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Sunrise Realty - TCC Disagrees with CRA's Appraisal of Land vs. Building Costs 

Canadian Tax Adviser


January 29, 2013


In Sunrise Realty Investments Limited v. The Queen, the Tax Court of Canada (TCC) allowed the taxpayer's appeal regarding the purchase price allocation of a property with land and a rental building. However, when the decision is compared to the CRA's assessment, the benefit to the taxpayer was only an additional $30,000 allocated to the building from the land that can be amortized over time.

Although this case was heard under the court's informal procedure and thus does not set precedent, it is interesting because it includes a copy of a portion of the CRA's valuation report. This case is also a good reminder that taxpayers need to be able to justify their purchase price allocation between land and building.


In August 2004, the taxpayer (Canco) purchased an investment property for $1.7 million. Of that total, $150,000 was allocated to land and $1.55 million to the rental building. The building includes an eight-unit retail plaza.


The CRA did not agree with Canco's allocation of the purchase price and, after three appraisals, issued Notices of Assessments for the 2005-2010 taxation years in December 2011.


The CRA's real estate appraiser took into account that the land on the property was vacant at the time Canco purchased it. He concluded the land component of the property had a value of $760,000 and the building with related improvements had a value of $920,000 in August 2004.


Taxpayer's position
In its Notice of Appeal, Canco noted that the CRA made comparisons with other commercial land sales in the area but did not consider the location of the property. Canco stated that the CRA ignored factors important to land values including location, demographics and accessibility.


Canco noted that the CRA made multiple appraisals due to deficiencies and errors in the reports. Canco also said that the CRA did not provide reasons for rejecting its appraisal of the land.


TCC finds flaws with CRA's valuation report
The TCC stated that, although the CRA's valuation was faulty, it could still be used as a basis to determine the value of the land at the time of purchase. The CRA's valuation report included adjustments for lot size, for location, and for "other" adjustments. The TCC also considered seven comparable properties.


The TCC noted, however, that the CRA could not say how much of a decrease or increase in the

 value should be allocated to each adjustment. Instead, the CRA's report "simply stated that he [the valuator] made adjustments. This is what I find [to be] the major flaw in his valuation". Further, the CRA referred to developments on comparable land that took place after 2004. The TCC said it was concerned by this inclusion since it could not evaluate whether the adjustments or the amount of the adjustments were valid. The TCC noted that "a judge cannot accept a valuation if [he or she] cannot comprehend the reasoning by which a conclusion has been derived from the comparable sales".


TCC needs to determine land value based on incomplete information
The TCC used the CRA's report as a starting point and gave weight to Canco's concerns. The TCC made adjustments "not too dissimilar from those made by the [CRA] bearing in mind the valid concession of his comparables made by [Canco]".


After its analysis of comparables, the TCC determined that the land had a value of $731,000 and the building had a value of $949,000. So, although Canco's appeal was granted, the result to Canco was only slightly better than the CRA's allocation. Specifically, Canco was granted an additional $30,000 for the building that can be amortized over time rather than having the tax attribute locked in the value of the land until it is sold.


Unfortunately, we do not know whether the taxpayer would have received a better result if it had produced its own valuation report at trial.


For more information, contact your KPMG adviser.







Information is current to January 29, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500


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