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Turner Drake & Partners Ltd.
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Halifax, N.S.
B3K 1P5
Canada

Tel.: (902) 429-1811
Toll Free: (800) 567-3033
Fax.: (902) 429-1891

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Charlottetown, P.E.
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Canada
Tel.: (709) 722-1811

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Toronto, ON.
M5C 1S2
Tel.: (416) 504-1811

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# Wednesday, 24 August 2016

Builders of multiple-unit residential apartment buildings will be all-too familiar with the GST/HST self-supply rules administered by Canada Revenue Agency (CRA) under the Excise Tax Act. Engaging with CRA at any level is a knee-trembling experience that is best avoided if at all possible, so spare a thought for apartment builders, who have no choice but to engage every time they finish a new project. The self-supply rules require that builders volunteer the value of their completed asset, remit the GST/HST due and then wait to be told if they got it right. Welcome to the unnerving world of self-supply.

Based on the number of calls we have been getting of late, CRA is growing increasingly suspicious of the values being declared by builders in this new age of ultra-low discount rates and ultra-high property values. They smell profit and want a bigger piece of it. If you’ve been targeted for scrutiny, it’s time to call for reinforcements.

How it works

For those who are unfamiliar with the process and want to follow along, this is how it works. Generally speaking, “used” residential property is exempt from GST/HST and no liability arises when it is sold in the marketplace. But new residential property is taxable upon completion, and for rental property the liability usually arises when the first unit is occupied, at which time GST/HST becomes payable based on the “Fair Market Value” of the asset. The most common situation, of course, is newly constructed rental apartment buildings, but the self-supply rules apply to other types of residential property, including condominiums if the builder chooses to rent them rather than sell them, an increasingly likely scenario in markets where the demand for condominiums has dried up. So on that happy day when the first unit is rented, the builder is deemed to have sold and repurchased the property at its declared (i.e. self-assessed) “Fair Market Value,” and gets to celebrate the occasion by remitting the required GST/HST.

The purpose of the GST/HST self-supply rules is to ensure the builder does not escape paying tax on value-added components of the project, such as the value of employed labour, financing costs and profit, the value of which would have been taxable had the asset been sold rather than rented upon completion. According to the official CRA publication (GST/HST Memoranda series 19.2.3, paragraph 5), the stated purpose of the self-supply rules is to create a “level playing field” and remove the potential tax advantage a builder would otherwise have in constructing a residential complex for rent.

So what is “Fair Market Value” and what does the Tax Court say?

CRA’s Policy P-165R gives some guidance and basically interprets it as the highest price that can be achieved in an unrestricted market – much the same as the industry-standard definition of Market Value. It also recognises the three traditional methods for determining Market Value, colloquially known as the “three approaches to value,” being the Cost, Income and Direct Comparison approaches. While the CRA Policy statement does say that no particular method should be excluded categorically, the Tax Court of Canada has tended to favour the Cost Approach in its rulings on GST/HST self-assessment cases. The most recent Tax Court ruling to cross our desk (Beaudet v. The Queen, 2014 TCC 52) adopted the Cost Approach method in favour of the other methods to establish the Fair Market Value of a residential apartment complex, but only after giving careful consideration to each of the other methods. So don’t be fooled into thinking the other valuation methods have no relevance: on the contrary, CRA will expect all the relevant valuation approaches to be examined and reconciled. They are deeply suspicious that reliance solely on the Cost Approach method conceals genuine profit, whereas the Income Approach method uncovers it. They might be right, but buildings which sell in the marketplace and generate those ultra-low discount rates are cash flow vehicles, delivering stable revenues backed up by full occupancy and a track record of success. New-builds have neither full occupancy nor a track record and must be valued accordingly for self-supply purposes.

Whether or not the final result matches other market valuations done on the same property for other purposes – typically mortgage financing – does not appear to distract the Court, which remains firmly focused on the specific issue at hand. That was perhaps most clearly expressed in an earlier Tax Court decision (Sira Enterprises v. The Queen 98-2463-GST-G) when it said “[t]he Court’s duty is to determine the fair market value of the properties for the purpose of the GST. The Court is not interested in the fair market value of these properties for the purpose of sale, and indeed there might be many factors which might have to be considered if the court were required to determine the fair market value for the purpose of sale, which may not be relevant for GST purposes.”

So protect yourself and sleep well

Our advice to builders is to be pre-emptive: have an independent assessment of the Fair Market Value done upon – or even in advance of – completion to support the self-assessed value being reported for GST/HST purposes. That puts you in the best possible position to defend a future challenge, and will undoubtedly help you sleep at night.

So if you, or someone close to you, is losing sleep at the prospect of engaging with CRA, give our Counselling Division a call.



Written by Lee Weatherby, Vice President of our Counselling Division. For more information about our counselling services, feel free to contact Lee at (902) 429-1811 or lweatherby@turnerdrake.com

Wednesday, 24 August 2016 14:55:06 (Atlantic Daylight Time, UTC-03:00)  #    -
Counselling
# Monday, 15 August 2016

Linear projects such as transmission line rights of way (RoW) are fertile ground for seeds of suspicion, mistrust and hostility. The scale of the project which may involve dozens, if not hundreds of property owners ensures that the acquiring authority is required to deal with a similar number of individuals. The very nature of the scheme, the forcible taking of property from people who individually stand to gain little from its outcome, often fans the flame of opposition… an experience that pits the “little guy” against corporate Canada. This is worsened if the acquiring authority deploys agents who rely on bluff, bluster and bonhomie rather than real estate expertise, and consider it their mandate to minimize the compensation payable.

Few acquiring authorities assess compensation on a property-specific basis before opening negotiations, or follow the leadership of the Nova Scotia Department of Transportation and Infrastructure Renewal and agree to the owner retaining professional advice at the acquiring authority’s expense. Most regard the property owner as a hindrance. They wait until negotiations founder before preparing an accurate estimate of the compensation properly payable under the Expropriation Act presumably on the assumption that, since they have not expropriated the property, anything goes. Even when a formal estimate of loss is prepared by an independent appraiser, it may not address the entire compensation… little wonder then that property owners distrust authority.

As part of our Counselling Division, which has completed the valuation and negotiation of compensation for several large infrastructure projects, I have seen tension between the acquiring authority and landowners unfold. Based on those experiences, here are the Top 5 reasons property owners use to warn the acquiring authority to “Stay off my land!”

5. The Grudge

One of the most difficult obstacles to overcome is a landowner who simply does not trust the acquiring authority. Often this is because they have been forced to part with their land in the past to make way for an already established RoW, and their previous experience was not a good one. Landowners that are approached yet again may view the current acquisition as a way to “settle the score” for an acquisition they feel was handled poorly in the past. A landowner that has a longstanding negative view of the acquiring authority may be difficult to deal with from Day 1.

4. Uninvited Guests

Much like the stress caused by termites, cockroaches or your in-laws, many landowners worry about the uninvited guests that a new RoW across their land may bring: hunters, recreational vehicles or people looking for a quiet place to dump their garbage. These concerns generally involve worries about damage to the land, liability issues and environmental impact.

3. Au Naturel

Appearances can be deceiving, and sometimes scrub land that appears to have little value may offer far more than meets the eye. Land can harbour an abundance of natural resources from which its owners can profit, such as cultivated crops, gravel deposits, minerals and harvestable timber. Often overlooked is the cost to extract these valuable resources and the fact that market values in many areas already incorporate resource values. Remember to be conscious of over-counting and double-counting when it comes to compensation payments.

2. Nothing Will Ever Be the Same

The general impact of the new RoW is something that almost every landowner contemplates. Some consider the impact to be minimal and will be happy to support the project in exchange for fair compensation payment, but others view the impact as harmful and often have many legitimate concerns that should be addressed. Common concerns include changes to view planes, interference with access, increased noise levels, loss of windbreaks, parcel severance and health concerns.

1. The Greatest Subdivision that Never Was

If I had a nickel for every time I was told that a new RoW was impacting a future subdivision … well, I’d have at least a couple bucks! Impact on future development potential is hands down the most common theme that I have encountered. Sometimes legitimate subdivisions or lands ripe for development are disrupted by RoW projects, and in those instances landowners should be compensated accordingly. However, in my experience many of the “subdivisions” that RoWs just can’t seem to avoid are more of a dream than a reality.

Overall, I would say that the concerns expressed by landowners are often a blend of rational and irrational thought. The world is becoming a more sophisticated place, and landowners are better educated and have access to more information than ever before. In the past, liaison with landowners may have simply included a couple of phone calls and a pat on the back from an employee of the acquiring authority. Nowadays the representative of the acquiring authority should have an increasing number of abilities including exceptional interpersonal skills, above-average organizational skills, patience and training in real estate valuation techniques.

The representative of the acquiring authority should give all landowners the benefit of the doubt and listen carefully to all of their concerns without judgement. Listening to the concerns of a landowner and working with them to mitigate as many of these items as possible is a great way to gain a landowner’s trust. However it is important to be aware that some landowners will go to extreme lengths in order to disrupt the project or increase the compensation payable to them. Good record keeping and a genuine understanding of the burdens that a RoW may bring to a landowner are key.

In the end, you’ll rarely win over every landowner involved in a RoW acquisition, but by keeping these five points in mind, hopefully you can minimize the number of times you hear the phrase “STAY OFF MY LAND!”



Written by Matthew Smith, Manager of our Counselling Division. For more information about our counselling services, feel free to contact him at (902) 429-1811 or MSmith@TurnerDrake.com.

Monday, 15 August 2016 12:43:03 (Atlantic Daylight Time, UTC-03:00)  #    -
Counselling
# Tuesday, 29 March 2016

The combined service of Turner Drake’s three most senior consultants is a staggering 110 years… and counting. Still swift of mind (if not of foot), they provide an unparalleled resource for our clients and give wise counsel to our own junior ranks. One of these senior consultants is Lee Weatherby, Vice President of our Counselling Division who is now well into his fourth decade of service with Turner Drake.

When Lee started with the company in 1981, we were operating nicely with cutting-edge typewriters, rotary-dial phones, and comfortable indoor plumbing. Already a veteran of the litigious world of expropriation, Lee was immediately able to share his training and experience with the local legal community. Over the years, he has worked alongside many lawyers, providing litigation support and forensic valuation advice. He has presented himself as an expert witness at countless trials, arbitrations, and mediation hearings, and while refusing to accept all the credit, it is worth noting that many of those who were once clients are now judges. And he was always nice to them.

Forensic valuation work is an invaluable tool when disputes arise. If you own real estate, you will have likely engaged with an irate tenant, landlord, insurance adjuster, assessor, or neighbour at one time or another. Any self-respecting lawyer will tell you that when serious disputes arise, negotiation is a far better solution than trial, and alternative dispute mechanisms are a happy middle ground for would-be combatants. Our own experience tells us that there are fewer litigants prepared to try their luck at trial, and for good reason. Inevitably, there will be some merit in both sides; when it comes to matters of real estate the challenge is to measure who has the best case and the best evidence to support it. The seasoned valuation expert will not only provide the underpinnings for your own case, but will also help to remove them from your opponent’s – presuming, of course, that your case is credible to start with. Exposing the frailties (and indeed the strengths) in your opponent will put you at a distinct advantage at the negotiating table, and greatly improve your chances of success should you decide to chance your luck at trial.

Thinking outside-the-box has long been a corporate philosophy within the halls of Turner Drake, and strategic thinking of one of the hallmarks of the Counselling Division. Challenging cases and unusual real estate assets are commonplace, and there aren’t many properties that Lee hasn’t encountered during his tenure with the company. He is never one to tire of the mundane, but tends to thrive on the more obscure challenges; from heavy water production plants to underwater burial grounds, from debunked bunkers of the cold war era to obsolete pulp and paper mills of the modern era. There is little that has not crossed his desk at one time or another and no challenge has ever been left unresolved. If you have a property that’s a real head scratcher, give Lee a call.




Lee Weatherby, Vice President of our Counselling Division. For more information about our counselling services, feel free to contact Lee at (902) 429-1811 or LWeatherby@TurnerDrake.com.
Tuesday, 29 March 2016 15:49:24 (Atlantic Standard Time, UTC-04:00)  #    -
Counselling
# Thursday, 11 December 2014

Court work is one of the responsibilities - and hazards - of our profession. Valuation reports are often prepared to help settle disputes and assist with negotiations, but inevitably some cases will proceed to a court or arbitration hearing.  In my field of work, expropriations are the most common files to end up in the court room, where I will be obliged to attend and present evidence as an expert witness.  I can expect to be examined and questioned by lawyers for both sides, intent on casting me either as hero or villain depending on their client’s respective interests.  This is the ultimate test of professional accountability, and there is no doubt the role of expert witness can be an uncomfortable one even for the initiated.  The true objective is to survive with credibility still intact, but after 30 (plus) years in the business I have found there can be rewards.

Prepare, prepare, prepare

There will be no rewards if you are not properly prepared before entering the court room. It is not unusual for a case to be heard months, even years, after the work was done, by which time much of the detail will have been forgotten.  It is vital to take the time to review each page and every document in advance.  Fumbling through files in the witness box is unsettling - particularly if the client is watching.  It is akin to revising for exams; you know the information is in there, if only you could find it.  If the mantra of the real estate profession is location, location, location, then the slogan of the expert witness is prepare, prepare, prepare.  You’ll be glad you did.  This can be your finest hour… or your worst nightmare.

Taking charge of the witness box

Thorough preparation builds confidence and makes the presentation of your own evidence go much more smoothly, but most importantly it prepares you for the onslaught of cross examination. You rarely get an easy ride on cross examination.  The questions are intended to expose every flaw, magnify every error and batter the witness into submission.  But you are entitled to defend yourself; the witness box is your stage and you are entitled to perform when called upon.  

My colleague recalls an occasion before a particularly hostile and theatrical lawyer.  The cross examination began with a blistering attack, unleashed with menace and purpose, intended to reduce the witness to a quivering wreck right from the start.  He demanded an answer and was clearly prepared to wait all day till he got it.  The court room fell silent.  Not easily intimidated, the witness paused then calmly asked the court for a glass of water, drank it, and asked “Now, would you mind repeating the question, please”.  By which time the lawyer had forgotten the question and fumbled through papers trying to reconstruct the moment.  But it was lost. You could almost hear the applause.

The weight of the evidence

Don’t underestimate the power of paper.  “The one with the thickest file always wins” – or so they say, and I believe there is some truth to that when it comes to expert witnesses.  These days of course it’s the one with the most megabytes, but you can’t beat a thick file to demonstrate that the work was done thoroughly and diligently, full of supporting notes, data and analysis to defeat every question that might be asked.  Much of it might never be referred to but some of it will be entered into evidence and scrutinised.  I recently reached new heights at the weigh-in, hauling several boxes of material into the court room which were wheeled into place and unloaded in front of an expectant audience.  So effective was the reaction that I intend to repeat the performance on every occasion, filling boxes with dusty files from the basement if necessary.  “Question me at your peril; I have all the answers” is the message.

Testifying tips brought to you by our experienced expert witness and Vice President of our Counselling Division, Lee Weatherby. To learn more about Lee, visit our Team Leaders page or check out our Facebook page to get a little more intimate!

Thursday, 11 December 2014 12:54:47 (Atlantic Standard Time, UTC-04:00)  #    -
Counselling
# Thursday, 24 July 2014

1. Steel-Toe Boots/Shoes: Many industrial sites require steel-toe boots or shoes, however; they are handy to have at any inspection site, just in case you don’t see that raised curb or camouflaged sprinkler head. Better to be safe than sorry!

2. Camera: A picture is worth a thousand words… and will save you a lot of writing!  A good quality camera can help you relive that inspection experience firsthand once you’re back at the office.

3. Flashlight: The last place you want to be is under the street, in a dust covered 200 year old room that you just saw on Ghost Hunters last weekend... only to find out that the lights don’t work. Tip: If you’re often in the dark, invest in a headlamp… stylish and practical!

4. Batteries: Useful to power electronic measuring devices and the above referenced camera and flashlight. These tools aren’t much help without the juice!

5.      Extra Writing Utensils: Once I jogged across the street to quickly snap a picture of an apartment building but when I got back to the building I could not find my pencil for the life of me. So I stepped outside and looked around… only to find my pencil crushed to bits in the middle of the road.  Not to worry though, my back-up pencil and I completed the job just fine!

I recommend placing all of your inspection gear in a plastic tote that can easily be moved between the office and the trunk of your car.  By keeping everything in one place you will never forget to pack that one item you so desperately end up needing. 

Happy Inspecting!

Advice given by Matthew Smith, Consultant in Turner Drake’s Counselling division and Manager of our St. John’s office. For more real estate counselling advice, you can reach him at msmith@turnerdrake.com or 1 (800) 567-3033.

Thursday, 24 July 2014 15:41:07 (Atlantic Daylight Time, UTC-03:00)  #    -
Counselling