appellant adduced reasonable evidence supported by plausible and, above all, highly realistic information. Of course, there were no thick files, elaborations on the many theories involved or learned reasons explaining why one approach was adopted over another. Does that have the effect of disqualifying or discrediting an approach whose principal quality was common sense? I do not think so. One thing is certain and that is that the actual value of an immovable can be determined without it being absolutely necessary to rely on a professional in the field or to submit a thick appraisal report.
[59] In the instant case, the appellant established the value of his lots using a rational formula completely consistent with good appraisal practice, that is, by taking the average of unsolicited offers made by persons with very good knowledge of the real estate market. The value assigned to the lots moreover proved to be consistent with estimates prepared by persons working in fields related to that market. I am referring to the various creditors who agreed to have their claims guaranteed by clearly identified lots.
[60] Having acquired the lots for the purpose of building a pension fund for himself, the appellant turned down the offers, thinking that if the lots were worth that much to developers, they were worth just as much to him, particularly since certain discussions with one of the two developers had led him to believe that there was still room for a greater increase in value.
[61] In this case, the respondent's expert did not have that independence which would have enabled him to do objective work that would stand up against any criticism and have the essential quality of impartiality. For that reason, I take no account of the value he attributed to the lots.
[62] As to the value that the appellant attributed to his lots, I am of the opinion that it was reasonable and consistent with the realities of the market at the time he made his election. He determined the value based on information whose quality was not disputed. In support of the validity of the value assigned to his lots, the appellant presented evidence of a very acceptable degree of relevance and quality. Consequently, I find that the value attributed by the appellant was correct and plausible.
[63] For these reasons, the appeal is allowed, with costs.
Signed at Ottawa, Canada, this 29th day of January 2002.
|
"Alain Tardif" |
J.T.C.C.
Translation certified true
on this 2nd day of May 2003.
Erich Klein, Revisor