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Valuation Case Law


HST Self Supply

There are three recognised methods of computing Market Value, colloquially known as “the three approaches to value” viz., Cost, Income, Direct Sales Comparison… and many variations of each. Failure to use any of them has to be justified in the Valuation Report. The Cost Approach essentially computes the cost of creating the asset and is based on the twin assumptions that (1) Market Values in the long run should equal the costs of production and (2) reproduction costs represent a ceiling for Market Values since investors should not be willing to pay more for an improvement than the cost of obtaining a substitute in the marketplace. Under this Approach, value is measured by adding to the land value (found by Direct Comparison) the cost, in current prices, of reproducing the structure and site improvements, and then subtracting any loss in value due to physical depreciation, functional and external obsolescence. The Income Approach recognises that the Market Value of an interest in real property is equal to the present value of future benefit flows. This Approach first estimates the expected future benefit flows from a property. These benefit flows are then converted into a market value through a variety of alternative mathematical techniques for capitalisation. The Direct Comparison Approach is based on marginal demand theory and derives the Market Value of a particular interest in real property through the analysis of the sale prices of similar properties.  The underlying idea is that the marginal demand should be the same for two similar properties in a real estate market.  Therefore, the fact that one sold for a certain price should indicate that the other property, if offered for sale, would sell for approximately the same amount (provided that market conditions have not changed). The Approach utilises market information on the prices and characteristics of recently sold properties to determine the value of the subject property. CRA’s Policy Statement P-165R states that none of the three Approaches to arriving at Fair Market Value (Cost, Income, Direct Sales Comparison) should be excluded “categorically”. The Tax Court of Canada (TCC)have also followed this suggestion, carefully considering all three approaches even though they have tended to favour the Cost Approach in many cases. Take a look at some of these cases: they identify the issues that have surfaced between CRA and the taxpayer:

November 2000:
Tax Court of Canada
Sira Enterprises Ltd. v. The Queen
Relevance of Mortgage on the Property
Relevance of Previous Appraisals on the Property
Relevance of the Market Value of Properties for Sale
Relevance of the Actual Construction Cost


Sira Enterprises Ltd. v. The Queen (TCC File 98-2463-GST-G), decided on November 11th 2000, was an early case which helped inform our thinking on GST/HST valuations. The dollar numbers were not large but the principles enunciated in the TCC decision were groundbreaking.  The dispute dated back to 1996 and involved six apartment buildings ranging in size from 16 to 24 units, located in Moncton, New Brunswick. The properties were owned by Sira Enterprises Ltd. and the buildings had been erected for them by A.V. Construction Ltd. an associated company. Construction commenced in 1995. Input Tax Credits (ITC) had been applied for and paid quarterly during construction. Sira based its self-supply valuation on their actual construction costs and did not rely on any other appraisal method. CRA’s appraiser used the Income and Direct Sales Comparison approaches and discarded the Cost Approach entirely because “usually, for income property, I am more interested in the income stream and not the costs”. The TCC decision ruled that (1) the amount of the mortgage was of little relevance, (2) previous appraisals on the property were not relevant, in part because CRA had not asked Sira to produce them, (3) the Court was not interested in the market value of the properties for the purposes of sale because it might reflect factors which were not relevant to the GST FMV, (4) the actual construction cost adjusted to add the discount afforded Sira by their associated construction company A.V. Construction Ltd., was the most relevant indicator of Fair Market Value and that was the figure adopted by TCC.

February 2014:
Tax Court of Canada
Beaudet v. The Queen
Which Valuation Approach is the Most Relevant?
How Should the Site be Valued?
How Should the Purchase Price be Adjusted?
Should the Actual Construction Costs be Used?
Should the Impact of Financing be Reflected?
Should the Contractor’s Profit and Overhead be Included


Beaudet v. The Queen (TCC File 2014 TCC 52), decided on February 14th 2014. The dispute dated back to 2010 and involved four apartment buildings erected on a single lot acquired in 2003, located on Rue de l’Aster, Quebec. The builder, Beaudet Claude et Saucier Alain based their self-supply valuation on their actual construction costs and did not rely on any other appraisal method though he did attempt the Income Approach before discarding it. These construction costs included the builder’s profit on labour and worksite mobilisation costs (fixed costs such as trailers, temporary electrical service and equipment) plus the price of the land, but were adjusted downwards for the extra costs incurred because of site stability and sub-contractor issues. Beaudet’s appraiser added the cost of the on-site supervisor to these costs and deducted, as functional obsolescence, poor sound proofing and a leaking roof. CRA’s appraiser relied on the Income and Direct Sales Comparison approaches but also took a stab at the Cost Approach using a costing system rather than actual construction costs and added Developer’s Profit. The TCC decision ruled that (1) the Cost Approach was the most relevant in this case, (2) the land should be valued on a per square foot rather than a per apartment unit basis, (3) the purchase price of the land had to be adjusted to the appraisal date, (4) actual construction costs should be used reduced for construction cost overruns, or particular problems with regard to soil contamination or bearing capacity discovered after purchase, or errors in design or construction, (5) actual construction costs should be increased to reflect the cost of financing and a portion of the indirect costs (advertising, certain contractor’s administrative costs), (6) contractor’s profit and overhead should be included in the construction cost but Developer’s Profit should be excluded.

March 2021
Tax Court of Canada
Carvest Properties v. The Queen
Relevance of “Cost plus 6%” Formula
Date Each Condominium Should have been Valued
Use of Income Approach Incorrect

Carvest Properties Limited v. The Queen (TCC File 2017-345(GST)G, decided on March 18th 2021. The dispute dated back to December 1st 2008 and involved a 137-unit apartment building (of which 89 units were at issue), whose units were registered as condominiums, located at 1985 Richmond Street, London, Ontario. Although this was a rental apartment building the units had been registered as condominiums to ensure that they were treated for municipal property tax purposes as residential property, rather than attracting the higher tax rate levied on rental apartment buildings (a practice that was later outlawed by the Provincial government in 2017). The builder, Carvest Properties Limited based their self-supply valuation on the actual cost of construction for the entire building plus 6% for notional builder’s profit. This figure was then aggregated with the land value, determined by the Direct Comparison Approach. The resultant figure was then apportioned equally to each condominium unit regardless of its size, rent, value and the date each was leased (December 1st 2008 through April 1st 2010). This “cost plus 6%” formula had been agreed with CRA on two other Carvest owned rented condominium properties for self-supply FMV purposes (in lieu of earlier CRA appraisals based on the Direct Sales Comparison approach and Carvest appraisals using the Income Approach). Carvest also fielded an alternate FMV, computed by their independent appraiser, Mr. Uba, which valued the property using the Income Approach on the grounds that it was really a rental apartment asset. Mr. Uba then apportioned the value of the entire complex between each condominium unit based on its size. However, during the hearing Carvest had a change of heart and ditched Mr. Uba’s appraisal arguing that he had valued the wrong property rights, in the wrong property, using the wrong approach to valuation, and asked the Court to disregard his appraisal. CRA’s appraiser, Mr. Duda, discarded the “cost plus 6%” formula, instead valuing each condominium unit using the Direct Sales Comparison approach i.e. he compared each condominium unit with sales of comparable units in the marketplace adjusting for size, quality and price changes in the market. He then applied a “6% discount” to reflect the fact that the condominium units were theoretically being placed on the market over a constricted time period and that this over-supply would negatively impact their values. Mr. Duda reasoned that although the market was “active” the introduction of 137 units over a 16-month period was “sizeable”. This “volume discount” was based on a study by a colleague which concluded that a 0-6% discount was reasonable.

In the case of a rental apartment building, self-supply is triggered by the occupation or rental of the first unit, provided that the building is substantially complete, and FMV must be computed as of that date. However, with condominium apartments, self-supply is triggered on a unit-by-unit basis as each unit is occupied or rented, so FMV has to be computed individually for each unit as it is rented.

The TCC ruled that (1) Carvest’s “cost plus 6%” formula had no validity, (2) the FMV of each condominium unit should have been calculated at the respective date each was rented out and should have taken into account their difference in size, (3) the use of the Income Approach by Mr. Uba was incorrect because it appraised the entire building and not the FMV of each condominium unit as it was leased, (4) CRA’s appraisal using the Direct Sales Comparison approach with relevant comparable sales data and applying a reasonable volume discount was correct. The TCC decision referenced a Federal Court of Appeal case (27 Cardigan) which specifically considered the “volume discount” issue and decided that a 10% discount was reasonable when 187 condominium units were being added to existing supply over a 2.5 year time period (the Cardigan market was much less active than in the Carvest case).

The decision was subsequently appealed (Carvest Properties Limited v. Canada, 2022 FCA 124) but the Federal Court of Appeal affirmed that apartment buildings registered as condominiums must be valued on a unit-by-unit basis. They did not disturb TCC’s acceptance of the “volume discount”.

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