February 12, 2001, ECB Control No.: 35/97/200 (70 L.C.R. 161)

REASONS FOR DECISION

1.  INTRODUCTION

[1] The claimant, Campbell River Woodworkers' and Builders' Supply (1966) Ltd., owned the subject property at 2000 Island Highway in north Campbell River. The claimant had leased the property to Beaver Lumber Company Limited ("Beaver Lumber") for a building supply business since 1981.

[2] On January 8, 1997, the Minister of Transportation and Highways ("MoTH") expropriated the entire property for the new Vancouver Island Highway. At the time of the taking, the claimant had a 20-year lease with Beaver Lumber that had 14 years to run. MoTH made an advance payment of $1,800,000 on January 3, 1997 with a further payment of $80,000 plus interest on October 5, 1999.

[3] The primary issue in this case is that the claimant says that its lease with Beaver Lumber was a very advantageous one. The lease provided for an increase in base rent every five years with provision for percentage rent to be paid if sales reached certain levels. The expropriation has led to the frustration of this lease and the loss of the rental income to the claimant. The claimant is seeking compensation for the market value of its interest in the amount of $2,500,000. It is also claiming loss of a special economic advantage that is not included in the market value to the owner pursuant to section 31(2)(a) of the Expropriation Act, R.S.B.C. 1996, c. 125 ("the Act") as a result of the loss of the lease with Beaver Lumber. This claim is between $800,000 and $1,200,000. There is also a disturbance damage claim with respect to the payment of capital gains tax by the company as a result of the expropriation. The company is asking that after the board has determined its award for market value that we use schedules attached to its accountant's report to calculate the capital gains tax owing on that amount. Finally the company is seeking penalty interest as a result of various delays by MoTH.

2.  BACKGROUND

[4] John McDougall and his wife, Phyllis McDougall, are the present shareholders of the claimant. Mr. McDougall and a former partner bought a sash and door and cabinet business called Campbell River Woodworkers in 1956. The partners changed the nature of the business to a building supply store in 1962 and in 1966 Mr. McDougall bought out the former partner by purchasing the assets of the former company.

[5] The subject property consisted of seven lots in three distinct parcels that had a total area of approximately 6,875 square metres (74,000 square feet). These lots were registered in the company's name between 1969 and 1978. The largest parcel contained the building supply store and two storage sheds. These three buildings were constructed in the early to mid 1960s, with an addition to the retail portion in 1972. The total area of the three buildings was approximately 2,850 square metres (30,670 square feet). The other two parcels were both located across the street from the store and were used for storage yards and parking.

[6] On December 29, 1980, the claimant entered into lease of the subject property with Beaver Lumber. This lease was for 10 years from January 1, 1981 and stipulated a base rent and a percentage rent of sales. On January 1, 1991, the parties entered into a new lease, this time with a term of 20 years with two options to renew for five years each. This lease provided for an annual base rent as follows:

1991 - 1995		$150,000
1996 - 2000		$175,000
2001 - 2005		$205,000
2006 - 2010		$243,000

[7] In addition there was a percentage rent clause whereby the tenant, Beaver Lumber, was to pay 1.5% of gross sales over $7,000,000. While the gross sales were not sufficient to generate any percentage rent in 1991, 1992 or 1993, there was evidence that $7,286 was paid for 1994, $25,975 was paid for 1995, and $29,677 was paid for 1996. Thus the total rent received by the claimant for 1996 was $204,677. If the options to renew were exercised, the lease stated that the rent for the period covered by the option would be fair market value, provided that it was not less than the rent in the previous year. The lease was triple net and provided that Beaver Lumber pay virtually all the expenses but for repair of the basic structural fabric of the buildings. We heard evidence that Beaver Lumber had been owned by Molson Canada Ltd., which the claimant emphasized as an indication of the strong covenant. However, there was also evidence that by the time of the hearing Molsons was divesting itself of the Beaver Lumber stores.

[8] The expropriation occurred on January 8, 1997. When it became clear that the taking would oust Beaver Lumber from its location, a group of businessmen in Campbell River approached Beaver Lumber and offered to find a new site. This group was successful in finding a site nearby and entered into a lease with Beaver Lumber on August 31,1996, for a term of 20 years. This lease provided for annual rent payments commencing January 1, 1997 as follows:

1997 - 2001		$210,000
2002 - 2006		$231,000
2007 - 2011		$254,100
2012 - 2016		$279,510

There was no provision for a percentage rent of sales in this lease. There were also two options to renew for 5 years each. Beaver Lumber moved into the new site ("Beaver 2") during December 1996.

[9] After less than one year this Beaver 2 store closed. Although we did not have any definitive evidence on this, we were told that this was as a result of a decision by Beaver Lumber to close its eleven corporate stores. The Beaver Lumber franchises remain open and it was reported that one Beaver Lumber store in Duncan that closed down at the same time as the store in Campbell River has since reopened, reportedly as a franchised store. Despite the closing of the store, Beaver Lumber had continued to make all the base rent payments as of the date of the hearing. We heard evidence from a local Realtor, Bruce Baikie, that he had tried to sub-let the premises of Beaver 2 for Beaver Lumber with no success. He stated that there had been some interest from a few parties but the premises were either too large or the rent was too high for any prospective lessees to date.

[10] In December 1997, the claimant retained Mr. Baikie, the local Realtor, to look for "an equivalent property, either sold or for sale which has a similar income stream secured by a comparable lease of duration and covenant" as the subject property. Mr. Baikie searched various databases for Vancouver Island, north of Duncan, going back to 1994. He reported his findings in a letter; namely, that he could not find a 20-year lease of a single tenanted property to a company that was as financially secure as Beaver Lumber and that provided a similar income stream, including percentage rent. The claimant has not asked him to continue with any further searches. Mr. McDougall had been invited to participate in the group of businessmen who bought the Beaver 2 site, but he declined. His reasons for this were that he did not want to deal with partners and that in any event, the lease for the Beaver 2 site was not as attractive as the lease the claimant had enjoyed with Beaver Lumber. In fact, the claimant invested the full $1,800,000 advance payment with Investors Group.

3.  HIGHEST AND BEST USE

[11] Appraisal evidence for the claimant was provided by Douglas L. Mendel of Grover, Elliot & Co. Ltd. Paul M. Peppiatt from D.R. Coell & Associates Inc. provided expert valuation evidence for MoTH. The claimant also relied on Robert E. Low, a chartered accountant and business valuator, of Low Rosen Taylor Soriano for estimates of projected rental income throughout the lease.

[12] Both appraisers agreed that the highest and best use of the subject property was its current use at the time of the taking - as a Beaver Lumber store. Although the site was in three distinct parcels with seven separate legal titles, all of the property was utilized for the Beaver Lumber operation. One of the parcels was zoned for residential use but the appraisers provided evidence that the commercial use of the site was legal as it existed prior to the implementation of the zoning bylaw.

4.  MARKET VALUE

4.1  Claimant's appraisal evidence

[13] As the property was subject to a lease at the time of the expropriation both appraisers focussed on the Income Approach. Douglas Mendel, for the claimant, based his appraisal of the subject property solely upon the Discounted Cash Flow method. He felt that this method better reflected the future escalations in both the base and percentage rent over the term of the lease than the Overall Capitalization method.

[14] The first step in this Discounted Cash Flow method was to estimate the rental income that could be anticipated from the subject property over the remaining term of the lease. While the base rent would increase as stipulated in the lease, it was also necessary to estimate the percentage rent that would be received during the lease. This was dependent on future sales projections. Mendel analyzed the sales history of the Beaver Lumber store over the first six years of the current 20-year lease. The sales showed an average increase of 22% per annum from 1991-1996, although the largest increases were in 1992 and 1993 and the increase in 1996 was significantly lower than in earlier years. He also considered an industry publication on retail operations that reported an average growth rate in general retail sales of 4.19% over the 11 year period from 1984 to 1995. He then adopted a "conservative forecast" in projecting an increase in the gross sales of the Beaver Lumber store that he said was 3% per year for each of the remaining 14 years of the lease. However, after he forecast an annual growth rate of 3% of gross sales, Mendel actually made his calculations based upon a 3% per annum growth rate in the percentage rent (emphasis added), an error that he did not acknowledge in testimony. Thus, his estimate of percentage rent is based on an increase in the gross sales of less than 1%, rather than the stated 3%.

[15] The next step was to consider what expenses should be deducted from the projected income. Because Beaver Lumber was such a strong tenant Mendel decided that no provision was necessary for the risk of vacancy or collection losses. He did deduct 1.5% of the estimated gross income for structural repair. This was the only deduction he made.

[16] Mendel estimated the reversionary value of the subject property at the end of the lease in January 2011, by capitalizing the amount of the net income in the final year (including the percentage rent). This assumes that the combined base and percentage rent from the last year of the lease becomes the new base rent for the next lease. He capitalized this rent, less a 1.5% allowance for structural repair, at a rate of 10% to arrive at a value in January 2011 of $2,844,340. Mendel detailed six sale transactions in support of his overall capitalization rate. The comparables indicated a range of capitalization rates from 4.8% to 10.8% on sales data relating to much lower priced investments with prices ranging from $425,000 to $780,000.

[17] Mendel then discounted the estimates of annual rental income and the reversionary value to a present value at a discount rate of 10% to provide his estimate of market value at $2,500,000. We note that the present value of the reversionary value of approximately $2,800,000 was just under $750,000, which is a significant component of the overall market value at $2,500,000. Mendel did not provide any market support for his chosen discount rate other than his opinion that this was the current rate required by investors.

[18] Although Mendel only used one approach to value the subject property he did carry out a "check" on this valuation. He estimated the market value of the site as if vacant. He then deducted this land value of $1,100,000 from his estimate of market value, $2,500,000, to arrive at a value of the buildings and other improvements of $1,400,000. When he divided this sum by the aggregate size of the buildings he arrived at a figure of $48.03 per square foot as the value of the buildings. He felt that this was a reasonable figure which provided support to his estimate of value.

[19] Robert Low, the business valuator, also provided an estimate of rental income from the lease. He considered factors affecting the home improvement market in Canada. He also reviewed local economic factors such as projections in Campbell River's population and CMHC statistics on housing starts in Campbell River. From this information, he predicted the growth in business at the subject location. He made two projections for gross sales throughout the 14 years of the lease and the consequent rental income for both a "low" scenario ($3,874,000) and a "high" scenario ($4,074,000). At the request of counsel, Mendel used Low's two income projections in his Discounted Cash Flow analysis. This resulted in estimates of value of $2,600,000 for the low income stream and $2,700,000 for the high income figure. Although Mendel included these calculations as an addendum to his report, he did not characterize them as market value.

4.2  MoTH's appraisal evidence

[20] Paul Peppiatt, for MoTH, concluded four estimates of value for the subject property - one based upon the Cost Approach ($1,600,000) and three based on the Income Approach: the Overall Capitalization method ($1,710,000), the Building Residual Technique ($1,670,000) and the Discounted Cash Flow method ($1,880,000). His final estimate of value was based upon the Discounted Cash Flow method at $1,880,000. We will describe only the Discounted Cash Flow method, since Peppiatt ultimately relied on this method, and the Overall Capitalization method since we found this approach of assistance.

[21] Peppiatt's report was based upon a valuation date of June 28, 1996 although the date of expropriation, and therefore the appropriate valuation date, was January 8, 1997. Peppiatt stated that his Discounted Cash Flow calculation updated to the date of the taking would actually yield a lower market value. However, MoTH indicated that they would rely on the higher amount reflected in the June 1996 value. Although the claimant was critical of the use of the June 1996 date, it has not alleged that there was any change in market conditions between June 1996 and January 1997.

4.2.1  Overall Capitalization method

[22] In order to ascertain if there was any value to the leasehold interest, Peppiatt analysed the market value of the property by the Overall Capitalization method based on market rent, and then valued the leased fee interest in the Discounted Cash Flow method. As the Discounted Cash Flow resulted in a higher value, Peppiatt concluded that there was no value to the leasehold interest.

[23] In applying the Overall Capitalization method, Peppiatt had to first estimate the gross income. He estimated the base rent on an objective basis from the market evidence available in 1996 at $180,000 per annum, slightly more than the actual contract rent at that time of $175,000. Because the actual lease provides for a percentage rent, which by 1996 was approaching $30,000 a year, he added this sum to the $180,000 base rent for a total gross income of $210,000. We note that as he was attempting to value the unencumbered interest in the property, it was inappropriate to add in the percentage rent.

[24] In determining expenses to arrive at an appropriate net income figure, Peppiatt estimated a 1% provision for vacancy and collection losses, as well as an allowance of 2% for structural repair. He also deducted an additional $2,500 per annum to cover water, bookkeeping and general public liability insurance.

[25] Peppiatt provided details on seven sale transactions in support of his overall capitalization rate. The sale prices of these properties covers a broad range from $775,000 to $5,140,000. The capitalization rates ranged from 8.73% to 11.45%. Peppiatt relied primarily on the sale of the Coast Tractor and Equipment site in Campbell River that yielded an overall capitalization rate of 11.45%. He concluded that, because the building improvements of the subject property were older, with a limited economic life, a somewhat higher capitalization rate of 11.75% was appropriate. He estimated a value of $1,710,000 by this Overall Capitalization method.

4.2.2  Discounted Cash Flow method

[26] Peppiatt also completed a Discounted Cash Flow analysis. He estimated the gross income using the base rent for each year as stipulated in the lease and the same estimate of the percentage rent at a flat rate of $30,000 per annum for the remainder of the lease. From this he deducted the same 2% structural repair expense and the $2,500 annual expenses as he had used in the Overall Capitalization method.

[27] In order to arrive at a discount rate Peppiatt provided four sales of investment properties with forecasted Internal Rates of Return (IRR) in the range of 11.5% to 13.0%. In addition, he reviewed findings from Lincoln North & Company Limited for a variety of rates of return for large investors. He concluded 11% as an appropriate discount rate for the income stream.

[28] Peppiatt decided that the buildings and other improvements on the subject property would have no remaining economic life at the end of the lease term in 2011. Thus, he estimated the reversionary value in 2011 to be the same as his current estimate of land value - $900,000. He testified that estimating a reversionary value was speculative. Rather than project an increase in the future value of the property, he preferred to account for this possibility by using a lower discount rate, 9%, for the reversionary value.

[29] He concluded a value of $1,880,000 in this analysis and then relied on this estimate for his final estimate of market value.

4.3  Discussion

4.3.1  Appraisal approach

[30] Both of the appraisers based their estimates of market value upon the Discounted Cash Flow method although their calculations and final values differed substantially. While this method is a tool commonly used by investors, it is not very reliable as a sole appraisal approach. The Discounted Cash Flow method is inherently volatile due to the speculative nature of estimating both the future rents and the reversionary value of the property, together with the difficulty in estimating discount rates.

[31] The Uniform Standards of Professional Appraisal Practice, 1997 Edition, Canadian Supplement, Statement on Appraisal Standards No. 2, an excerpt of which was entered as an exhibit, states at p 67:

DCF [Discounted Cash Flow] analysis is an additional tool available to the appraiser and is best applied to value estimates in the context of one or more other approaches. ... Market value [Discounted Cash Flow] analyses should be supported by market derived data, and the assumptions should be both market and property specific.

Similarly, Lincoln North, a well recognized commentator on appraisal matters, states in an article The Discounted Cash Flow Method: Developing the Discount Rate, Valuation Network Report, Fall 1984, Volume 1, No. 2: .

..it is recognized that whatever discount rate evolves through even the most diligent and thorough investigation and analysis, the resultant value emerging from application of the Discounted Cash Flow Method of valuation must be matched with the value found by other diagnostic procedures to ensure that the end product represents a plausible and realistic market price for the property being evaluated.

[32] Lincoln North goes on to warn about the various difficulties there are in determining discount rates. Peppiatt based his selection of a discount rate on a combination of sources including a publication of Lincoln North as well as an analysis of forecasted Internal Rates of Return on similar properties. Mendel offered no market evidence to support his chosen discount rate.

[33] The actual IRR or discount rate can not accurately be determined until the end of the investment period when the property is sold and all of the net cash benefits have been received. For this reason, discount rates used in the Discount Cash Flow method must be based upon either projections of anticipated future benefits or historical data based on actual investment periods which have already concluded. This contrasts with the overall capitalization rate which is based upon the present income and the sale price of a property that has recently sold and is thus a better reflection of current market trends.

[34] We prefer to place a greater weight on the Overall Capitalization method of the Income Approach for two reasons. First, it does not require an estimate of the future value of the property; and second, as indicated above, the market evidence with respect to comparables for an overall capitalization rate is better than that for discount rates. We will look to the Discounted Cash Flow as a secondary approach.

4.3.2  Overall Capitalization method

[35] The first projection necessary for this method is an estimate of the income that would be made by a prospective purchaser in January 1997 when the property was expropriated. The base rent at this time was $175,000. The percentage rent depends on the level of sales. Although the sales had increased in each of the past five years, this increase was slowing down and flattening out in the three years immediately preceding the expropriation. There was also evidence that CMHC was forecasting a decrease in the housing construction market for Campbell River in 1997, 1998 and 1999, on account of the weakening resource economy locally. Low, the business valuator called by the claimant, is based in Toronto and we are not convinced by his evidence that the recent arrival of "big box" retailers in the home improvement market, including the opening of a Home Depot store in Nanaimo, would have no effect on sales. In our opinion, a purchaser would not be willing to make a generous forecast of the percentage rent over the next 14 years of the lease. We adopt Peppiatt's approach and will use the percentage rent for the most recent year, $30,000, as our estimate for the annual percentage rent for the overall capitalization method.

[36] The next consideration is the appropriate expenses to be deducted from the income. Although we acknowledge that there is a strong tenant in place, we agree with Peppiatt that it would be reasonable for a potential investor to apply an allowance for vacancy and collection losses. We adopt his relatively conservative estimate of 1% to account for this factor. Mendel used a rate of 1.5% as an allowance for structural repair. In view of the age of the subject buildings (24 to 37 years old at the time of taking), and the fact that the lease made the claimant responsible for structural repair, we find Peppiatt's estimate of a 2% allowance to be more reasonable, even though there was a history of good maintenance by the tenant. However, as the lease provides for the tenant to pay all expenses including water and insurance, we find that no additional deductions from the gross income are appropriate.

[37] The third consideration is the choice of an overall capitalization rate. In our opinion, Peppiatt's rate of 11.75% is excessively conservative. One of the reasons he gave for his overall capitalization rate was the age and limited life span of the buildings. Although the buildings were older, the evidence indicates that they had been well maintained by the tenant and we do not accept that a purchaser would assign no value to them at the end of the lease in 2011. Another factor to be considered in the selection of an appropriate capitalization rate is the anticipated rental income. The subject lease provided for substantial increases in the base rent at five-year intervals from the current rent of $175,000. And while we have already commented on the risks associated with the percentage rent, there is also some possibility of an increase in this component of the rent. The capitalization rate should reflect that the rent will increase to at least the base rents specified in the lease but might achieve more than that due to the percentage rent.

[38] We have reviewed the capitalization rate comparables provided by the appraisers. In his Discounted Cash Flow analysis, Mendel used a capitalization rate of 10% to calculate the market value of the subject property in January 2011. He provided six comparables with sale prices ranging from $425,000 to $780,000 and capitalization rates ranging from 4.8% to 10.8%. Two of his comparables have low development densities and when these are removed, the range narrows from 8.1% to 10.8%. Mendel also relied on the fact that the rent for the Beaver 2 store was established on the basis of 10% of the land value and the cost of construction. However, we note that this negotiation did not, in fact, involve a sale and therefore is of limited assistance in determining an overall capitalization rate. All of Mendel's comparables are significantly smaller than the subject.

[39] Peppiatt provided seven capitalization rate comparables, two of which overlap with Mendel's. Peppiatt's comparables cover a broad range of sale prices from $775,000 to $5,140,000. Peppiatt characterizes his comparables as "medium sized real estate investments that would appeal to the same type of purchaser who may be interested in the subject property". The range of rates for his comparables is from 8.73% to 11.45%. The highest capitalization rate, and the one on which Peppiatt relied, was derived from the transaction involving the Coast Tractor and Equipment site in Campbell River in September 1996. This was a sale by Coast Tractor which then leased the property back with a long term lease. In our opinion, this non-arms length transaction is not a reliable indicator of a capitalization rate. We note that the Realtor, Mr. Baikie, did not find this sale, although the annual income stream is only a little less than that for the subject property and it is a 20 year lease with a single tenant that offers a secure covenant. While Mr. Baikie may have merely overlooked this sale, its omission may be because the property was never listed on the open market. Removing this comparable provides a range of capitalization rates from 8.73% to 10.4%.

[40] We note that two of Peppiatt's comparables also had tenants with strong covenants. One was the sale of a much larger project, a retail mall in Courtenay, in December 1994 for $5,140,000. The indicated capitalization rate was corrected during the hearing to 9.75%. This mall was anchored by Consumers Distributing, TD Bank, and Tim Horton's, all of which had long leases. A number of the tenants also had percentage rent clauses in their leases. The other was the sale of a government leased building (which would provide a very strong covenant), in Courtenay, in August 1994 for $1,250,000, with an indicated capitalization rate of 9.48%. Another sale of a retail mall that was closer in price to the subject at $2,600,000 was in Courtenay in April 1996. It was fully leased at the time of the sale and yielded a capitalization rate of 8.73%. The most comparable sales in Campbell River were two sales of much smaller retail projects at approximately $775,000 each. These two sales were used by both appraisers. One was originally built in the 1950s and remodelled in 1980 for smaller commercial units. It sold in August 1994 with a capitalization rate of 10.0%. The other is a new but smaller sized retail development with small commercial units, two of which were unoccupied at time of sale in January 1997. The capitalization rate on this sale was 10.4%.

[41] Relying primarily on the two comparables which have leases with strong covenants, together with the evidence on the increase in the total rent over the term of the lease, we conclude an overall capitalization rate of 9.5%.

[42] Utilizing the current year's contract rent plus the estimated percentage rent, we calculate the market value as follows:

$175,000 base rent plus $30,000 percentage		$205,000
Less: 1% vacancy allowance		( 2,050)
Effective Gross Income		$202,950
Less: 2% allowance for structural repair		( 4,059)
Net Income		$198,891
$198,891 (Net Income) at 9.5% (O.C.R.) =		$2,093,589
Rounded to		$2,100,000

 

4.3.3 Discounted Cash Flow

[43] Mendel estimated the value of the subject property to be $2,500,000 by the Discounted Cash Flow method while Peppiatt estimated it at $1,880,000. The large difference between these values is principally attributable to the different reversionary values in 2011 of $2,844,335 (Mendel) and $900,000 (Peppiatt). The appraisers have also utilized different discount rates, (Mendel, 10%; Peppiatt, 11%, with 9% for the reversion) and different estimates of the percentage rent (Mendel, increasing; Peppiatt, flat rate).

[44] Again we need to estimate the income stream from the subject property in the view of a prospective purchaser in January 1997. Both parties agreed that the base rental income had a low risk of default due to the strong covenant of the tenant. However, there were differing opinions on the projected sales and the percentage rent over the remaining 14 years of the lease. A prospective purchaser would have been aware of the potential for increasing rental income. On the other hand, as we have already indicated, we do not accept that a purchaser would pay for the possibility of the percentage rent increasing throughout the 14 year period. We note that the Beaver 2 store subsequently closed although this could not have been predicted at the time of the expropriation. In any event, all the base rent payments up until the date of the hearing have been made. However, as there are now no sales at the store, there would have been no percentage rent payable if the expropriation had not occurred and the subject property was still in use. With hindsight, it is apparent that the percentage rent was riskier than might have been anticipated at the time of the expropriation. On the same reasoning as set out above, we agree with Peppiatt that from the perspective of the prudent investor at the time of the expropriation, an estimate of $30,000 for the annual percentage rental income is reasonable.

[45] As the Discounted Cash Flow method is the process of converting expected actual future benefits (income and reversionary value) into a present value, we will not deduct an allowance for vacancies from the anticipated rental payments. We concluded an allowance of 2% for structural repair in the Overall Capitalization method. As this is an expense that will be borne by the landlord throughout the term of the lease, this allowance is also appropriate for the Discounted Cash Flow calculation.

[46] In choosing a discount rate appropriate for the subject lease, we rely on the market evidence presented in Peppiatt's report. This indicates discount rates in the range of 11.25% to 13%, with most of the evidence suggesting a range of 11.25% - 11.75%. We agree that the base rental component of the subject lease did constitute a fairly low risk investment while the percentage rent estimate was subject to a higher degree of risk. The discount rates quoted from the Lincoln North publication indicate discount rates of 11.25% to 11.75% for retail shopping centres that would typically include a percentage rent component in the income. We note that the majority of the subject income stream was derived from the base rent. Mendel offered no specific basis for his choice of a 10% discount rate. We conclude that Peppiatt's discount rate of 11%, slightly below the range from the market data, is reasonable, given the strong tenant and the history of the growth in sales at the subject store.

[47] The next step is to estimate the reversionary value of the subject property. We disagree with Peppiatt's conclusion that the reversionary value would be land value only. This conclusion assumes that the overall value of the property will decline by more than 50% over the next 14 years, which in our view, is overly pessimistic. It is true that at the expiry of the lease in 2010, the subject buildings would be in the range of 40 to 50 years old. Even with good maintenance, some deterioration of the buildings would be expected and obsolescence is likely to be a significant factor as retail requirements typically change over time. We will capitalize our estimate of the final year's income for the reversionary value as Mendel has done. However, we will first make a deduction for a vacancy allowance since in January 2011 there will no longer be a strong lease in place. While Beaver Lumber has two options to renew, in our opinion, a prudent purchaser will not count on that possibility 14 years in the future. As a result, we will deduct a 5% vacancy allowance from the final year's income. In addition, in our opinion, a higher overall capitalization rate than the 10% used by Mendel is appropriate. In January 2011, the buildings will be 14 years older than in January 1997 and without the benefit of a strong lease. The capitalization rate to be applied to the income at this date must reflect the expected future value of the income stream from that date forward. While we have concluded an overall capitalization rate in January 1997 of 9.5%, in the circumstances of January 2011, we find that a rate of 12% is appropriate.

[48] Using the above noted figures, we calculate the present value of the income stream and the reversion at $2,058,925. Rounding this figure, we find the market value using the Discounted Cash Flow method to be $2,060,000.

4.4  Conclusion

[49] We obtained an estimate of market value by the Overall Capitalization Method, our primary valuation approach, of $2,100,000. This figure is supported by the value calculated by the Discounted Cash Flow approach; namely, $2,060,000. Based upon our analysis of the available data, we conclude that the market value of the subject property, at the time of taking, was, $2,100,000.

[50] The claimant made much of the fact that a number of revisions were required in Peppiatt's report and that as a result of these errors, little weight should be given to his opinion. First, we note that there were errors in both appraisers' reports. Second, many of the errors in Peppiatt's report flowed from a single mistake in one of his land sales. In our opinion Peppiatt was too pessimistic about the age and economic life of the buildings and as a result we have not accepted his opinion on the overall capitalization rate and reversionary value. However, Peppiatt completed several different appraisal approaches and provided extensive market data. Mendel only completed one approach, although he did provide a "check" on his Discounted Cash Flow analysis. Using this "check", Mendel derived a figure of $48.03 per square foot for the value of the subject buildings in January 2011. While he thought this was a reasonable figure and supported his market value of $2,500,000, we note, that the new Beaver 2 store was reportedly constructed for $45.08 per square foot. As this is a new building and presumably does not suffer from any functional obsolescence, it would seem likely that the value of the much older subject buildings should be well below this rate.

5.  SPECIAL ECONOMIC ADVANTAGE

[51] Section 31(2)(a) of the Act provides:

31 (2)	If not included in the market value of land determined in accordance with section 32, the following must be added to that market value:
	(a)	the value of a special economic advantage to the owner arising out of his or her occupation or use of the land;

[52] "Market value" is defined in section 32 of the Act - "the amount that would have been paid for [the land] if it had been sold at the date of expropriation in the open market by a willing seller to a willing buyer". The issue is whether in the circumstances of this case there is a valid claim for additional compensation of value to the owner under the heading of special economic advantage under section 31(2)(a).

5.1  Claimant's position

[53] The claimant in this case argued that the board should find such a special economic advantage. We heard evidence from Mr. McDougall and the claimant's accountant Mr. Huxham. The claimant also relied on expert evidence from Douglas G. Hildebrand, an economic consultant, of Columbia Pacific Consulting.

[54] The claimant asked us to look at the claimant company as a legal vehicle for its two shareholders, Mr. and Mrs McDougall, who were both over 75 years of age. Prior to the expropriation the claimant received good rent from Beaver Lumber which the McDougalls in turn received as "pension" income in the form of dividends from the claimant. Beaver Lumber assumed nearly all the maintenance and management responsibilities. The claimant was a passive investor in an income producing property, receiving a healthy income. Having had this investment taken away, the claimant says that it should be entitled to an amount of money sufficient, on reinvestment, to replace the income. The argument was that the McDougalls ought to be able to reinvest in something that would give them the same "pension" income with the same high level of security that they had received under the lease to Beaver Lumber. On counsel's instructions, Hildebrand used the same rent projections as the claimant's appraiser, Mendel, and at the end of the lease, the same reversionary value consisting of the final year rent projection capitalized at 10%. However he calculated the net present value from each of these assuming a discount rate equal to the long term corporate bond rate (4.44% after the long term inflation factor was removed). The claimant submitted that long term corporate bonds were an appropriate substitute for the expropriated lease since the bonds would also offer low risk, and would return the original investment at the end of the term.

[55] The amount of money needed to invest at the long term corporate bond rate of 4.44%, to get the same annual income and the same reversion value in January 2011 as estimated by Mendel, was greater than the market value concluded by Mendel of $2,500,000 (who used a discount rate of 10%). The claimant submitted that the difference between the two amounts of approximately $870,000 was an estimate of the special economic advantage defined in section 31(2)(a). In other words, the property was said to have had a greater value in its overall return to the McDougalls than was indicated by its market value. As an alternative, Hildebrand also used Low's projections of his "low" and "high" income that yielded two other estimates of alleged special economic advantage that were between $930,000 and 960,000. Finally, Hildebrand on counsel's instruction carried out the same calculations using the 3.5% discount rate prescribed in section 56 of the Law and Equity Act R.S.B.C. 1996, c. 253 and B.C. Reg. 352/81. These calculations suggested that the alleged special economic advantage was between approximately $1,100,000 and $1,300,000, depending on whether Mendel's projections of income were used or Low's "low" and "high" income projections. However, the claimant acknowledged that in Corner's Pride Farms Ltd. v. British Columbia. (1994), 52 L.C.R. 15 (B.C.E.C.B.) this board decided that the discount rate in the Law and Equity Act did not apply to claims for future damages under the Expropriation Act.

[56] The claimant acknowledged that there were no recent authorities directly supporting its position for special economic advantage. The claimant made a somewhat unusual argument as the legal basis for its claim that was further clarified in its supplementary submissions to the board. Prior to the enactment of reform legislation, the owner received compensation for the expropriated property on the common law principle of "the value to owner" or "economic reinstatement" of the owner. In addition, the courts recognized certain situations in which an owner was also entitled to compensation for the "special value" or added worth to the owners for some particular use of the property that is not included in the market value. We were referred to many of these cases and to a text on expropriation from 1963, Wilson and Lafleur, The Law of Expropriation, 2nd ed. The claimant noted that most of the cases discussed the special value to the owner as it arose out of the owner's use of the property, but did not emphasize the concept of uniqueness to a particular owner. According to the claimant, it was not until Gagetown Lumber Co. v. The Queen (1956), 6 D.L.R. (2d) 657 (S.C.C.) and later, more expressly, in Arpro Developments Ltd. v. Province of British Columbia (1977), 15 L.C.R. 97 (B.C.C.A., aff'd S.C.C.) that the courts articulated as one of the requirements for compensation for special value, uniqueness to the owner. The claimant suggested that the 1971 Report on Expropriation of the British Columbia Law Reform Commission did not specifically endorse this requirement expressed in Arpro.

[57] When the reform legislation was enacted in various jurisdictions, including British Columbia, it replaced compensation for the expropriated property on the principle of "value to owner" with the more objective "market value", that was defined as the amount that would be paid in an open market assuming a willing buyer and a willing seller. At the same time the Act in British Columbia incorporated section 31(2)(a) providing for compensation for "the value of special economic advantage to the owner arising out of his or her occupation or use of the land".

[58] The claimant attempted to make a link between these changes. It reminded us of the well-known principle that the purpose of compensation is to make the expropriated owner economically whole. It referred us to general statements about the purpose of compensation statutes found in the 1971 Report on Expropriation of the British Columbia Law Reform Commission. It reminded us of the comments of the Supreme Court of Canada in Toronto Area Transit Operating Authority v. Dell Holdings Ltd. (1997), 60 L.C.R. 81 that expropriation statutes are remedial and should be given a "broad and liberal interpretation". The claimant submitted that in order for the McDougalls to be made economically whole they needed to receive compensation in addition to the market value. This additional compensation was what was necessary on top of compensation for market value that would provide them with a similar income stream and reversion value as they expected from the lease. The claimant's position is that this additional compensation should be characterized under the relatively new legislative provision for "special economic advantage" and this provision need not necessarily be interpreted to have the same requirements as the common law concept of "special value".

[59] The claimant conceded that in prior cases this board has dismissed claims for special economic advantage under section 31(2)(a). These cases include Branscombe v. British Columbia (Minister of Transportation and Highways) (1993), 51 L.C.R. 241; Corner's Pride Farms Ltd. v. British Columbia. (Minister of Transportation and Highways) (1994), 52 L.C.R. 15; L'Abri B. C. Ltd. v. School District No. 34 (Abbotsford) (1994), 52 L.C.R. 161; leave to appeal refused (1994), 47 B.C.A.C. 194 (C.A.); and Okanagan Dairy Transport Ltd. v. Vernon (1995), 57 L.C.R. 211; aff'd (1997), 61 L.C.R. 90 (B.C.C.A.). The claimant argued that these decisions could largely have been justified on other grounds, including lack of evidence, and sought to distinguish them. Since the hearing in this case concluded, this board in Premanco Industries Ltd. v British Columbia (Ministry of Environment, Lands and Parks) (2000), 71 L.C.R. 6 has again dismissed a claim for special economic advantage under section 31(2)(a).

5.2  MoTH's position

[60] MoTH relied on evidence from Richard F. Crosson, an accountant and business valuer, of Blair Crosson Voyer. Crosson criticized Hildebrand's use of the long term corporate bond rate. He pointed out that there was no rationale in Hildebrand's report for assuming that the risk from even the base rent component of the lease was the same as the risk from long term corporate bonds issuers. He also criticized Hildebrand's adjustment of the long term corporate bond rate downwards for inflation. He stated that the use of the long term corporate rate did not reflect any of the business risks inherent in prospective percentage rents or the real estate market risk inherent in the reversionary value of the property.

[61] MoTH denied the claim for special economic advantage on several grounds. First, it submitted that the requirements set out in the case law were not met. In this case, there was nothing unique in the claimant's relationship to Beaver Lumber that would give it a special economic advantage compared to other prospective purchasers. If the property had been sold at the valuation date with the lease in place, any purchaser would have received the identical features of the lease that the claimant emphasized - its relative security, its potential for future percentage rent, and its reversionary value. Second, and perhaps more importantly, any economic advantage offered by the lease was already factored into the market value of both appraisers. Any special economic advantage that was already included in the market value would amount to double recovery. Third, turning this argument around, the claimant had relied inappropriately on the corporate bond rate and the discount rate in the Law and Equity Act and, using them instead of the appraiser's discount rate, produced what were in effect alternative estimates of market value. Fourth, the claimant had not met the onus of proving its claim since it offered a range of figures for the loss of special economic advantage between approximately $870,000 and $1,300,000 depending on the income stream and the discount rate chosen. Finally, MoTH characterized the claimant's submission that it should receive sufficient compensation to replace the claimant's income stream as an attempt to assert a "value to owner" claim when such a claim is not recognized in the present Expropriation Act.

5.3  Discussion

[62] In our opinion, the claimant's argument on special economic advantage cannot succeed.

[63] All of the authorities make clear that there are a number of requirements for this type of claim, including that the value be a special or peculiar one for the actual owner. With respect to the predecessor concept at common law of special value to owner, Spence J., speaking for the Supreme Court of Canada in Arpro Developments Ltd., directed the arbitrators to consider the claim as follows:

In order to receive any special value the onus is on Arpro to prove that its property, because of circumstances peculiar to Arpro, had more value than it would have had to another competent and knowledgeable developer putting the property to similar use.

[64] In our opinion, this element of the common law concept of special value to owner is the same concept that has been incorporated into section 31(2)(a). The claimant tries to get round Arpro by suggesting that in interpreting the subsequent statutory provision, section 31(2)(a), we could look to the 1971 Report on Expropriation of the British Columbia Law Reform Commission, which does not seem to accept the restrictions set out in cases like Arpro (although Arpro had not been decided at the time that the Report was written). However, the Report states at pp 125-127:

There are certain circumstances where market value would be insufficient as a measure of compensation. These occur where there is some element which has only value to the owner or an insignificant number of prospective purchasers. ...

The Ontario Law Reform Commission stated that circumstances of special value may exist in three different situations...:
1. [Non-applicable]
2. Where land has particular attributes, such as location or grade, which give that land a special value to the owner over other lands but which do not enhance the market value. ...
3. [Non-applicable]
...
We think that it would be wise to have a provision, as there is in both the Manitoba and Federal statutes, making compensable "the value to the owner" of "special economic advantage" arising out of his occupation of the land. (emphasis added)

In our opinion, the Report does specify the requirement of peculiarity to the actual owner for a claim for special value. It describes the need for special value where there is some characteristic that has value only to the owner or an insignificant number of prospective purchasers. In other words, the characteristic would not be valued by most general purchasers of the property and thus, would not be included in the market value. The Report also goes on to make clear that it intended the provision for "special economic advantage" as a partial replacement of the common law concept of special value, along with sections 31(2)(b) (compensation for value of improvements made by an owner not reflected in market value) and 35 (compensation for equivalent reinstatement when the property is used as a church or school for which there is no general market demand).

[65] E.C.E. Todd, in his text The Law of Expropriation and Compensation in Canada, 2nd ed. (Carswell, Toronto, 1992) lists at p. 118 the three requirements for special economic advantage in those jurisdictions with specific statutory provision for this claim:

It has been stated that the special economic advantage provision is a statutory retention of a vestige of (the) "value to the owner" concept. The "value" referred to in that subsection must be special or unique to that owner, it must arise out of his occupation of the land and it must be a value which is not included in the compensation awarded under any of the other heads or principles of compensation set forth in the Act. (Minute Muffler Installations Ltd. v. Alberta (1981), 23 L.C.R. 213 at 228 (Alta. L.C.B.)

The advantage must be (a) special, (b) economic and, (c) arise out of use or occupation. (the wording of the Alberta statutory provision is substantially similar, although not identical, to section 31(2)(a))

Professor Todd reviews the large number of cases where claims for special economic advantage under a statutory provision have been denied because one of these requirements is missing. One of the very few that has succeeded was Esposito v. Edmonton (City) (1981), 23 L.C.R. 81 (Alta. L.C.B.) in which the owners received a special economic advantage for their residence being next door to their business when these properties were expropriated. The proximity of the residence to the business saved the owners time and expense in commuting and provided a measure of security against theft and vandalism. Under a similarly worded provision the Alberta board held that the owners were entitled to a special economic advantage arising out of the owner's actual use of the property. This advantage would not apply to most other purchasers of the property and therefore would not be reflected in the market value.

[66] Another case that succeeded was referred to by the claimant; namely, Woolger v. The Queen (1975), 9. L.C.R. (F.C.); aff'd on other grounds (1977), 13 L.C.R. 243 (F.C.A.). The owner of the expropriated property had some professional expertise and considerable experience as a horticulturist. He had planted a large number of trees and shrubs on the expropriated property that he intended to use in a contract landscaping business at some point a number of years in the future when he had retired from his present employment. These trees and shrubs added nothing to the market value of the property. The court held that under a similar but not identical provision to section 31(2)(a) the owner was entitled to compensation for the special economic benefit of the present value of the anticipated after tax profit of this nursery stock. Again this special economic advantage arose out of the owner's actual use of the property. It is also implicit in the judge's decision that, since the nursery stock did not contribute to the market value of the property, it was relatively unique and would not be useful to most other purchasers of the property.

[67] Similarly, Coates J.A. and Waqué S.F. in New Law of Expropriation, Vol. 2, (Carswell, Toronto) comment on the difficulties in meeting the requirements of section 31(2)(a) in British Columbia at p. 35-92:

There have been a number of claims for economic advantage but none has succeeded. For a claim to succeed, the claimant must establish that subject lands have a special value personal to the claimant's use, which would not be enjoyed by any other owner using the property in the same way. ... The restriction on claims ... are quite rigid, the hurdles to compensation formidable. (emphasis added)

All of the cases of this board, in which a claim for special economic advantage under section 31(2)(a) has been made (listed in section 5.1 above), have applied the same criteria for meeting section 31(2)(a); namely, being special or peculiar to the owner, arising out of the occupation of the owner, and not already having been included in the market value.

[68] In the present case, there is no "special" value to the claimant. We do not find on the evidence that there is any characteristic of the property, including the lease to Beaver Lumber, which provides a benefit or advantage that is peculiar to the claimant as owner. The present value of the cash flow derivable from the lease (14 years of lease payments plus the reversion in 14 years time) is the same whether or not it is the claimant, or some other purchaser of the property receiving it. Indeed, the claimant concedes that the present value of the cash flow from the lease is not unique, but suggests that we need not make uniqueness a prerequisite for the claim. In the face of all of the recent case law and the authorities referred to above, we do not accept that this requirement can be ignored.

[69] The claimant urged us to interpret section 31(2)(a) in a "broad and liberal manner" and referred us to the general principles for interpreting expropriation legislation found in Dell Holdings. In Mariner Real Estate Ltd. v. Nova Scotia (Attorney General) (1999), 68 L.C.R. 1 (N.S.C.A.) the Court was also considering the effect of Dell Holdings on the interpretation of an expropriation statute. We find Cromwell J.A.'s comments at p. 25 to be relevant:

While the term "land" must be given a broad and liberal interpretation, the interpretation must also respect the legislative context and purpose. ... [T]he Court must give the term a meaning which is both consistent with the Act's remedial nature but also with appropriate regard to the legal context in which the term was adopted. It is not the court's function, as it would be if applying a constitutional guarantee of rights of private property, to evaluate the legality or fairness of where the legislature has drawn the line, but to interpret and apply it.

[70] We are not persuaded that any of the cases and authorities assist us in finding that the claimant has a claim for a special economic advantage.

[71] We also do not accept the evidentiary basis of this claim. First the claimant is Campbell River Woodworkers' and Builders' Supply (1966) Ltd., not the McDougalls and as such the personal circumstances of the McDougalls are legally irrelevant. It is the owner who is entitled to compensation, not the shareholders of the owner. Second we do not accept the basic tenet of this claim: that, but for the expropriation, the risk of the claimant receiving the projected cash return from the lease laid out by Mendel was the same as the risk of receiving that projected return from long term corporate bonds. Hildebrand stated in cross-examination that he was instructed by counsel to use the long term corporate bond rate as a discount factor. In re-examination he clarified this. He said that it was his professional opinion that the income flow from the base rent in the lease was "fairly analogous" to that from long term corporate bonds (in that both were relatively secure) and that similarly, the reversion value of the lease was "generally analogous" to the redemption value of the bond, (since you received something back at the end of the term). However, he refused to say that that the long term corporate bonds would provide the same security as the lease. The long term corporate bond rate does not consider any business or real estate market risks that are inherent in the return from the lease. In particular, in our opinion, the receipt of $2,800,000 for the reversion value of the lease as capitalized by Mendel has a significantly higher risk compared to the redemption value of a long term corporate bond. If the risks in these two vehicles are not identical there is no basis for the claimant to take the projected return from the lease and value it at the long term corporate bond rate.

[72] More fundamentally, the very characteristic urged on us by the claimant as the heart of its claim for special economic advantage, the lease to Beaver Lumber, was the central component of what was being valued by both appraisers in their determinations of the market value of the property. The value of the lease was included within the "market value" presented by these witnesses for both sides. Hildebrand stated in testimony that the only difference between his calculations of the overall cash flow and Mendel's calculations of market value was in the discount rate used. The difference in the two totals characterized by the claimant as special economic advantage was not an extra item of value. In this respect the present case is to be distinguished from the two cases mentioned above, Esposito and Woolger, in which the owners were successful in their claims for special economic advantage. In Esposito and Woolger the awards for special economic advantage were for features such as the expropriated property's location or the nursery stock on the expropriated property, which were not included in the market value. In the board's view, it is not open to a claimant to present evidence of a market value which necessarily includes the value of the lease, and then counteract that evidence with an opinion of a different kind of expert who applies a different type of discount rate to the value of the very same income stream.

[73] We deny the claim for special economic advantage.

6.  DISTURBANCE DAMAGES - Capital gains tax

6.1  Introduction

[74] One of the effects of an expropriation is that the owner is treated for income tax purposes as having disposed of the property for the amount of the compensation accepted or awarded. If the amount of this compensation is greater than the amount the owner paid to acquire the property, there is a capital gain, and the owner will in principle become liable to pay tax on that gain. In this case the claimant company had in fact paid capital gains tax based on the amount of the advance payment when that payment was received in 1997 (minus some deductions for management salaries). We heard expert evidence from the claimant's accountant, Mr. Huxham, and MoTH's expert on income tax matters, Robert Voyer. After reviewing the relevant sections of the Income Tax Act the board was satisfied that the claimant need not have paid the capital gains tax in 1997. Section 44(2) of the Income Tax Act provides that a taxpayer in these circumstances is not deemed to have received the proceeds of disposition for the property until the earliest of the two following relevant dates:

(a) the day, the taxpayer has agreed to an amount as full compensation to the taxpayer for the property ...taken ...

(b) .. the day on which the taxpayer's compensation for the property is finally determined by [this board (including any appeals of this decision)].

Neither of those events had yet occurred at the date of hearing.

6.2  Claimant's position

[75] The claimant argued that the expropriation brought about a deemed "sale" earlier than the property would otherwise have been sold, and that capital gains tax was therefore payable by it earlier than would have been the case if it had been left to its own devices. This acceleration of the tax should be seen as causing a real expense, measured by the time value of money over the number of years by which the tax was accelerated. This expense, according to the company, should then be recoverable under section 34 as an item of disturbance damage.

[76] The claimant went further, and urged the board to find in this particular case that the property would not have been sold voluntarily in any short time frame, and certainly not as long as the existing lease to Beaver Lumber remained in place. Mr. McDougall testified that he did not intend to sell and, given the income the claimant received from the lease, it would make no sense for the claimant to sell, at least until the expiry of the lease in 2010. The claimant reminded the board that given the corporate nature of the claimant it could continue to hold the property even if the principal shareholders should transfer their shares, to their heirs, for example. In such circumstances, said the claimant, the total amount of tax payable on the receipt of expropriation compensation should be treated as an expense under section 34, because the equivalent tax liability on a voluntary disposition would be so far in the future (at least 14 years until the lease expired) as to have a negligible present value. After we had determined the market value we were asked to consult Mr. Huxham's report to ascertain the amount of capital gains tax that would be payable on the award. The claimant had already paid capital gains tax on the $1,800,000 advance payment received in the 1997 tax year. We had evidence that the capital gains tax on this sum in 1997 would have been $317,427 if no offsetting provisions were applicable. However, the company in fact paid $280,416 because of payments to the directors as management salaries.

[77] The claimant acknowledged that there were a number of legal authorities that purported to deny compensation claims for the tax consequences of an expropriation. The claimant attempted to distinguish some of these cases and pointed out that none of them was binding on us in any event. The claimant urged us to consider the broad and liberal interpretation of expropriation legislation as set out in Dell Holdings Ltd. v. Toronto Area Transit Operating Authority (1997), 60 L.C.R. 81 (S.C.C.), including, in particular, the Ontario legislative provisions for disturbance damages.

6.3  MoTH's position

[78] MoTH took objection to this claim on a variety of grounds. The first observation was that the claimant's liability to pay tax had not yet arisen, and indeed could not arise until after the board had awarded compensation in this proceeding. In addition, the respondent pointed out that the eventual tax liability on the expropriation proceeds would vary according to other income and expense factors in that taxation year. The claimant had provided a chart with a range of different awards of market value we might make together with the rounded amounts of the full capital gains tax that would have been payable on each of these awards at the time of the hearing. However, no information had been provided on the "interest" or the time value of money over the number of years by which the capital gains tax was accelerated.

[79] Applying the usual rule that a claimant must prove its damages, MoTH submitted that the claimant had not met its onus to show that capital gains tax is directly attributable to the disturbance caused by the expropriation. Nor had it proved the total loss that had been incurred by the claimant. The respondent argued that there were so many uncertainties that the tax liability was simply too remote and speculative to be an item of damages. More fundamentally, MoTH insisted that the claim was theoretically unsound. It urged the board to find that tax liability on an award of compensation is not, as a matter of interpretation, a head of damages under the Act and cited a number of cases in support of this principle.

[80] MoTH also pointed out that in all cases where damages are permitted and proved, the claimant or plaintiff nevertheless has a responsibility to mitigate - to take steps to minimize the loss. The Income Tax Act provides that even after the board has awarded compensation in this type of proceeding (and any further appeals are either taken or foreclosed), there is still a further two year period within which an expropriated owner can acquire a replacement property. In this way the owner can continue to defer its liability for capital gains tax until the replacement property is itself sold. This claimant made no serious efforts to mitigate its tax liability damage by finding a replacement property. In addition, the claimant could have reduced its tax liability on the capital gains tax that it mistakenly paid in 1997 by paying out taxable dividends and claiming refundable tax dividends on hand. This would have triggered tax payments for Mr. and Mrs. McDougall personally at an unknown rate. The company as a separate legal entity made no efforts to mitigate its tax liability by this means either.

6.4  Discussion

[81] In order to succeed this claim must fall within section 34(1) as "...reasonable costs, expenses and financial losses that are directly attributable to the disturbance ...".

[82] Professor Todd, in The Law of Expropriation, says at p. 560 "claims for compensation to indemnify the expropriated owner for income tax consequences of the receipt of compensation ... are invariably denied". The claimant attempted to distinguish some of these cases that had denied compensation for claims for income tax. In Hebron Investment Ltd. v. Scarborough Board of Education (1972), 3 L.C.R. 356 (Ont. L.C.B.), for example, the board had held that tax implications had no relevance to the question of determining compensation for market value. The issue of income tax consequences as disturbance damages was not discussed. Similarly, in Peterson v. Calgary (City) (1977), 43 L.C.R. 171 (Alta L.C.B.) the board had also denied a claim for capital gains tax as being irrelevant to the issue of market value. In a later Alberta case, Gapanow Construction Ltd. v. City of Calgary (1993), 50 L.C.R. 275 (Alta. L.C.B.), an attempt was made to fit a claim for additional income tax caused by the expropriation under disturbance damages. However, the board dismissed this in a sentence saying that there could be no disturbance damages in connection with unoccupied land. We agree with the claimant that the reasoning in these cases are not particularly relevant in considering the present claim for capital gains tax as a disturbance damage.

[83] The claimant urged us to consider two cases where tax claims by the claimant succeeded. In Joyce v. City of Saint John (1978), 16 L.C.R. 224 (Prop. Comp. Bd.; N.B.), a claim for recapture of accumulated depreciation allowed as write-offs on previous income tax returns was allowed. However, on appeal, counsel for Mr. Joyce, the respondent, conceded that the Board was in error in making this award. See 18 L.C.R. 78 (N.B.C.A.). Remitting deferred income tax could not be an "expense caused by the expropriation". Instead Mr. Joyce claimed for interest for accelerated income tax on recapture saying that but for the expropriation he would have disposed of the property on his projected retirement, some 13 years after the expropriation. Richard J.A. speaking for the Court, commented on how speculative such a claim was: it was uncertain when Mr. Joyce would have sold the properties and it was also uncertain what the tax consequences would be. There was no precedent for a claim for interest for accelerated tax and, in any event, he was "far from being convinced of the sound basis, logic and reasonableness of such a claim". The claim was denied. The only case where it appears that a claim for tax has been accepted and has not been overturned on appeal is Newfoundland Light & Power Co. v. Carter (1979), 18 L.C.R. 340 (Bd. of Comm. of Pub. Utilities; Nwfd.). In this case the property was valued by the land residual method and on the authority of the New Brunswick Board decision in Joyce (the Court of Appeal decision in Joyce was not considered), the Newfoundland board held that the effect of income tax should be taken into account in arriving at the capitalized value. Thus, the tax in this case is relevant to the market value of the property, which is to be distinguished from the claim in the present case where the tax is claimed as a disturbance damage.

[84] We do not find either of these decisions at the board level particularly helpful. Neither of them provide any detailed reasoning for the award. The facts in Carter are distinguishable from those in the present case and in any event Carter relied on the board decision in Joyce that was overturned on appeal.

[85] We are more persuaded by the New Brunswick Court of Appeal's reasoning in Joyce, particularly with respect to the speculative nature of the claim and the lack of a sound, reasonable, basis for a claim for accelerated tax. Similarly, in the earlier case of Loukras v. The Queen (1974), 7 L.C.R. 240 (F.C.), Urie J. found the claim for an award for taxes that might be due as the result of the expropriation to be speculative. So too, in the case of Manitoba v. Hilger (1982), 25 L.C.R. 308 (Man. Q.B.). The claim for capital gains tax following the expropriation would have been payable on the voluntary sale in any event and the claim was really for paying the tax at some earlier time. There could be no certainty what the capital gains tax rates would be in the future, or whether the tax regime would remain the same; and it was highly speculative when the owner would have decided to sell if it had not been expropriated. The claims in all of these cases were rejected.

[86] In British Columbia, arbitrators have rejected a similar claim for capital gains tax as too remote, the arbitrators noting that all the authorities cited to them were against the claim. See W.J. Ellis Co. Ltd. v. City of Kamloops (1984), 29 L.C.R. 321 at 332. In a decision of this board, Casamiro Resource Corp. v. British Columbia (1993), 50 L.C.R. 99 (B.C.E.C.B.), there was a claim for a tax component to gross up the "income" claim for lost profits that might have been received but for the expropriation. This claim was rejected with the board pointing out that compensation for the market value was on the same basis as a voluntary sale of the mine.

[87] Turning to the present case, as we have already indicated, we accept that the obligation to pay capital gains tax has not yet arisen and will not arise until the date of this decision or the date that any appeal of this decision has been determined. We agree with the appellate decisions in Joyce and Hilger that there is uncertainty as to what the capital gains tax will be on the subject property at some point in the future. We also agree that the claim is more properly characterized as one for the acceleration of tax rather than for the tax itself, which would have been payable on a voluntary sale in any event. However, this claim for the acceleration of tax is even more speculative. We do not know when the subject property might have sold if the expropriation had not occurred. Even in the circumstances of this case, we do not think that an individual shareholder's intentions about the claimant not selling this lease until 2011 can be seen as determinative, especially since this may cover a period when other people own the shares. If the expropriation had not occurred, we do not know what the market value for the subject property would have been at the time when it might have sold. There can be no certainty what the capital gains tax rates would be in the future, or whether the tax regime would remain the same. The claimant cited Frankel Steel v. Metro Toronto, [1970] S.C.R. 726 in support of its argument that it should be entitled to an interest allowance for the number of years that its liability for capital gains tax was accelerated. However, that case did not deal with tax, but rather with moving expenses that were brought forward in time by the expropriation. Nor was uncertainty (of amount or of the state of future law) an issue. It therefore does not assist the board with any of the principal arguments against allowing a claim for accelerated capital gains tax.

[88] With all of these unknowns it is not surprising that there has been no effort by the claimant to quantify the claim for acceleration of the tax, but to say that the tax liability on a voluntary sale would be at least 14 years in the future (until the lease expired) and therefore the deferral would be at least as great as the tax itself. (We note that since the tax is not yet payable, the acceleration is for a shorter time than 14 years.) We agree with MoTH that the claim for acceleration of income tax is uncertain and speculative and has not been proved.

[89] Further, we accept MoTH's point that even if damages had been proved that the claimant would have had a duty to mitigate and that it has not done so. The Income Tax Act provides the claimant with a two year period following our decision (or from the disposition of any appeal from that decision) to acquire a replacement property and to thereby defer any capital gains tax. The claimant said that the Realtor, Mr. Baikie's, evidence was that there were no replacement properties within a reasonable distance of Campbell River that provided a similar income stream with a comparable lease as existed on the subject property. However, replacement property for the deferring of liability for capital gains tax need not meet such stringent requirements. While the length and terms of a lease on replacement property may be a proper consideration that the claimant takes into account in deciding what to do with the advance payment and any further award, it is not relevant to the issue of replacement property for deferring liability for capital gains tax. The claimant's accountant, Mr. Huxham, conceded that the criteria for replacement property under the Income Tax Act is not a property with identical features, and that the claimant knew that there were various properties it could have bought, including participation in the Beaver 2 store, that would have qualified. There were other properties that could have been purchased as a replacement property for the subject property for the purpose of deferring liability for capital gains tax and we reject the claimant's argument to the contrary. The claimant made the voluntary decision to pay tax on an accelerated basis before it was in fact required to do so, and to not defer any of its liability for capital gains tax by buying a replacement property. In these circumstances it may not charge MoTH with the costs of that acceleration.

[90] Finally, we agree with Richard J.A. in Joyce: we are "far from being convinced of the sound basis, logic and reasonableness" of the present claim. In our opinion, this claim for capital gains tax or the acceleration of capital gains tax is not a "reasonable cost, expense or financial loss that is directly attributable to the disturbance...".

[91] Although the claimant refers us to the guidelines in Dell Holdings to treat the Act in a broad and remedial manner in order to fully compensate an owner whose property has been taken by the state, we do not find this principle of assistance in this case. The claim for capital gains tax or the acceleration of capital gains tax is uncertain and speculative; the claimant has not mitigated its loss; it is not a reasonable cost that is directly attributable to the disturbance; and there are a number of Court and board decisions that hold that this claim is not sustainable. While none of these authorities are binding we find a number of them persuasive.

[92] The board denies the claim for capital gains tax or accelerated capital gains tax.

7.  INTEREST

7.1  Section 46(1), Regular interest

[93] We have awarded the claimant company $2,100,000. The advance payments totalled $1,880,000: $1,800,000 was paid on January 3, 1997 and a further $80,000 was paid on October 5, 1999. Under section 46(1)(a) of the Act, the claimant is entitled to interest on any amount awarded in excess of an amount paid by MoTH under section 20(1) or (12), taking into account moneys paid by MoTH to the claimant on account of compensation from time to time, with interest to be calculated annually at the rates specified in section 46(2) and (3).

7.2  Section 46(4), Additional interest

[94] The advance payments under section 20 of $1,880,000 were 89.5% of the total compensation awarded of $2,100,000. Under section 46(4) of the Act, since the advance payment was less than 90% of the total compensation awarded MoTH must also pay additional interest, at an annual rate of five percent, on the principal amounts outstanding at January 3, 1997 and October 5, 1999 respectively until the date of this decision. This board in Richland Farms Ltd. v. British Columbia (Ministry of Transportation and Highways) (1991), 46 L.C.R. 66 established the basis upon which an award for additional interest is to be made. First, while interest under section 46(1) compounds annually, additional interest under section 46(4) provides for simple interest only. Second, the calculation of additional interest runs on the outstanding difference from the date of each advance payment.

7.3  Section 47, Penalty interest

[95] The claimant company is claiming penalty interest under section 47 on the grounds that MoTH has caused an unreasonable delay in the hearing of this matter. Section 47 provides:

47	If, in the opinion of the board, an unreasonable delay in proceedings under this Act has been caused by an owner or the expropriating authority, the board may penalize
	(a)	the owner, by depriving the owner, in whole or in part, of the interest to which he or she is entitled, or
	(b)	the expropriating authority, by increasing, by not more than double, the interest it is required to pay.

[96] The original Form A in this matter was filed on May 30, 1997 by previous counsel. Mr. Coates notified Mr. Musto, previous counsel for MoTH, that he was the new solicitor of record on July 30, 1997. The Form B was eventually filed on September 30, 1997, although the claimant requested that it be filed earlier. A Demand for Discovery of Documents was also made on July 30, 1997 and MoTH ultimately produced a List of Documents dated December 16, 1997. In September 1998, Mr. Coates proposed three possible hearing dates to Mr. Musto - February, May, or September/October, 1999. Mr. Coates stated that his personal preference was September/October but he could be ready in May. Mr. Musto replied that he was unavailable until February 14, 2000. However, after a Notice of Motion seeking an order to set down a hearing date was delivered, Mr. Musto agreed to a hearing date in September or October 1999. The hearing was initially scheduled for September 13, 1999 but a month later it was rescheduled to October 12, 1999.

[97] The claimant company refers to the provisions in the Expropriation Compensation Board Practice and Procedure Regulation, B.C.Reg. 452/87. A Form B shall be filed within 21 days of the Form A having been served and similarly, under Rule 26(1) of the Rules of Court that apply to the board, a List of Documents must be provided within 21 days of receipt of a Demand for Discovery of Documents. MoTH was therefore 102 days late in filing the Form B and 179 days late in providing a List of Documents. MoTH also initially attempted to delay the hearing beyond the dates proposed by the claimant on the grounds that counsel was not available. The claimant says that Ministry's counsel being too busy is not a good enough excuse for this delay and that the claimant is entitled to penalty interest for the delay.

[98] MoTH says that, whatever occurred between counsel during the course of the hearing, the hearing was not in fact delayed. In fact it was held at the time for which the claimant had expressed a preference. It refers us to the test as set out in Bayview Builders Supply (1972) Ltd. British Columbia (Minister of Transportation and Highways) (1999), 66 L.C.R. 176 (B.C.C.A.) at 192: was this "such delay as it would not in the circumstances be reasonable to expect the other party to put up with".

[99] It is true that the Form B and the List of Documents were delivered late, although the correspondence shows that the claimant accepted certain portions of these delays. It is not the case that every failure to meet the time limits specified in the Practice Regulation and the Rules of Court will attract penalty interest. Both the filing of pleadings and the delivery of Lists of Documents are very frequently accomplished at some date after the specified date, although it is fairly well understood by counsel that there are steps that they can take to minimize delay or to seek strict compliance with the time limits. Having reviewed all the documents in this case, and considered the circumstances surrounding the delay in these particular steps, we do not see that either of these delays was so unreasonable that the claimant should not have had to put up with it. In any event, neither delay appears to have contributed to any ultimate delay in the scheduling of a hearing as it was some nine months after the List of Documents was produced that Mr. Coates first raised the subject of setting a hearing date. We agree with MoTH that the hearing was not in the end delayed. We therefore find no basis for a claim for penalty interest.

8.  COSTS

[100] We have awarded the claimant company $2,100,000. The advance payment was $1,880,000. The compensation awarded is 111.7% of the advance payment. Since this percentage is less than 115%, under section 45(5) the board has discretion with respect to the amount of costs to be awarded to the claimant. The claimant made submissions that following June 28, 1999, and the depositing of the Tariff of Costs Regulation, B.C.Reg 189/99, it should be entitled to its costs at Scale 3. MoTH requested that the issue of costs be delayed until after this decision is released in order that it might consider bringing forward a without prejudice settlement offer. In all of the foregoing circumstances, we consider it appropriate to adjourn the matter of costs at this time.

THEREFORE IT IS ORDERED THAT MoTH shall pay to Campbell River Woodworkers' and Builders' Supply (1966) Ltd.:

1. Compensation in the amount of $2,100,000 for the market value of its interest in the expropriated property pursuant to section 31(1) of the Act.

2. Interest on the $2,100,000 under section 46(1) of the Act from January 8, 1997 until paid, with adjustments to take into account moneys paid by the respondent to the claimant as compensation pursuant to section 20(1) and (12) of the Act and as interest. Pursuant to section 46(2) of the Act, interest shall be calculated annually at the following rates:

1) Four and three-quarters per cent (4.75%) from January 1, 1997 to June 30, 1997
2) Four and three-quarters per cent (4.75%) from July 1, 1997 to December 31, 1997
3) Six per cent (6.00%) from January 1, 1998 to June 30, 1998
4) Six and one-half per cent (6.5%) from July 1, 1998 to December 31, 1998.
5) Six and three-quarters per cent (6.75%) from January 1, 1999 to June 30, 1999.
6) Six and one-quarter per cent (6.25%) from July 1, 1999 to December 31, 1999.
7) Six and one-half per cent (6.5%) from January 1, 2000 to June 30, 2000.
8) Seven and one-half per cent (7.5%) from July 1, 2000 to December 31, 2000.
9) Seven and one-half per cent (7.5%) from January 1, 2001 to June 30, 2001.

3. Additional interest on $300,000 pursuant to section 46(4) at the rate of annual rate of five per cent (5%) from January 3, 1997 until the date of this decision, with adjustments to take into account moneys paid by the respondent to the claimant as compensation on October 5, 1999 pursuant to section 20(12) of the Act.