North Van Yard Tax Dispute. What We Know About The Lease

Decision and Order

IN THE MATTER OF AN APPEAL PURSUANT TO S. 50 OF THE ASSESSMENT ACT

CONCERNING:

	B C Rail Partnership B C Railway Company
APPELLANTS
AND
	Assessor Of Area #08 - Vancouver Sea To Sky Region
RESPONDENT

Appeal Nos.:			2005-08-00081; 2005-08-00203; 2006-08-00036
Refer to as:			B C Rail Partnership Et Al v, Area 08 (2007 PAABBC 20070004)
Date of Decision:			April 12, 2007
Properties:	08-44-316-010-0122-7170-5, 0-0, District of North Vancouver 08-44-316-010-0133-9150-X, 1311-1321 1st St W, District of North Vancouver 08-44-316-010-2202-8000-2, District of North Vancouver 08-44-316-010-3107-4705-8, District of North Vancouver 08-44-316-500-2812-3510-4, District of North Vancouver 08-45-328-28-0000-000-000, District of West Vancouver 08-48-338-500.0054874.000, District of Squamish 08-48-390-006428.150, 0-0, District of Whistler 08-48-390-280000.100, District of Whistler 08-48-560-50325.010, Village of Pemberton 08-48-748-03830.000, Squamish Rural
Heard:		January 15, 16, 17, 18, 19 & 25, 2007, at Richmond and Written Submissions last received, March 21, 2007
Panel:		Simmi K. Sandhu, Panel Chair Bruce Maitland, Panel Member
Appearances:		James Fraser, Counsel, for CN P.D. MacDonald, Counsel for BC Railway Company & BCR Properties Ltd.
		Guy McDannold, Counsel, for the Respondent

INTRODUCTION

[1] In July, 2004, the Appellant (“CN”), a privately held corporation, assumed British Columbia’s historic and publicly held railway business. [2]The Provincial government, by way of British Columbia Railway Company (“BCRC”) and subsidiaries, entered into the complicated transaction, in which CN acquired all assets, tangible and intangible, of British Columbia Railway (“BCR”) including the right to operate the provincial railway system. However, ownership of the railbed remained with the Province. The purchase price of all of the assets was in excess of one billion dollars Canadian. The transaction also included the parties entering into a long term lease agreement in which CN was granted a long term tenure to real property located throughout the province owned by the railway, buildings, equipment and the railway track, for the purpose of the operation and maintenance of the railway.

[3] The real property included properties that are the subject of these appeals (the “Properties”), specifically:

i) the Yard Lands comprising:

• For the 2004 assessment roll, the Intermodal Yard (roll no. 316-010-02202-8000-2),
• For the 2005 and 2006 rolls, the Main Yard (roll no. 316-500-2812-3510-4),
• For 2004 and 2005 rolls, Vancouver Wharves (roll no. 316-010-0122-7170-5),
• For the 2005 roll, Lot J (roll no. 316-010-2202-8010-X),
• For 2005 and 2004 rolls, Occupied Portion of Lot A (roll no. 316-010-0133-9150-X),
• For the 2005 roll, the West Vancouver Lands (roll no. 328-000-000-00);
• the Forsythe site (316-010-3107-4705-8 for the 2004 roll) in the Main Yard;
  (collectively, the “North Shore Lands”)
• Whistler Lands (for 2004, roll no. 08-48-390-006428.150; for 2005 & 2006, roll no. 08-48-390-280000.100), and
• Squamish Lands (roll no. 08-48-338-500-0054874.00).

BACKGROUND

The Transaction

[4] As part of the July, 2004 transaction in which CN assumed operation of the railway, CN acquired the shares of BC Rail Ltd., as well as the partnership interests in BC Rail Partnership.

[5] For the purposes of this appeal, the most important aspect of the overall transaction is the Revitalization Agreement and Lease. BC Rail Partnership (the “Tenant”) entered into the Revitalization Agreement with BCRC (the “Landlord”), in which the Tenant acquired the long term right to uninterrupted and exclusive use of BCRC’s right of way, real property, railbed and track for the operation and maintenance of the railway (the “Revitalization Agreement). The Agreement is for an initial term of 60 years, followed by a renewal option of 30 years, followed by 15 renewal options of 60 years each. The terms of the Revitalization Agreement were replicated in a registrable form of a Lease, which the Tenant registered in the Land Title Office (the “Lease”). We will refer to both agreements as the “Lease Agreements”.

[6] As part of the transaction, both BCRC and CN commissioned separate reports from Standard’s & Poor’s allocating the one billion dollar purchase price to the real property and other assets. Standard & Poor’s provided the same allocation to each party. BCRC used the allocation to the real property as the declared value for the purposes of paying the provincial sales tax, and CN used the allocation for the purposes of reporting the transaction in its annual report as required.

Revitalization Agreement & Lease

[7] Section 7.1 of the Revitalization Agreement and section 3.1 of the Lease set out in similar terms the Permitted Uses. Section 7.2 of the Revitalization Agreement and section 3.2 of the lease set out in similar terms the Restrictions on Use.

[8] Section 7.1 of the Revitalization Agreement is reproduced below:

7.1 Permitted Use. The Tenant shall not use nor permit the use of the Leased Property or any portion thereof for any purpose other than the operation and maintenance of a railway, including branches, extensions, sidings, railway bridges, tunnels, stations, depots, rail trackage, rolling stock, equipment, stores, communication or signalling systems and related facilities and equipment used for railway purposes, rail yards, intermodal and other facilities for the loading and unloading, interchange and storage of freight and passengers and other works connected with and ancillary to the railway or for such other uses or works as may be included from time to time within the definition of “railway” in the rail Legislation or for such uses contemplated under any of the Assigned Agreement or any of the instruments comprising the Non-Fee Simple Interests, unless the prior written consent of the Landlord is obtained, which consent may be arbitrarily withheld.

[9] Section 7.2 (and section 3.2 of the Lease) lists uses that are specifically restricted.

[10] The use of the Properties is restricted to the broad array of railway uses. Any use not falling within the permitted railway use requires the approval of the Landlord, which approval may be arbitrarily withheld.

[11] John Lusney, President of BC Rail Properties Ltd., testified on behalf of the Landlord. Mr. Lusney testified that the Landlord would take a broad and reasonable interpretation of section 7 of the Revitaliazation Agreement (section 3 of the Lease). He testified that the uses permitted in these sections are broad, including railway and hotel use for railway. As for uses not specifically permitted within these sections for which the Landlord’s consent is required, he testified that the Landlord would consider any alternate use to the Properties, as long as the use was outside of the 100 foot statutory right of way along the railway track, a contiguous use of the main railway track and consideration of municipal requirements. However, he testified that there will be occasions where the Landlord will say “no” to an application for a use not permitted in the Lease Agreements. He also testified that the Landlord may seek compensation for approving a use not permitted in the Revitalization Agreement. Importantly, he was not able to give specific examples of uses that would or would not be allowed by the Landlord. Each request would be entertained by the Landlord on a case by case basis.

[12] CN argued that the market value of the North Shore Lands should reflect the restriction on use that is contained in these agreements and relies upon the decision in Western Stevedoring Co. Ltd. v. Assessor of Area 08 (2005 PAABBC 20050019 & 2006 SC 509 ). Also, CN says that the market values of the properties are as allocated and declared in the acquisition transaction, which values are less than the assessments of the properties.

[13] The Assessor, on the other hand, says that the restriction on use provides for a broad range of uses that is reflected in the properties’ assessments and that the allocated and declared values in the acquisition transaction do not present actual, or market, values.

ISSUES

[14] The following are the issues in these appeals:

i) What is the actual value of the North Shore Lands for the assessment years pursuant to section 19 (1) of the Assessment Act?

More particularly, the issue to be determined is the highest and best use of these Lands, whether there should be an allowance to the actual value of these Lands for a restriction in use contained in the Lease Agreements, and if so, how that allowance should be quantified.

ii) What is the actual value of the Forsythe Tower and office building on the Forsythe site, but more particularly, should there be an allowance to the actual value for economic obsolescence and if so, how much?

iii) What is the proper depreciation of the improvements on the Yard Lands?

iv) What is the proper classification and actual values of the Whistler and Squamish Lands?

I. ACTUAL LAND VALUE OF THE NORTH SHORE LANDS

[15] Both parties presented the expert evidence of appraisers, David Lane for CN and Craig Barnsley and Paul Borgo for the Assessor. On behalf of CN, the Board heard testimony from Jerry Berriault, Assistant Superintendent of Operations (BC South), Larry Yurkiw, Manager of Real Estate and Business Development, responsible for BC, and Louis Trudel, National Manager for Property Taxation. In addition, Brent Matzek, formerly of Standard & Poor’s, testified by way of teleconference.

Highest and Best Use/Restriction on Use

[16] Generally accepted appraisal practice requires that any valuation of a property be based on the property’s highest and best use.

[17] David Lane, for CN, stated that the highest and best use of the Properties is the use to which they are restricted to under the Lease Agreements, which is the operation and maintenance of a railway.

[18] He did not provide a traditional appraisal report because he stated that the valuation of the Properties represented a unique appraisal problem due to the restriction on use contained in the Lease Agreements. Mr. Lane’s opinion is that section 19(5) of the Act and the Western Stevedoring, supra. decision requires that he value the Properties based on their restricted use, namely their current use for the maintenance and operation of a railway.

[19] On the other hand, Craig Barnsley for the Assessor produced a more traditional narrative appraisal report setting out his conclusion on value for the Properties.

[20] Mr. Barnsley determined that the present railway use is an under-utilization and does not reflect the highest economic return. He determined the highest and best use to be redevelopment under existing I-2 and I-3 zoning. This is based on the Assessor’s view of Mr. Lusney’s evidence that the intention of the Landlord regarding the permitted uses of the lands outside of the actual railway right of way were not significantly restricted in use to any appreciable degree beyond that imposed by municipal zoning regulations.

Board Decision & Analysis

[21] Section 19(1) of the Assessment Act requires the determination of actual value, or "the market value of the fee simple interest in land and improvements". In the case of Crown land that is held or occupied otherwise than by, or on behalf of, the Crown, section 19(5) of the Act instructs that the Assessor "must include in the list of factors that he or she considers under subsection (3), any restriction placed the use of the land and improvements by the owner of the fee.” The Court in Western Stevedoring, supra., held that this section places a duty on the Assessor and the Board to consider any restrictions on use of the land when assessing actual value.

[22] An allowance for a restriction on use is not automatically imposed in every case of Crown ownership with a restriction in place. (see the Court’s decision in Western Stevedoring, supra.).

[23] As for highest and best, the Court, Western Stevedoring, supra., held that it was incorrect to say that …” in all cases of Crown ownership with restrictions that the highest and best use is limited to the restricted use. Each case will depend on its facts”.

[24] The Board must, therefore, consider the restrictions on use contained in the Lease Agreements in determining actual value. The issue, here, is whether the restriction affects value and if so, how is the affect on value quantified.

[25] Mr. Barnsley, in coming to his highest and best use as being redevelopment for industrial uses, relies largely on his view of Mr. Lusney’s evidence.

[26] Mr. Lusney testified that the Landlord will be reasonable in considering uses not specifically permitted in the Lease Agreements. In other words, the Landlord will consider any requests for uses not contained in the Lease Agreements. However, he was unable to provide any specific non-railway uses that the Landlord would permit and he also testified that the Landlord will say “no” on occasion. He also testified that the Landlord may ask for compensation for allowing a non-permitted use on the Properties. Can CN or a sub-lessee be reasonably assured from the reading of the Lease Agreements and the testimony of Mr. Lusney, that any proposed non-railway development under I-2 or I-3 zoning would be probably approved?

[27] In determining whether or not the Landlord would permit a non-railway use not contained in the Lease Agreements, the Board should consider whether or not there is a reasonable expectation that the Landlord would allow this use (see Petro-Canada Inc. v. Assessor of Area #12 (1991) 61 B.C.L.R. (2d) 86 (S.C.)). The evidence of Mr. Lusney does not provide that reasonable expectation.

[28] The Assessor referred to the recent agreement signed by CN with Bell Canada allowing Bell Canada to install fibre optic cables along some of the Properties. The Landlord had not given prior approval to this agreement. The Assessor argued that this is evidence of the broad scope of permitted non-restricted use of the Properties. However, CN submits that this use is included in the enumerated uses in the Lease Agreements as “signalling and communication systems” for railway purposes, though only a few of the cables are used by CN for the railway. Mr. Lusney disagreed with this interpretation and stated that the parties were in negotiations on this matter. The fact that there is an ongoing dispute on the interpretation of this specific term indicates that the scope of the permitted uses is not necessarily broad given the Landlord’s opposition to the fibre optic agreement.

[29] We find that the market value of the Properties is essentially encumbered by the Lease Agreements and is less than the fee simple unencumbered value for the following reasons:

• There is no reasonable probability that a non-permitted use will be approved;
• If a non-permitted use is approved, there is the possibility that compensation will be required. Any compensation would affect market value, reducing the market value to CN;
• The Properties are restricted in use by BCRP (the Crown) and that restriction may not allow them to be developed to their highest and best use.
• The market or actual value of these Properties restricted in use by the Lease Agreements is lower than similar fee simple unencumbered lands based on Mr. Lane’s testimony. We accept his evidence that the rail restriction removes the subject properties from the normal market for industrial properties. This is evidenced by the redevelopment of Lot J and Lot A which were returned to BC Rail by CN as they no longer required these properties for their railway use. There are currently plans to rezone and redevelop these lands into a Costco site. Therefore, once the properties were no longer subject to the restrictions and the use contemplated in the Lease Agreements, they are now the subject of rezoning and redevelopment.

[30] Therefore, we find that the highest and best use of the Properties is the restricted use set out in the Lease Agreements, that is a railway use. This affects the market value of the Properties. The question is how much?

Valuation Evidence

1. CN's Evidence:

[31] Mr. Lane says that as there is no market for the restricted, railway use, the traditional approaches to value cannot be used and instead, a proxy is required for the market value of the Properties.

[32] Therefore, he did not rely upon comparable sales as he argued that there were no sales comparable to the Properties with the same restrictions on use nor did he provide an independent analysis in determining the actual value for the Properties.

[33] Instead, he relied on a number of indicia of value which he said represented the land values of the Properties with the restrictions on use in place:

i) the allocation of the purchase price in the Transaction as set out in the Standard and Poors (S&P) report prepared for CN for accounting purposes.

[34] The S & P report put the market value (unencumbered) for the lands in the District of North Vancouver at $575,000 per acre, and the lands in West Vancouver at $500,000 per acre. Mr. Lane also used an economic adjustment factor from the S&P report of 62.01% to reflect the encumbrances on the Property of the Lease Agreements. The 62.01% is a result of the difference between the value arrived at by S &P and the purchase price. Using the 62.01% deduction on the $575,000 per acre for the North Vancouver lands, Mr. Lane arrived at an encumbered value of $218,500 per acre (rounded), and for the $500,000 per acre West Vancouver lands, $189,500 per acre (rounded).

[35] We have great difficulty with the reliance on the S & P report allocations.

Mr. Matzek, the co-author of the S&P report, in an e-mail to Mr. Trudel at CN made the following comments on the report and its use:

“ 1. The analysis and subsequent report we provided to CN on the BC Rail acquisition is meant for use by the partnership for internal planning purposes related to the sale. The analysis with the report represents a purchase accounting analysis and SHOULD NOT be used or interpreted for any other use. If we were to have done the report for property tax purposes the level of detail and analysis would have likely been different. Not to mention, a rather large economic adjustment was made to the fair value of the assets given the economics of the business and proposed purchase price at that time (value of identifiable tangible and intangible assets were more than the purchase price pre economic adjustment).

2. Given the time constraints on the project, the sheer amount of property to be valued, and level of scope decided upon with the client – we did not put say a land adjustment grid together for every land parcel. We collected data within the area and interpreted it for our analysis.”

[36] Therefore, we have a report that Mr. Matzek admitted is not a real estate appraisal, but rather is a report for internal accounting purposes. The only comparable sales data in the S & P report is a BC Assessment printout of Across the Fence sales along the entire BC Rail track network. There are four sales listed for North and West Vancouver, none of which are remotely comparable to the Properties.

[37] The S & P Report is a mass valuation of hundreds of properties that may or may not reflect market value for any individual property. We have no evidence that the values in the report used by Mr. Lane are the unencumbered or encumbered actual or market values for the Properties.

[38] The 62.01% discount used by Mr. Lane to reflect the diminution in market value of the Properties due to the restriction on use is arrived at by dividing the purchase price by the S & P unencumbered estimate of value of the assets acquired from BC Rail, including land.

[39] We have insufficient evidence before us that the sale price of BC Rail to CN reflected the encumbered market value of the land, or that the sale price in total reflected the market value of all the assets sold, or how the sale price was arrived at by the parties, or what other considerations impacted the sale price or negotiations.

[40] We have insufficient evidence that the numerator we have is the encumbered value of the assets, including land, and no evidence that the denominator we have is the unencumbered market value of the assets, including land. We have no direct evidence that the difference between the purchase price and the S&P valuation represents the diminished land value due to the restriction in use laid out in the Lease Agreements or represents some other factor(s). It is for these reasons we can not accept that the 62.01% adjustment factor represents the diminution in value due to the land use restrictions in the Lease Agreements.

ii) declaration of market values for the purpose of payment of the Property Transfer Tax required as part of the Transaction.

[41] Mr. Lane also relied on BC Rail’s Land Purchase Tax declaration, which we were informed came from a different report prepared by S & P for BC Rail, which report was not tendered as evidence. The values reported for the Properties in that S & P Report are identical to the values in the S & P report prepared for CN. Both values are reduced by 62.01% to $218,500 for North Vancouver and $189,500 per acre for West Vancouver. The one exception was the Intermodal Yard, which was reported at $575,000 per acre, as it was at the time of reporting, going to revert to the Landlord, and thus not be restricted in use by the Lease Agreements. The Intermodal Yard was not returned to BCRP, and forms part of the properties leased from the Landlord to CN.

[42] Normally, Property Transfer Tax reported values are the actual purchase price of a distinct parcel of real estate. The purchase price in the BC Rail – CN transaction was $1 billion for land, track, equipment and rolling stock. S&P produced a report for the Landlord that Mr. Lusney said was used for the Property Purchase Tax values. We do not have this report in evidence that supported the declarations in the tax forms. As such we cannot find that the declarations represent market value of each subject parcel.

iii) 2006 assessments of four acreage industrial properties

[43] Another indication of value used by Mr. Lane were per acre 2006 assessment values for four acreage properties located on the waterfront near the Properties. Mr. Lane’s values per acre for the four properties ranged from $236,453 to $514,000.

[44] The four properties are zoned I-1, while the Properties under appeal are zoned
I-2 and I-3. Mr. Barnsley provided evidence that the Seaspan site (actual value $236,453) was contaminated and the actual value reflected the contamination. Mr. Barnsley was unable to reconcile Mr. Lane’s actual values per acre for the other three with the Assessment Authority records. Mr. Barnsley did note that the properties were a mixture of upland and waterlot, which may account for the differences between Mr. Lane’s values and the Assessment Authority records.

[45] We find that these four 2006 assessment values provided by Mr. Lane do not give us reliable, direct market evidence that relates to the Properties under appeal. Firstly, these are assessed values not actual sales. Secondly, there was some discrepancy in the Assessor reconciling Mr. Lane’s figures with Assessment Authority records, and the four properties are a mixture of upland and waterlot, while the Properties under appeal are all upland properties.

v) values for railway right of way lands set out in BC Regulation 325/96

[46] Mr. Lane argued that, although the Properties, are not railway right of lands as set out in BC Regulation 325/96, the rates set out in the Regulation are an indication of the market land value of the Properties and the restriction on use. He argued that, adjusting the legislated rates for 40% plottage, provides a value that reflects the Properties’ highest and best use.

[47] We have great difficulty with this argument, given that the legislated rates only apply to lands that meet the criteria of railway right of way lands as set out in the Regulation. Typically, rates legislated in the Act and Regulations are rates that are an exception to the general requirement that properties be assessed at market value. The legislature sets the rates to apply only to certain properties that meet the requirements set out in the legislation. The subject Properties do not meet the criteria set out in the Regulation. There is nothing to indicate that the rates are reflective of any market value or that the rates, adjusted or not, reflect the factors that affect the land values of the Properties.

2. Assessor’s Evidence

[48] On the other hand, the Assessor provided the only sale comparables in Mr. Barnsley’s report. Mr. Barnsley used the sales of five similarly zoned properties in Vancouver and North Vancouver, and one property that was appraised for restructuring purposes and not sold. The sales were adjusted for time, and factors such as site remediation. The adjusted sales prices per acre ranged from $551,138 to $986,174.

[49] We do not consider Sale No. 6, the property appraised for restructuring, to be a good comparable as it occurred in October 2000, requiring a 56% time adjustment. It is also not a sale, but a valuation for an internal reorganization and the appraisal is not in evidence at this hearing.

[50] From the sales evidence, Mr. Barnsley determined an actual or market value for the Properties’ large parcels of $900,000 per acre for the 2005 assessment. This value is an unencumbered market value based on his assumption that the Lease Agreements do not affect the Properties’ highest and best use, and he used the sales of properties with a highest and best use very different from our findings. As we have found a different highest and best for the Properties, we can not accept Mr. Barnsley’s value of $900,000 per acre for the large parcels.

3. Board’s Decision & Analysis on Valuation

[51] We are required to come to a valuation based on the evidence before us. We are faced with a situation where we can accept neither Mr. Lane’s valuation due to difficulties with his valuation, nor Mr. Barnsley’s due to our different conclusion regarding highest and best use. We are faced with the requirement that we make a determination of actual, or market value, for the Properties, with little or unreliable market evidence.

[52] In a similar situation, the Board accepted a “proxy” for the market value of the properties in Western Stevedoring, supra. Here, we do not have a specific proxy that we can accept.

[53] We have found that the market value of the Properties are encumbered by the restrictions on their use. Ideally, we would have liked to have had as evidence, sales of comparable properties that are similarly restricted in use, but we do not have this evidence as there are no sales of properties with similar restrictions that are comparable. As such, this presents a challenging appraisal problem, namely arriving at the market value of the Properties with little or insufficient market evidence.

[54] In reviewing the evidence we do have, we have sales of industrial properties that suffer from encumbrances that detract from their fee simple market value.

[55] Sale No. 1 at $683,434 per acre time adjusted, was encumbered by contamination and site reconfiguration costs that detracted from its unencumbered market value.

[56] Sale No. 3 at $554,776 was encumbered by a lack of flood protection and required pre-loading that detracted from the market value of its fee simple interest

[57] The restrictions on the Properties are not the same as the encumbrances on these two comparables, but are evidence of the effect of one or more encumbrances on the market value of similar properties to the Properties. These are actual sales evidence of similar industrial properties and provides some market evidence, though not ideal, from which we can make a reasonable determination of actual value. Qualitatively, these sale comparables are in a similar position with their encumbranced values as the subject Properties with the restriction on use. As indicated earlier, this is not ideal evidence, however, is the best evidence that we have before us. Alternatively, this can be said to represent a proxy of value that has some basis in the market evidence that is available.

[58] Using the average sale price of the two encumbered comparables time adjusted indicates an encumbered value of $619,000 per acre, as of July 1, 2004.

[59] Mr. Barnsley provided six sales of small lots, an agreement for sale of a BC Rail property, and a licence to occupy issued by the District of North Vancouver. He determined from these comparables a base acreage rate for the Forsyth site of $1,900,000.

[60] None of the comparables used by Mr. Barnsley for the small acreage valuation were encumbered by restrictions in use, soil contamination or negative site characteristics. We cannot accept any of these comparables or Mr. Barnsley’s valuation conclusion, as the comparables do not reflect the restriction in use under the Lease Agreements. To value the Forsythe site we will use the encumbered value of $619,000 per acre, as the Forsythe site is also encumbered with the use restrictions in the Lease Agreements.

[61] We find the encumbered base rate for the 2005 Roll is $619,000 per acre. Mr. Lane made no adjustments for time between the 2005 roll actual value and the 2006 roll actual value. Mr. Barnsley analyzed 22 re-sold properties and determined an increase in land values of 1.25% per month. We accept Mr. Barnsley’s evidence of 1.25% per month increase or 15% per annum.

[62] Mr. Lane provided no adjustment for the southern portion of the yard to reflect the impact of the rights of way access and shape. Mr. Barnsley downward adjusted the southern portion of the yard by 50% to reflect the impact of the right of way, access and shape. We do not accept an adjustment for this as the impact of the rights of way, access and shape affects redevelopment of the site to a non-railway use. Because the southern portion of the yard is used for rail purposes and our encumbered value per acre reflects the restriction to rail use rather than a redevelopment use, the encumbered value does not need to be further adjusted.

[63] For the 2004 roll, however, we find that the restrictions on use are not relevant for purposes of determining actual value. The statutory valuation date for the 2004 roll is July 1, 2003, with the state and condition date of October 31, 2003 (section 18 of the Assessment Act), when the Lease Agreements did not exist.

[64] In 2004, the Assessor issued a supplementary 2004 assessment pursuant to section 26(5) of the Act after CN took over operations as CN is a non-exempt party and as such is assessable. CN says that, regardless of the valuation date and state and condition date for the 2004 roll, the Board must take the use restrictions in the Lease Agreements into account even though these documents did not exist at that time. CN says that the provisions in section 18 of the Act apply only to a normal section 12 supplementary assessment but not to a section 26(5) supplementary assessment arising mid-taxation year because to do so would contradiction section 19(5). Section 19(5) of the Act provides that if “…land and improvements are to be assessed under sections 26, 27 and 28….”, the assessor must consider any restrictions placed on the use of the land and improvements.

[65] We disagree with CN. Section 18 provides valuation and state and condition dates to determine actual value for an “assessment roll”. “Assessment roll” is defined by section 1(1) of the Act and “includes a revised assessment roll, a supplementary assessment roll (emphasis added) and any amendments made under sections 63 and 65(10)”. As indicated by both parties, there is essentially one principle of statutory interpretation, namely “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament.”(Bell Express Vu Ltd. v. R [2002] 2 S.C.R. 559) Based on the ordinary and grammatical reading of sections 18 and section 1(1), it is clear that section 18 applies to supplementary assessments. There is no distinction in the Act between a “normal” supplementary assessment and a section 26 supplementary assessment. The scheme of the Act is to determine the actual value of properties in general and actual value is determined by the reference of statutory valuation and state and condition dates. CN argues that to do so would be inconsistent with its interpretation of section 19(5). However, section 19(5) simply indicates that restrictions on use imposed by the owner of the fee must be considered in situations under section 26, where the Crown is the owner of the fee. It does not state that the statutory valuation and state and condition dates are inapplicable. To interpret the section in this manner would be contrary to the scheme of the Act.

[66] Therefore, for the 2004 assessment rolls, we accept the Assessor’s evidence on the land values on the basis that the restriction on use does not encumber or effect the market value of the Properties.

2005 Land Value Conclusions

Intermodal Yard

Base Acreage rate	$619,000
Adjusted to July 1, 2004 (x1.0)	619,000
x site area	12.81 acres
Actual Value 2005 Roll	$7,929,000

Southern Component

Base Acreage rate	$619,000
x site area	9.01 acres
Actual Value 2005 Roll	$5,577,000

Forsythe Land Value

Base Acreage rate	$619,000
x site area	1.46 acres
Actual Value 2005 Roll	$904,000

Main Yard Valuation (including Intermodal Yard, Southern Component and Forsythe Site)

Intermodal and Southern Component	$13,506,000
Blended Value + Forsythe Site	$ 904,000
Total Blended Value:	$14,410,000

West Vancouver lands

Base Acreage rate	$619,000
Adjusted to July 1, 2004 (x1.0)	$619,000
x site area	5.84 acres
Actual Value 2005 Roll	$3,615,000

Lot J

Base Acreage rate	$619,000
Adjusted to July 1,2004 (x1.0)	$619,000
x site area	2.42 acres
Actual Value 2005 Roll	$1,498,000

Occupied portion of Lot A

Base Acreage rate	$619,000
Adjusted to July 1, 2004 (x 1.0)	$619,000
x site area	1.43 acres
Actual Value 2005 Roll	$885,000

Vancouver Wharves (from Jan 1, 2005 to August 4, 2005)

Base Acreage rate	$619,000
Adjusted to July 1, 2004 (x 1.0)	$619,000
x site area	10.82 acres
Actual Value 2005 Roll	$6,697,580

2006 Land Value Conclusions

Intermodal Yard

Base Acreage rate	$619,000
Adjusted to July 1, 2005 (x1.15)	$712,000
x site area	12.81 acres
Actual Value 2006 Roll	$9,121,000

Southern Component

Base Acreage rate	$619,000
Adjusted to July 1, 2005 (x1.15)	$712,000
x site area	9.01 acres
Actual Value 2006 Roll	$6,415,000

Forsythe Land Value

Base Acreage rate	$619,000
Adjusted to July 1, 2005 (x1.15)	$712,000
x site area	1.46 acres
Actual Value 2006 Roll	$1,040,000

Main Yard Valuation (including Intermodal Yard, Southern Component and Forsythe site)

Intermodal & Southern Component	$15,536,000
Blended Value +Forsythe Component	$1,040,000
Total Blended Value	$16,576,000

II. Value of Improvements on the Forsythe Site

[67] The Forsythe Site is located in the Main Yard and includes a control tower and office building.

[68] The control tower on the site was constructed in 1995 and the office building in 1994.

[69] BC Rail, prior to the acquisition by CN, in its rail operations made full use of both the tower, for yard control, and the office building, for administration and yard crew support (changing and lunch rooms).

[70] However, CN says that it does not need the tower for yard control, as they use a system of remote cameras and computers that do not need visual surveillance of the yard or yards under their control. They also argued that administration and yard crew support can be operated out of modular buildings, such as Atco trailers. Mr. Berriault testified that neither the office building nor the tower would have been constructed by CN.

[71] Mr. Lane concluded that the office building and tower represents a significant over improvement relative to their requirements and as such, significant portions of the office building were not utilized or under-utilized. Therefore, he says that the tower and the office suffers from functional obsolescence. Mr. Lane valued the tower and office by way of a replacement model approach. He determined that improvements at the Lynn Yard, which contains Atco trailer(s), would serve the function for CN as the tower and office building at the Forsythe site. He determined the cost of the Lynn Yard improvements and applies physical depreciation. Mr. Lane says that the resulting value accounts for the functional obsolescence found in the Forsythe improvements.

[72] The Assessor costed the control tower using the BC Assessment airport costing manual, while the office building was costed using the industry standard Marshall & Swift commercial cost manual. The resulting calculated replacement cost new was then depreciated to reflect the physical age of each of the improvements.

[73] The Assessor says that there should not be additional depreciation applied for functional and economic obsolescence because the tower and building both continue to provide the same functional utility as when built, and that CN has made a business decision not to use the structures more fully either for itself or in leasing out the offices to other companies.

2004 Assessment Roll

[74] For the 2004 supplemental roll, BC Rail was still operating the site as of the state and condition date as the Lease Agreements were not yet in place. Even, after CN took over the site in 2004, the evidence indicates that the tower and office building were operated in a similar manner as operated by BC Rail. Mr. Yurkiw, of CN, in cross examination stated that CN did not initially change many of BC Rail operations, to maintain BC Rail employee morale during the integration of the two operations. As there was little change made by CN after the acquisition by CN, we therefore accept for the 2004 supplemental roll year the Assessor’s depreciated values for the Forsythe tower and office building as set out in Mr. Barnsley’s report (Exhibit 27) at page 53.

2005 & 2006 Assessment Roll

Office Building

[75] CN has made a business decision to not use the office in the Forsythe building for its administration requirements. They have relocated office staff to Lynn Yards and to Surrey.

[76] By October 31, 2005, CN had vacated the administration portion of the Forsythe building, there was only one office occupied. As of October 31, 2005, the yard crews were using the:

• lunch room
• locker room
• mechanical office
• crew reporting station
• washroom and clean up area

[77] Without the Lease Agreements in place, CN could, if there is a market, lease the Forsythe office space to non-railway tenants. However, there are restrictions imposed by the Lease Agreements which does not allow CN to lease the Forsythe building to a non-rail use. Therefore, although CN made a business decision to transfer some of its offices from this location, the restrictions imposed by the Lease Agreements must be taken into account.

[78] In May 2006, Rocky Mountaineer rented two of the offices in the administration portion. Rocky Mountaineer is permitted, as it is a rail use. In order to lease to a non-rail use under the terms of the Lease Agreements, CN requires the Landlord’s permission, which may be arbitrarily withheld. If the Landlord does grant permission, there needs to be a demonstrated market for the office space.

[79] We can understand Rocky Mountaineer’s interest in the two offices as they operate out of the attached rail yard. We did not hear any evidence that there is demand for these offices from non-rail users. We must, based on the evidence, conclude that the Forsythe building suffers from some functional obsolescence (over-improvement) for the roll years 2005 and 2006.

[80] If the Landlord grants approval for a non-rail use in all or a portion of the Forsythe building and CN is successful in leasing the building, the Assessor can adjust the future roll accordingly. We at this time have no certainty on the matter, and agree in part with CN’s argument that the building suffers from some functional obsolescence as it is an over-improvement.

[81] In order to calculate the obsolescence, we have reviewed the areas that are being used by CN.

[82] The Assessor has informed us that the Forsythe building has six offices, a reception area and a conference room occupying 60% of the building gross area or 4,153 sq. ft. Considering the reception area and conference room as office space, Rocky Mountaineer occupies approximately 25% of the office area, or 1,038 sq. ft.

[83] The yard crews occupy 40% of 6,921 sq. ft, or 2,768 sq. ft.

Office Area In Use	1,038 sq. ft
Yard Crew Area	2,768 sq. ft
Total Assessable Area	3,806 sq. ft

[84] Functional obsolescence: 6,921 sq. ft – 3,806 sq. ft = 3,115 sq. ft
Functional obsolescence as a percentage 3115/6921 = 45%

Replacement cost new	$1,041,301
Less depreciation @ 24%	( 249,672)
	790,629
Less functional obsolescence @ 45%	( 355,783)
2006 depreciated value	$ 434,846
	$ 435,000 rounded

Forsythe Tower

[85] As of October 31, 2005 and June 2006, there were two employees working in the tower. CN is arguing that the employees could be working out of a ground level modular structure, as there is no need for visual contact with the yards under their control. Remote cameras and computers are now used for this function.

[86] For the 2004 supplemental roll, 2005 and 2006 roll years, CN continued to use the tower for directing yard operations. We accept CN’s argument that the tower is not required for directing yard operations, however, as late as June 2006, CN was using it for this purpose. We accept the Assessor’s position that as of his date of inspection in June 2006, the “Forsythe Tower was fully functional and in operation with two control officers at work”. CN did not dispute that the tower has been fully operational through 2006. We accept the Assessor’s depreciated improvement values for 2005 and 2006 rolls.

[87] We accept the Assessor’s conclusion of $521,000 (ie RCN of $667,789 less depreciation of 22%) depreciated value for the 2005 and 2006 rolls. We accept the Assessor’s 5% reduction to $495,000 for the 2004 supplemental roll.

III. Appropriate Depreciation of the Improvements on the Main Yard Lands

[88] Mr. Lane produced a chart (Exhibit 22) where he applied Marshall and Swift depreciation tables to the Assessor’s Reproduction Cost New (RCN) values to determine a revised depreciation cost new value for the North Shore CN Yard improvements.

[89] Except for the Forsythe building dealt with earlier, and one other improvement, the Assessor’s depreciated improvement values and Mr. Lane’s were not far apart.

The one major difference was Dept #4 Site Improvements item 15 – Site paving includes site prep, storm drains and lines.

[90] Mr. Lane’s position was that 16 year old paving would be depreciated by more than the 20% used by the Assessor. It was pointed out to Mr. Lane during cross-examination that the improvements included not only paving, but infrastructure such as storm drains and lines. Mr. Lane admitted his 80% depreciation was for paving, and not for infrastructure that may last much longer than paving.

[91] The Assessor stated that the 20% depreciation figure was not only for paving, but also included site preparation and the underground piping for drainage.

We accept the Assessor’s depreciation figure of 20% as it is applicable to all the site improvements, not just the paving as per Mr. Lane’s testimony.

IV. Proper Classification and Actual Values of the Whistler and Squamish Lands

[92[ Section 1(1) of the Criteria for Railway Right of Way Definition Regulation, B.C. Regulation 325/96 (the “Regulation”) provides that land that occupied by a railway corporation and is a continuous strip of up to 100 feet in width used for the operation of track in place of a railway corporation is considered to be a right of way for track in place. As such, these lands are classified as Class 2- Utilities. Included in these lands is land used exclusively as an interchange or single siding, wye or spur for the operation of track in place of a railway corporation or required to control slope stability, remove snow, secure cuts and fills, protect a line of sight or prevent flooding to allow for the safe operation of track in place of a railway corporation. There are prescribed rates for the right of way for the track in place and for the safe operating lands.

[93] The Assessor essentially takes 50 feet on either side of the centre of the railway track as the right of way for track in place, and classifies the right of way as class 2. However, lands outside the statutory basic 100 feet right of way in the Whistler and Squamish Lands has been classified as class 6- Business & Other. CN says that, to the extent land lies outside the 100 feet wide basic corridor cannot be used for non-railway purposes under the Revitalization Agreement and was not used for active railway operations, it must by inference have been used for safe operation pursuant to section 1(1)(c)(iii) of the Regulation.

[94] However, Mr. Trudel of CN testified that the land in question is not used for the enumerated uses, ie slope stability, removal of snow, protecting a line of sight, etc. These lands outside of the 100 feet right of way has no actual use. Mr. Trudel argues that as CN is not using the lands for its railway operation and can’t use the lands for anything else pursuant to the Revitalization Agreement, the lands should automatically fall under section 1(1)(c)(iii) as safe operating lands.

Board Decision & Analysis

[95] There is no dispute that the lands outside of the 100 feet right of way that are within the Whistler & Squamish Lands do not fall into any of the enumerated requirements set out in section 1(1) of the Regulation. CN says that they should be treated as “safe operating lands” pursuant to section 1(1)(c)(iii) of the Regulation even though they are not required for the uses set out in that section.

[96] Section 1(1) of the Regulation sets out the criteria for the right of way for railway track in place and the requirements for safe operating lands.

[97] This is not a situation of the Board being asked to interpret the regulation, and therefore, to apply the principles of statutory interpretation. Rather, the Board is being asked to infer into the Regulation criteria that are clearly not present. CN is requesting the Board to infer into section 1(1)(c)(iii) a criterion that lands, outside the right of way and not used for any purpose, be considered “safe operating lands”. The Board has no jurisdiction to do this. It is for the Legislature to amend the Act and regulations, not the Board.

[98] As such, the Board has no evidence that the lands in question meet the requirements for class 2-Utilities, and therefore, the only classification available is class 6-Business & other.

[99] The parties have agreed to the values in the event that these lands are classified as class 6-Business & other. They are as follows:

Squamish Lands (338-500-0054874.000) 2004 Supplementary Roll (2005-08-81):

Lands:	PC02:	$101,600	Improvements	0
	PC06:	$187,000	Improvements:	$107,000
	PC06:	$303,000	Improvements	0

Whistler Lands 390-6428.150 2004 Supplementary Roll (2005-08-81):

Land:	PC 02	$1,148,104	Improvements	0
	PC02	$33,333	Improvements	0
	PC06	$585,000	Improvements	0
Total		$1,766,437

390-280000.100 (2005-08-81 & 2006-08-36):

Land:

PC 06

$585,000

Improvement

0

ORDER

[100] The Board orders that the parties provide a joint recommendation to amend the rolls that are the subject of this decision pursuant to the findings set out herein.

[101] The Board should receive a joint recommendation from the parties no later than April 30, 2007 and retains the jurisdiction in the event the parties are unable to agree.

It must be noted here that in my limited knowledge of computers, the only way I could get this information out was to cut and paste it in its entirety.

This dispute was entered into almost immediately after the signing.