A-464-75
Bendix Automotive of Canada Limited (Appel-
lant)
v.
The Queen (Respondent)
Court of Appeal, Jackett C.J., Heald and Ryan
JJ.—Ottawa, February 9, 1978.
Income tax — Income calculation — Valuation of shares —
Parent company agreeing with Control Data Corporation to
exchange its shares for shares in Computing Devices of
Canada — Appellant required to declare dividend to fulfil
agreement — Value of distributed shares for purposes of
non-resident withholding tax — Income Tax Act, R.S.C. 1952,
c. 148, ss. 106(1a)(a), 109(1), 139(1)(a).
This is an appeal from a judgment of the Trial Division
dismissing an appeal from the Tax Review Board which in turn
dismissed appellant's appeal from an assessment increasing the
value of a dividend paid by the appellant. In 1969, appellant
distributed a dividend to its parent corporation to fulfil a share
exchange agreement between the parent and Control Data
Corporation, on the basis of one share of Control Data for each
five shares of Computing Devices held by appellant. Appellant
contends that the value to be placed on the shares for 15%
withholding tax purposes should be based on the value of
Control Data shares acquired by the parent, taking into
account restrictions on transfer in the offer. Respondent values
the shares at the price at which a block of Computing Devices
shares was traded on the Toronto Stock Exchange in August
1969. The issue is whether or not the Trial Division should have
changed the Minister's determination of the value expressed in
money.
Held, the appeal is allowed. The value is the amount for
which the shares would have been sold by a willing, well-
informed owner not acting under pressure to a willing purchas
er not acting under pressure. Two branches of evidence are to
be considered: (1) the market history of the value of the shares
held by persons other than the appellant in the third company
and (2) the consideration received for the block of shares
constituting the dividend by the parent company from a pur
chaser with whom it was dealing at arm's length immediately
after the payment of the dividend. Either the Trial Judge put to
himself the wrong question or he was clearly wrong in conclud
ing that the evidence of the market value of the minority shares
(influenced as it seems to have been by the exchange offer that
arose out of the negotiations between the purchaser and the
parent company) outweighed the evidence of the value of the
consideration negotiated with an arm's length third person for
the block of shares constituting the dividend at the relevant
time.
INCOME tax appeal.
COUNSEL:
H. Stikeman, Q.C., and R. Pound for
appellant.
D. Aylen, Q.C., and D. Olsen for respondent.
SOLICITORS:
Stikeman, Elliott, Tamaki, Mercier & Robb,
Montreal, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
delivered orally in English by
HEALD J.: This is an appeal from a judgment of
the Trial Division [[1976] 1 F.C. 115] dismissing
an appeal from the Tax Review Board which in
turn had dismissed the appellant's appeal from an
assessment dated May 5, 1974, increasing for the
purposes of Part III of the Income Tax Act, the
value of a dividend paid by the appellant.
The issue in this appeal is whether the Trial
Division should have changed the Minister's deter
mination of the value expressed in money of a
dividend of shares paid by appellant on August 7,
1969, to its parent company in the U.S.A., the
Bendix Corporation (hereinafter Bendix). Such a
determination is necessary for the purpose of cal
culating the 15% withholding tax payable under
sections 106(la)(a), 109(1) and 139(1)(a) of the
Income Tax Act, R.S.C. 1952, c. 148. Those sec
tions read as follows:
106....
(l a) Every non-resident person
(a) shall pay an income tax of 15% on every amount that
a person resident in Canada, other than a person described
in paragraph (b), pays or credits, or is deemed by Part I to
pay or credit to him as, on account or in lieu of payment
of, or in satisfaction of a dividend other than
(i) a dividend from a non-resident-owned investment
corporation if the corporation has, previous to the pay
ment of the dividend and at a time when it was taxable
under section 70, paid dividends (other than dividends
on which no tax was payable under this Part) the
aggregate amount of which is not less than the corpora
tion's surplus determined in prescribed manner for taxa
tion years for which it was not taxable under section 70,
or
(ii) a dividend that would not be included in computing
income under Part I by virtue of section 67; and
109. (1) When a person pays or credits or is deemed to have
paid or credited an amount on which an income tax is payable
under this Part, he shall, notwithstanding any agreement or any
law to the contrary, deduct or withhold therefrom the amount
of the tax and forthwith remit that amount to the Receiver
General of Canada on behalf of the non-resident person on
account of the tax and shall submit therewith a statement in
prescribed form.
139. (1) In this Act,
(a) "amount" means money, rights or things expressed in terms
of the amount of money or the value in terms of money of the
right or thing;
The appellant is a wholly owned subsidiary of
Bendix. Bendix is a corporation resident in the
U.S.A. and not resident in Canada. The appellant
was the registered owner of 517,313 shares of the
common stock of Computing Devices of Canada,
Limited (hereinafter C.D.C.). Such shares repre
sented 66.75% of the issued and outstanding shares
of C.D.C. On May 1, 1969, Bendix entered into an
agreement with Control Data Corporation (herein-
after Control Data), a U.S. resident corporation
with which it dealt at arm's length, pursuant to
which Bendix agreed to exchange its shares of
C.D.C. (which were beneficially owned by Bendix
through its 100% shareholding in the appellant) on
the basis of one Control Data share for each five
shares of C.D.C.
As a condition to the Control Data exchange
offer, Control Data required that the Control Data
shares which Bendix was to receive in exchange for
the C.D.C. shares be subject to certain restrictions.
Under the restrictions, Bendix was obligated not to
sell in excess of 25% of the Control Data shares
within the first year after acquiring them and not
in excess of 50% prior to two years from the date
of acquisition.
A formal prospectus and take-over bid circular,
dated May 15, 1969, extended the offer of one
share of Control Data stock for each five shares of
C.D.C. to all shareholders of C.D.C., but was
made subject, inter alia, to Control Data acquiring
90% of the outstanding shares of C.D.C. All of the
conditions precedent to completion of the
exchange offer were completed by July 31, 1969.
By August 7, 1969, 97.9% of the issued and out
standing shares of C.D.C. had been tendered pur
suant to the terms of the exchange offer.
On August 7, 1969, Bendix took the necessary
steps to fulfil its part of the May 1, 1969 agree
ment with Control Data. This involved:
(a) convening a meeting of the Board of Direc
tors of the appellant (of which 5 of 6 directors
were employees of Bendix);
(b) causing it to declare a dividend in kind of
the C.D.C. shares; and
(c) immediately tendering the C.D.C. shares to
Control Data.
The restrictions as to disposal of the Control Data
shares had the effect of reducing their value below
that of unrestricted shares. The price of unrestrict
ed shares of Control Data on August 7, 1969 was
U.S. $149.50. One expert appraiser testified, at
the trial, that an average value for the shares
received by Bendix as of August 7, 1969 would be
U.S. $130 per share. No contrary evidence was
given.
There was never, at any time, any restriction on
anyone with respect to the sale of the C.D.C.
shares, the only restriction being on Bendix with
respect to some of the Control Data shares which
it received in exchange for C.D.C. shares. The
appellant itself made no agreement with Control
Data as to the disposition of the shares of C.D.C.
which it was declaring and paying as a dividend to
Bendix.
C.D.C. shares traded actively on the Toronto
Stock Exchange between January 1 and August
31, 1969, the closing prices ranging from a low of
$23 1 / 8 on February 28, 1969 to a high of $34 on
August 20, 1969. Sales volume of the C.D.C.
shares was as high as 29,772 shares on January 24,
1969 and 36,900 on May 23, 1969, but the last
day on which there was a substantial volume of
shares traded was July 11, 1969, when 3,825
shares were sold. On August 7, 1969, the day the
dividend in question was declared, 50 shares of
C.D.C. were sold at $31 on the Toronto Stock
Exchange. Although the market was thin after
July 11, 1969, prices for C.D.C. shares continued
to rise even after August 7, 1969, and, with a few
exceptions, were above $31 for the sales made
during the balance of the month of August, 1969.
The shares of C.D.C. were not evaluated before
Bendix commenced negotiating with Control Data
and no evidence with respect to the value of the
C.D.C. shares themselves, other than the market
value, was submitted by any of the witnesses at
trial. Appellant's only expert witness at trial, Mr.
Haythe, was not instructed to value the C.D.C.
shares that comprised the dividend and he
expressed no opinion as to their value.
In valuing the dividend in kind of the C.D.C.
shares for purposes of determining the "amount"
of the dividend and hence the tax payable under
section 106 of the Act, the appellant, through
Bendix, obtained an independent valuation of the
Control Data shares (for which the C.D.C. shares
were exchanged) from Mr. Madison Haythe, a
New York investment banker. The Minister, on
the other hand, in making his determination of the
amount of the dividend, multiplied the price at
which 50 shares of C.D.C. traded on the Toronto
Stock Exchange on August 7, 1969 (i.e.,—Canadi-
an $31 per share), by the 517,313 shares of C.D.C.
comprising the dividend in kind.
The sole question raised by this appeal is the
"amount" of the dividend paid by the appellant to
its parent company. As the dividend consisted of a
block of shares in a third company, that "amount"
is by virtue of section 139(1)(a) of the Income Tax
Act, the "value" in terms of Canadian money of
that block of shares.
In my view, in the circumstances of this case,
that `value" is the amount for which they would
have been sold by a willing, well-informed owner
of such shares not acting under pressure to a
willing purchaser not acting under pressure. In
applying that view, it must be borne in mind that
the block of shares in question represents a majori
ty of the shares in a relatively closely held com
pany and that the appellant had decided that it no
longer desired to have the responsibility for the
operation of the business carried on by that
company.
As I appreciate it, there were two main branches
of evidence to be considered, viz:
(a) the market history of the value of the shares
that were held by persons other than the appel
lant in the third company; and
(b) the consideration received for the block of
shares constituting the dividend by the parent
company from a purchaser with whom it was
dealing at arm's length immediately after the
payment of the dividend.
As I understand the facts, either the learned
Trial Judge put to himself the wrong question or
he was clearly wrong in concluding that the evi
dence of the market value of the minority shares
(influenced as it seems to have been by the
exchange offer that arose out of the negotiations
between the purchaser and the parent company)
outweighed the evidence of the value of the con
sideration negotiated with an arm's length third
person for the block of shares constituting the
dividend at the relevant time.
I would allow the appeal with costs and refer the
matter back for re-assessment on the basis that the
value of the dividend distributed as reported by the
appellant should not have been increased.
* * *
JACKETT C.J. concurred.
* * *
RYAN J. concurred.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.