Carvest Properties Limited v. The Queen

Carvest Properties Limited v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-03-18
Neutral citation
2021 TCC 21
File numbers
2017-345(GST)G
Judges and Taxing Officers
Gabrielle St-Hilaire
Subjects
Part IX of the Excise Tax Act (GST)
Decision Content
Docket: 2017-345(GST)G
BETWEEN:
CARVEST PROPERTIES LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on September 9, 10, 11 and 12, 2019, at London, Ontario and on October 20 and 21, 2020, at Ottawa, Ontario; final submissions received December 7, 2020.
Before: The Honourable Justice Gabrielle St-Hilaire
Appearances:
Counsel for the Appellant:
David D. Robertson
Steven Raphael (2019 hearing dates)
Maude Lussier-Bourque (2020 hearing dates)
Brittany Rossler (October 20, 2020)
Counsel for the Respondent:
Martin Beaudry
Alexander Nguyen (2019 hearing dates)
Judith Lemieux (2020 hearing dates)
JUDGMENT
The appeal from the reassessments of goods and services tax made under Part IX of the Excise Tax Act for reporting periods between December 1, 2008 and June 30, 2009 is dismissed.
In light of the concessions made at the beginning of the hearing:
i) The matter is referred back to the Minister of National Revenue for reassessment on the basis that the reassessments for reporting periods between July 1, 2009 and July 31, 2011, including the reassessments of the new residential rental property rebate applications, are vacated; and
ii) The appeal for the reporting period beginning December 1, 2011 and ending on December 31, 2011, is dismissed.
Costs are awarded to the Respondent. The parties shall have 30 days from the date of this Judgment to reach an agreement on costs and to so advise the Court, failing which the Respondent shall have a further 30 days to serve and file written submissions on costs and the Appellant shall have a further 30 days to serve and file a written response. Any such submissions shall not exceed 10 pages in length. If the parties do not advise the Court that they have reached an agreement and no submissions are received within the applicable time limits, costs shall be awarded to the Respondent in accordance with the Tariff.
Signed at Ottawa, Canada, this 18th day of March 2021.
“Gabrielle St-Hilaire”
St-Hilaire J.
Table of contents
I. Introduction 1
II. Preliminary Matters 2
III. Issue 2
IV. Background 3
V. Analysis 4
A. Legislative Framework – Self-supply Rules 4
B. Recognized Approaches to Valuation 10
C. Valuation of the Richmond Property 11
(1) Carvest’s approach to valuation – the cost plus 6% approach 11
(2) Independent expert, Mr. Grant Uba’s approach to valuation – the income approach 18
(3) CRA’s approach to valuation – the direct comparison approach 21
(4) Parties’ submissions on CRA’s valuation and findings 24
i) Valuation method 25
ii) Comparables 31
iii) Absorption discount 33
VI. Conclusion 35
VII. Costs 36
Citation: 2021 TCC 21
Date: 20210318
Docket: 2017-345(GST)G
BETWEEN:
CARVEST PROPERTIES LIMITED,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
St-Hilaire J.
I. Introduction
[1] This is an appeal by Carvest Properties Limited (hereinafter referred to as Carvest or the Appellant) from reassessments under Part IX of the Excise Tax Act [1] (ETA) for reporting periods between December 1, 2008 and December 31, 2011.
[2] Carvest, an Ontario corporation founded in 1986 by Mr. Joseph Carapella, is in the business of real estate development and residential leasing in southern Ontario. Over the years, Carvest built over fifty residential apartment buildings and seven or eight condominium projects.
[3] Ultimately, this case is about the fair market value (FMV) of leased apartments registered as condominium units in a residential complex that is subject to the self-supply rules in section 191 of the ETA.
[4] In filing its goods and services tax/harmonized sales tax (GST/HST) returns for the periods in issue in this appeal, Carvest self-assessed GST/HST based on the FMV of the entire building as determined by what will be referred to as the cost plus 6% method of valuation. The Minister reassessed Carvest for additional GST/HST based on the FMV as determined by using the direct comparison method of valuation applied to the individual condominium units.
II. Preliminary Matters
[5] At the beginning of the hearing, the parties advised the Court that some of the periods were no longer in issue. In light of the concessions made by the Respondent, the reassessments for GST/HST for periods ranging from July 1, 2009 to July 31 2011 (periods numbered 8 to 32 in Appendix A) are vacated. The reassessments of the new residential rental property rebate applications for these periods are also vacated.
[6] For efficiency reasons, the Appellant abandoned its appeal for the reporting period from December 1, 2011 to December 31, 2011 (period numbered 33 in Appendix A). Hence, the appeal for this period is dismissed.
[7] In light of the concessions made at the beginning of the hearing, the reassessments in issue before the Court are the reassessments for GST for reporting periods between December 1, 2008 and June 30, 2009 (see Appendix B). The result of the paring down of the reporting periods under appeal is that, out of the 675 units in four residential apartment buildings originally at issue, there are now 89 units in one building at issue.
III. Issue
[8] The core issue before the Court is whether the Minister correctly determined the FMV of the condominium units situated at 1985 Richmond Street in London, Ontario in assessing the GST for the reporting periods from December 1, 2008 to June 30, 2009 (hereinafter the relevant periods). More specifically, the issue concerns the proper valuation methodology to be applied in determining the FMV of units, registered as condominium units, in a residential apartment building when applying the self-supply rules in section 191 of the ETA.
[9] In self-assessing using the cost plus 6% method of valuation, Carvest established the FMV of the entire building, inclusive of all 137 units, to be $22,043,071.65. [2] The Canada Revenue Agency (CRA), using the direct comparison approach, determined the combined value of the 137 units to be $33,850,000. [3]
IV. Background
[10] In the course of six days of hearings, the Court heard from seven witnesses, four for the Appellant and three for the Respondent. There was a significant amount of time spent on testimony the purpose of which appeared to be to establish a persistent approach, [4] a pattern of behaviour by CRA officials as it pertained to properties that were not the subject of the appeal. Some of those properties had been the subject of prior objections, appeals, and settlements. More importantly, others were properties that were currently under audit, documentary and oral evidence of which was not allowed. As expressed during the hearing, it is my view that such evidence is not particularly helpful in determining the issue in this appeal as the conduct of the Minister or of CRA officials is not relevant to the fair market value of the relevant property nor to the appropriate valuation method to be applied in this particular case.
[11] According to Carvest’s founder and president, Mr. Joseph Carapella, Carvest has been in the business of developing, owning and renting out apartment buildings in southern Ontario for over 30 years.
[12] The building at issue in this appeal is a 12-storey apartment building containing 137 units situated at 1985 Richmond Street in London, Ontario. Carvest started the first steps in developing this project, acquiring permits and purchasing the land in two stages between 2003 and 2005. The building was ready for occupancy by the end of 2008.
[13] Carvest is part of the Tricar Group. [5] Tricar entered into tenancy agreements for the Richmond property and the first lease, dated October 19, 2008, was for occupancy of unit 101 for a one-year term beginning December 1, 2008. [6]
[14] For many years, landlords in London, Ontario and other surrounding municipalities, registered their apartment buildings under condominium plans to ensure that they were assessed for municipal taxes at the residential rate rather than at the commercial rate. This continued until 2017 when the government of Ontario amended the relevant legislation to prohibit municipalities from assessing tax on multi-residential apartment buildings at a higher municipal tax rate than residential properties. [7]
[15] Through its bare trustee, 1967 Richmond London Limited, Carvest registered the condominium plan for the Richmond property on May 7, 2009. [8] Mr. Carapella testified that he never intended to sell the individual units but that he registered them as condominiums to attract the municipal tax at the residential rate which was about half that of the commercial rate.
V. Analysis
A. Legislative Framework – Self-supply Rules
[16] This case involves the application of the self-supply rules in section 191 of the ETA.
[17] Generally, self-supply rules are intended to ensure that GST/HST attaches to the construction or the substantial renovation of a residential complex that is builder-occupied or rented out by the builder. The ETA accomplishes this by deeming a sale to have occurred: the builder is deemed to have made a taxable supply by way of a sale of the residential complex and is deemed to have repurchased the residential complex. The builder is deemed to have paid the GST/HST as a recipient of the supply and to have collected the GST/HST as the supplier. To put it bluntly, the builder is deemed to have sold the complex to themself or itself. The amount of tax deemed to have been paid and collected is calculated on the FMV of the complex and is included in net tax calculated under section 225 of the ETA and must be remitted to the CRA.
[18] In Polygon Southampton Development Ltd. v R, [9] Justice Malone, writing for the Federal Court of Appeal, commented on the purpose of the self-supply rules as follows:
23 In my analysis, these rules for new homes were implemented in order to create a level playing field as between builder lessors and non-builder lessors, as well as between builder occupiers and non-builder occupiers. As noted above, when a builder builds a new home and sells it, GST is payable on the sale. Thus, a non-builder who wants to purchase a new home and lease it to another person, or occupy it himself, would have to pay GST on his purchase. Hence, absent the self-supply rules, a builder who leases or occupies a new home would have a competitive advantage over the non-builder through the realization of tax savings, as such occupation would not create a taxable supply, and the lease of the home to another would be exempt from GST, as residential leases are exempt under Schedule V, Part 1, section 6. […] Another purpose of these provisions is to ensure that a new home is taxed at its full fair market value as soon as it is occupied as a new home, so that a lease or personal occupancy cannot postpone or exempt the application of the GST. [10]
[19] Section 191 of the ETA reads, in part, as follows:
191 (1) For the purposes of this Part, where
(a) the construction or substantial renovation of a residential complex that is a single unit residential complex or a residential condominium unit is substantially completed,
(b) the builder of the complex
(i) gives possession or use of the complex to a particular person under a lease, licence or similar arrangement (other than an arrangement, under or arising as a consequence of an agreement of purchase and sale of the complex, for the possession or occupancy of the complex until ownership of the complex is transferred to the purchaser under the agreement) entered into for the purpose of its occupancy by an individual as a place of residence,
(ii) gives possession or use of the complex to a particular person under an agreement for
(A) the supply by way of sale of the building or part thereof in which the residential unit forming part of the complex is located, and
(B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment,
other than an agreement for the supply of a mobile home and a site for the home in a residential trailer park, or
(iii) where the builder is an individual, occupies the complex as a place of residence, and
(c) the builder, the particular person, or an individual who has entered into a lease, licence or similar arrangement in respect of the complex with the particular person, is the first individual to occupy the complex as a place of residence after substantial completion of the construction or renovation,
the builder shall be deemed
(d) to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession or use of the complex is so given to the particular person or the complex is so occupied by the builder, a taxable supply by way of sale of the complex, and
(e) to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times.
[…]
Self-supply of multiple unit residential complex
(3) For the purposes of this Part, where
(a) the construction or substantial renovation of a multiple unit residential complex is substantially completed,
(b) the builder of the complex
(i) gives, to a particular person who is not a purchaser under an agreement of purchase and sale of the complex, possession or use of any residential unit in the complex under a lease, licence or similar arrangement entered into for the purpose of the occupancy of the unit by an individual as a place of residence,
(i.1) gives possession or use of any residential unit in the complex to a particular person under an agreement for
(A) the supply by way of sale of the building or part thereof forming part of the complex, and
(B) the supply by way of lease of the land forming part of the complex or the supply of such a lease by way of assignment, or
(ii) where the builder is an individual, occupies any residential unit in the complex as a place of residence, and
(c) the builder, the particular person, or an individual who has entered into a lease, licence or similar arrangement in respect of a residential unit in the complex with the particular person, is the first individual to occupy a residential unit in the complex as a place of residence after substantial completion of the construction or renovation,
the builder shall be deemed
(d) to have made and received, at the later of the time the construction or substantial renovation is substantially completed and the time possession or use of the unit is so given to the particular person or the unit is so occupied by the builder, a taxable supply by way of sale of the complex, and
(e) to have paid as a recipient and to have collected as a supplier, at the later of those times, tax in respect of the supply calculated on the fair market value of the complex at the later of those times.
[20] Subsection 191(1) of the ETA applies to a residential complex that is a single unit residential complex or a residential condominium unit. Subsection 191(3) of the ETA applies to a multiple unit residential complex (MURC) defined in subsection 123(1) as “a residential complex that contains more than one residential unit, but does not include a condominium complex.” Hence, in simple terms as relevant for the purposes of this matter, subsection 191(3) applies to apartment buildings while subsection 191(1) applies to residential condominium units.
[21] Although both provisions contain a self-supply rule that requires the builder to self-assess tax on the FMV of the property, there is an important distinction. Subsection 191(3) requires that the builder of an apartment building self-assess on the FMV of the entire building at the time the first unit is rented out while subsection 191(1) requires that the builder of condominium units self-assess on the FMV of each condominium unit as each unit is rented out.
[22] The Explanatory Notes issued by the Minister of Finance in May 1990 confirm the above general statements and read as follows:
Subsection 191(1) Self-supply of single unit residential complex or residential condominium unit
This subsection applies the self-supply rule to newly constructed or substantially renovated single unit residential complexes (detached houses, semi-detached houses and rowhouse units) and residential condominium units. It treats the builder of a substantially completed complex or unit as having made a taxable supply of the complex or unit either if it is rented out or, if the builder is an individual, it is occupied by the builder as a place of residence. Where this occurs, the builder is liable to pay GST at the later of the time the construction or renovation is substantially completed and the time possession is given to another person under the rental agreement or the builder moves in. The GST is to be calculated on the fair market value of the complex or unit at that later time.
Subsection 191(3) Self-supply of multiple unit residential complex
In the case of a substantially completed multiple unit residential complex, such as an apartment building, the subsection treats the builder/landlord as having made a taxable supply of the entire complex at the time the first unit is rented out or, if the builder is an individual, occupied by the builder. The builder is required to remit GST on the fair market value of the complex as of that time. Where units are rented out before the complex is substantially complete, the self-supply rule applies at the time of substantial completion. [11]
[23] Both parties agree that subsection 191(1) of the ETA applies to the units in the Richmond property. What appears to complicate matters is the fact that Carvest built the Richmond property as a rental apartment building but registered it as a condominium for municipal tax reasons. Subsection 191(3), which applies to a MURC, requires the builder to self-assess for GST on the entire building; hence, the builder must determine the FMV of the entire building at that time. However, subsection 191(1), which applies to condominium units, requires the builder to self-assess for GST for each unit when it is first leased; hence, the builder must determine the FMV of each unit as it is rented out.
[24] Assessing the FMV of condominium units under subsection 191(1) of the ETA by trying to treat the property as an apartment building built for rental purposes, normally self-assessed as a MURC under subsection 191(3), is like trying to put square pegs in round holes. Had the property been a MURC, the self-supply rules would have required that Carvest self-assess and report GST on the FMV of the entire building at once and not on the FMV of each unit as it was leased over a period of approximately 16 months. However, the property that is the subject of this appeal is not a MURC.
[25] As noted earlier, Carvest registered the units in the Richmond property under a condominium plan, albeit for municipal tax reasons. I find on the evidence submitted at the hearing that Carvest intended to register and did register the units under a condominium plan such that they meet the definition of residential condominium unit provided in subsection 123(1) of the ETA. [12]
[26] Given that the conditions of application found in paragraphs 191(1)(a), (b) and (c) are met, paragraphs (d) and (e) are triggered and the builder, is deemed:
i) to have made and received a taxable supply, by way of sale of the complex, at the later of the time the construction is substantially completed and the time possession or use is given to the particular person; and
ii) to have paid and collected tax in respect of the supply calculated on the fair market value of the complex at the later of those times.
[27] These latter provisions deem a sale to have occurred and oblige the builder, to self-assess tax on the FMV of the condominium units as each unit is leased.
[28] Hence, this case is about the FMV of the condominium units in the Richmond property for the purposes of the application of the self-supply rule in subsection 191(1) of the ETA. In turn, it is about the appropriate approach that should be used to establish that FMV.
B. Recognized Approaches to Valuation
[29] Both parties agree, and it is the testimony of CRA appraiser Mr. Ron Duda and appraiser and independent expert Mr. Grant Uba, that there are three generally recognized approaches to the valuation of property: i) the direct comparison approach; ii) the cost approach; and iii) the income approach. In their appraisal reports of the Richmond property, both Mr. Duda and Mr. Uba describe the three approaches. [13]
[30] In Southpark Estates Inc. v Canada, [14] Justice Pelletier, writing for the Federal Court of Appeal, provided the following short summary describing the three valuation approaches:
14 … To obtain an assessment of fair market value under the Income approach, one calculates the property's potential to earn a profit, and capitalizes that profit on the basis of the desired rate of return. Simply put, if a property generates a profit of $100,000 per year, an investor who wishes to earn a 10% return on his investment would be willing to pay $1,000,000 for the property. The Cost approach attempts to determine the value of the property by the cost of replacing it with new construction and accounting for the “new for old” factor by means of depreciation. The Comparison approach seeks to establish fair market value by comparing the subject property to other market transactions of similar properties subject to adjustment to reflect differences in circumstances. [15]
[Emphasis added]
[31] At the hearing, the parties introduced evidence on the approach to the valuation of the Richmond property applied by i) Carvest (the cost plus 6% approach); ii) Carvest’s independent expert, Mr. Uba (the income approach); and iii) CRA appraiser, Mr. Duda (the direct comparison approach). I hasten to add that, although the Appellant asked the Court to qualify Mr. Uba as an expert “to provide his expert opinion with respect to the fair market value of the 89 units in question in this appeal,” [16] the Appellant now submits that the FMV of the Richmond property as self-assessed by Carvest is reasonable, regardless of Mr. Uba’s opinion of a higher FMV. [17] The Respondent submits that Mr. Uba valued the wrong property and used the wrong approach to the valuation and asks this Court to disregard Mr. Uba’s appraisal report.
C. Valuation of the Richmond Property
(1) Carvest’s approach to valuation – the cost plus 6% approach
[32] In self-assessing and reporting for GST, Carvest determined the FMV of the units in the Richmond property by using the cost plus 6% method. I note that the Appellant is asking this Court to find that the FMV it established using the cost plus 6% approach is to be favoured over the FMV established by its own independent expert, Mr. Uba. For reasons explained below, I also reject Mr. Uba’s valuation. Carvest argues that the cost plus 6% method is the appropriate approach to determining the FMV of the units in the Richmond property. For the following reasons, I disagree.
[33] In applying the cost plus 6% method, Carvest determined the cost of each unit by aggregating the construction costs of the entire building, adding a notional builder’s profit of 6%, adding the FMV of the land evaluated using the direct comparison approach, and dividing the total by the number of units. [18] Hence, it appears to be a unique method different from the three generally recognized approaches to valuation discussed above.
[34] In self-assessing, Carvest used the same FMV for each unit regardless of its size and regardless of the time at which the unit was leased although the 137 units in the Richmond property were leased over the reporting periods commencing on December 1, 2008, through April 1, 2010. [19] In cross-examination, Mr. Joseph Carapella acknowledged that the units varied in size, attracted varying rents and did not have the same value.
[35] In support of its position that the cost plus 6% approach is appropriate in the circumstances, Carvest makes the following arguments:
i) as the Appellant relied on guidance specifically provided in writing by the CRA to use the cost plus 6% approach, the Respondent is estopped from reassessing the Appellant in a manner inconsistent with its earlier factual representations; [20] and
ii) because of the unique timing of the self-assessment of 1985 Richmond – being December 2008 to June 2009 [21] during the height of the global financial crisis – the cost plus 6% approach used by the Appellant reasonably reflected the FMV of the units in question at the time. [22]
[36] In rejecting the cost plus 6% approach, the Respondent argues that:
i) the Appellant cannot rely on the estoppel doctrine, inter alia, because: [23]
a) the Appellant did not raise this ground in its pleadings;
b) the Richmond property does not fall within the scope of the Shannon letter;
c) even if the Richmond property fell within the scope of the Shannon letter, it would not be binding on the Minister or on the Court; and
ii) the Appellant should be precluded from relying on this approach as it is inadequate and no evidence was submitted as to the validity of this method. [24]
[37] I will address the Appellant’s estoppel argument first. In doing so, it is helpful to set out what first led Carvest to use the cost plus 6% approach.
[38] Mr. Carapella testified that he had disagreements with the CRA with respect to the FMV of two other properties for GST purposes around 1999. One of these properties was a townhouse rental project (20 Chapman Court) and the other, a townhouse student rental project (190 Fleming Drive), both in London, Ontario and both registered as condominiums. As these projects were income-producing properties, Carvest used an income approach to determine their FMV for the purposes of self-assessing for GST. According to two 1999 appraisal reports, [25] the CRA’s predecessor, Revenue Canada, established the FMV of these properties based on a direct comparison approach, which produced higher values than those determined by Carvest.
[39] Clearly, these properties are not the subject of this appeal. However, they are relevant insofar as the Appellant argues that the Minister is estopped from assessing the Richmond property in a manner that differs from the approach agreed to for the purposes of settling the dispute involving the Chapman Court and Fleming Drive properties.
[40] After receiving the two appraisal reports, Mr. Donald S. Bryant, Mr. Carapella’s lawyer at the time, set up a meeting with Mr. Warren Shannon, the head of Real Estate Appraisals at Revenue Canada in London. After the meeting on September 2, 1999, Mr. Bryant sent Mr. Shannon a letter outlining the basis for their position that the appraisals done using a direct comparison approach were inappropriate. [26] Mr. Bryant stated that the projects in question had been constructed for rental purposes but had been registered as condominium units for municipal tax purposes.
[41] Unable to resolve the dispute about the Chapman Court and Fleming Drive properties, Carvest objected to the reassessments and the Minister confirmed them. However, after further meetings and discussions with Mr. Shannon, Carvest came to an agreement that is reflected in a letter from Mr. Shannon (the Shannon letter) dated February 15, 2001, which reads in part as follows: [27]
This will confirm our discussion of February 14, 2001 regarding the fair market value for GST self supply purposes of multi-family residential properties.
In the instance of a building constructed for long term rental purposes, the fair market value of the building would be represented by cost, as defined by the Agency Audit and would be directly related to the Input Tax Credits claimed. An amount of 6% will be added to this cost for builder’s overhead/profit etc.
Land value would be added at fair market value, determined by an appraisal using the Direct Comparison Approach. In the instance of sites purchased at a reasonably current date to construction, with approvals in place, the purchase price may well represent fair market value.
These guidelines would apply to your Chapman and Fleming projects, which I understand have been confirmed by our Appeals Division. It would be your responsibility to initiate any further action on these files.
The projects you have under or nearing construction, intended for long term rental, would be viewed as described above. …
[Emphasis added]
[42] Mr. Carapella testified that he was very happy with this result and self-assessed the buildings he built for long-term rental, although registered as condominium units, using the method he now referred to as the “cost plus 6%” valuation method. Mr. Carapella found that this method was even better than the income approach to valuation as it took all the guesswork out of determining FMV. He gave the letter from Mr. Shannon to Carvest’s controller and told him to file Carvest’s GST returns based on Mr. Shannon’s direction. Carvest agues that the Minister is now estopped from assessing the Richmond property using a method other than the cost plus 6% method.
[43] The Respondent contends that the Appellant cannot rely on the estoppel in pais doctrine because it was not invoked in the pleadings. Although it could be argued that the Appellant can argue estoppel on the basis of its pleadings, it is my view that the estoppel argument fails on several grounds. Most importantly, it fails because the evidence clearly shows that the CRA agreed to apply the cost plus 6% approach for the purposes of settling the dispute involving the Chapman Court and Fleming Drive properties, two properties that are not the subject of this appeal. Further, the Shannon letter dated February 15, 2001, explicitly provides that this approach will apply to Carvest projects “under or nearing construction, intended for long-term rental.” Under cross-examination, Mr. Joseph Carapella acknowledged, and the evidence shows, that the Richmond property was not “under or nearing construction” in 2001. I find that the Shannon letter providing that the FMV would be determined by the cost plus 6% approach did not cover the Richmond property.
[44] The Appellant argues that the principle of estoppel should apply to prevent the Minister from reassessing “in a manner contrary to its official’s representations of fact that the Appellant relied on to its detriment.” In support of this position, the Appellant referred to the Federal Court of Appeal’s decision in Wilchar Construction Limited v The Queen, [28] wherein the Court summarized the elements of estoppel as follows:
The essential elements of an estoppel have often been stated as follows:
(1) a representation intended to induce a course of conduct on the part of the person to whom the representation is made;
(2) an act resulting from the representation by the person to whom the representation was made; and
(3) detriment to such person as a consequence of the act. [29]
[45] I find that there was no “representation intended to induce a course of conduct,” related to the Richmond property. On the contrary, the Shannon letter expressly limits the application of the cost plus 6% approach to the two properties that are the subject of dispute at the time and to projects under or nearing construction. The Appellant knew that those projects did not include the Richmond property. The Appellant cannot now argue that it acted to its detriment on the basis of the representations made by the Minister’s officials.
[46] Estoppel cannot override the law. In Goldstein v R, Justice Bowman expressed the view that estoppel in pais does not apply “where a particular interpretation of a statute has been communicated to a subject by an official of the government, relied upon by that subject to his or her detriment and then withdrawn or changed by the government.” [30] It is not that estoppel does not lie against the crown but rather no estoppel can arise where such representations are not in accordance with the law. [31] The Minister is not bound by Mr. Shannon’s interpretation of the ETA. It is an established principle that the Minister has a duty to assess tax on the facts as she finds them in accordance with her understanding and interpretation of the law. Further, if the Minister errs in assessing a taxpayer, “she is not bound to repeat that error in perpetuity.” [32] For all these reasons, the Appellant’s estoppel argument must fail.
[47] Having dismissed the estoppel argument, the Court must now address the Appellant’s argument that the cost plus 6% approach is nonetheless an appropriate method in the circumstances. I agree with the Respondent’s submission that there was no evidence regarding the validity of this approach, which differs from the cost approach that is one of the three generally accepted methods of valuation.
[48] The Appellant’s expert witness, Mr. Grant Uba, testified about the traditional cost approach as follows:
Q. First, could you describe to the court or explain to the court as a professional appraiser and accredited appraiser the approach, how you determined the fair market value of a real property or residential real property.
A. Madam Justice, there are three traditional approaches that may be applied in valuation. There's the cost approach, and in a nutshell, the cost approach is first estimating the market value of the land as vacant. The next step in the cost approach is to estimate what the replacement cost or the reproduction cost of the structures and site improvements might be.
The determination of use as replacement cost or reproduction cost is depende[nt] upon the nature of the assignment, but once that cost has been determined, it's a matter of determining what the depreciation is to the structure and site improvements for such items as wear and tear, functional obsolescence, and possibly -- and function obsolescence would be, as an example, where a residence -- for example, the market requires having two four-piece bathrooms. A subject property might only have one-and-a-half bathrooms. So that may be functional obsolescence that has to be addressed.
And the other thing that would be considered is external obsolescence. So if you were located next to a railway line, for example, that may have diminishment in value. So the total of the physical wear and tear, any functional obsolescence and external obsolescence represents the accrued depreciation to the property. That subtracted from the replacement cost or reproduction cost of the structures and site to determine the value or the cost less depreciation. The sum of that cost plus depreciation plus the land value represents the indicated market value by the cost approach. It just -- the cost approach is least used for any improvements that are of age. Older buildings. Cost approach is typically used for special purpose-type structures. Might be a church or could be an arena, those types of assets that don't sell on a regular basis. [33]
[49] Keeping in mind that Mr. Uba was valuating the Richmond property building (and not the individual units), he did explain why he did not use the cost approach as follows:
Q. So now understanding the three approaches, which approaches did you choose to use in your valuation of the units at 1985 Richmond Street?
A. Didn't utilize the costs approach because the cost approach would not realize the increase in value for renting out the subject property. So the cost approach would recognize or would result in the lowest value for the subject property. [34]
[50] In his appraisal report for the Richmond property, Mr. Uba wrote that “the cost approach is applied to estimate the market value of property types that are not frequently exchanged in the market.” [35] He added that “[s]ince the application of the Cost Approach provides a value estimate for the fee-simple interest of a property, the Cost Approach does not consider how rental income affects the value of an income producing asset”. [36] I would add that both CRA appraisers, Mr. Ron Duda and Mr. James Rokeby, testified that the traditional cost approach was inappropriate in the circumstances. [37] Further, Mr. Uba, Mr. Duda and Mr. Rokeby all agreed that the income approach is the method used by the industry to determine the FMV of income producing apartment buildings.
[51] I find that none of the witnesses who conducted appraisals – none of the CRA witnesses, nor the Appellant’s independent expert witness – provided testimony on the validity, in any circumstances, of the cost plus 6% approach applied by the Appellant. In my view, this was a modified version of a cost approach applied in, and limited to, a negotiated settlement.
[52] According to the evidence introduced at trial, it is clear that the cost plus 6% approach had been accepted by the CRA to establish the value of some Carvest properties for settlement purposes. It is also clear that the Respondent took the view that the cost plus 6% approach was not a valuation method and that, although the Appellant had used that approach since the settlement based on the Shannon Letter, the CRA did not agree with that position. [38] I conclude that the cost plus 6% is not an appropriate method to establish the FMV of the Richmond property. I would add that Carvest incorrectly self-assessed FMV on a single date, December 1, 2008, while subsection 191(1) of the ETA requires that Carvest self-assess on the FMV of each unit as it is rented out, and it is clear that not all the units were rented out on December 1, 2008. Further, Carvest incorrectly valued all units, irrespective of size, at the same amount.
(2) Independent expert, Mr. Grant Uba’s approach to valuation – the income approach
[53] I found Mr. Uba’s testimony to be professional, straightforward and credible. The Court qualified Mr. Uba as an independent expert in the appraisal of real property. I note that the Respondent did not raise any issues regarding Mr. Uba’s qualification as an expert. However, like both parties, I have also rejected Mr. Uba’s determination of the FMV of the Richmond property for the reasons set out below.
[54] Mr. Grant Uba is a professional real estate appraiser. He held various designations over the years and has been accredited by the Appraisal Institute of Canada (AIC) since 2003. Mr. Uba was a member of the board of directors of the AIC for 6 years and he is currently a member of the adjudicating committee that investigates complaints against members for violations of the appraisal standards and the AIC’s bylaws. He was retained by the Appellant to complete an appraisal of the Richmond property. [39] Mr. Uba had also been retained by the Appellant in 2013-2014 to appraise the property at 335 Southdale Road West in London, which was the subject of a settlement referred to further below.
[55] Mr. Uba gave an overview of the Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP standards) [40] and testified about the process he followed in determining the FMV of the Richmond property.
[56] As referenced earlier, Mr. Uba explained that he did not use the cost method because it does not consider how rental income affects the value. Mr. Uba also explained that he did not use the direct comparison method in determining the FMV of the Richmond property because there were no sales of comparable properties, i.e. high-end purpose-built rental buildings, in London in 2008. [41] Under cross-examination, Mr. Uba testified that he would use the direct comparison approach if he were evaluating the FMV of a condominium unit that the owner was leasing but wanted to sell.
[57] Mr. Uba used the income valuation metho