T-5536-78
Hugh Waddell Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Gibson J.—Toronto, December 1;
Ottawa, December 10, 1981.
Income tax — Income calculation — Capital gain —
Valuation day value of shares in C.T.C. Dealer Holdings
Limited — Canadian Tire Dealers Association's auditors
determined that the valuation day value of each share repre
sented by the voting trust certificate was $40.50 Whether
valuation day value should be determined by consideration of
only immediate sale, or formula price derived on retirement or
death, or value beyond the valuation formulae in the declara
tion of trust — Fair market value on valuation day of each
share was $40.50 — Income Tax Act, S.C. 1970-71-72, c. 63,
s. 39(1)(a) — Income Tax Application Rules, 1971, S.C.
1970-71-72, c. 63, Part III, s. 26(3).
On valuation day, the plaintiff owned a voting trust certifi
cate representing 3,345 shares in C.T.C. Dealer Holdings Lim
ited ("D.H.L."). On July 1, 1975 the plaintiff sold the voting
trust certificate for $39.75 per share. The Minister assumed
that the valuation day value of each share was $33.35. The
plaintiff claims that the valuation day value of each share was
in excess of $40.50, the value of the shares on the Toronto
Stock Exchange on valuation day, and the valuation day value
determined by the Canadian Tire Dealers Association's audi
tors. Accordingly, the plaintiff denies that it realized any
capital gain on the sale of the shares. The ownership of D.H.L.
shares was limited to members of the Association, and the
buying and selling of shares was governed by a declaration of
trust executed by the plaintiff in 1971. The Minister considered
only immediate sale to determine fair market value because
such an approach envisages a closing of the purchase and sale
as of December 31, 1971. The plaintiff attacked a second
proposed approach which involved consideration of the formula
price derived on retirement or death because the formula only
deals with voluntary sales of certificates to Canadian Tire
dealers and sales on retirement or death of Canadian Tire
dealer vendors. Therefore the computation of price does not
prove what a dealer would pay for the certificate so as to "step
into the shoes" of the plaintiff on valuation day. The plaintiff
submits instead that such a dealer/purchaser would pay a
premium based on "retention value" because on acquisition
such a dealer could keep such shares until he disposed of his
Canadian Tire business or died. The issue is which of the three
approaches should be used to determine the valuation day value
of the shares in question.
Held, on the pleadings it is not necessary to find precisely
what the premium is so long as the valuation day price is at
least $40.50. The fair market value of the certificate represent
ing 3,345 shares on valuation day is $40.50 multiplied by 3,345.
There was a retention value in the subject certificate and
therefore a premium would be paid for the subject certificate
being an amount in excess of the price of the shares on
valuation day.
Commissioners of Inland Revenue v. Crossman [1937]
A.C. 26 (H.L.), considered. Beament v. Minister of Na
tional Revenue [1970] S.C.R. 680, distinguished. West
Estate v. Minister of Finance for the Province of British
Columbia [1976] C.T.C. 313 (B.C.S.C.) distinguished. Re
Mann Estate [1972] 5 W.W.R. 23 (B.C.S.C.), affirmed
[1974] C.T.C. 222 (S.C.C.), referred to.
INCOME tax appeal.
COUNSEL:
W. Goodman, Q.C. and J. Swystun for
plaintiff.
P. Barnard for defendant.
SOLICITORS:
Goodman and Carr, Toronto, for plaintiff.
Lapointe Rosenstein, Montreal, for defend
ant.
The following are the reasons for judgment
rendered in English by
GIBSON J.: On December 31, 1971 (valuation
day) Hugh Waddell Limited owned a voting trust
certificate representing 3,345 shares in C.T.C.
Dealer Holdings Limited (hereinafter called
"D.H.L."); and on July 1, 1975 sold that voting
trust certificate for a sum equivalent to $39.75 per
share market price of Canadian Tire Corporation
Limited shares. The Minister of National Reve
nue, by assessment, assumed that the valuation
day value of each D.H.L. share represented by the
certificate was $33.35. Hugh Waddell Limited
claims that the valuation day value of each D.H.L.
share was in excess of $40.50 per share and that
because it had sold these shares at $39.75 per
share it had not realized any capital gain on the
sale of the shares for the purposes of the Income
Tax Act, R.S.C. 1952, c. 148, as amended by S.C.
1970-71-72, c. 63, s. 1.
The December 31, 1971 (valuation day) value of
Canadian Tire Corporation Limited shares on the
Toronto Stock Exchange was $40.50 per share.
The significance of this is more apparent from the
statement of facts, Exhibit 55, but the following
from the statement of claim indicates the
significance:
At all material times the Plaintiff operated a Canadian Tire
dealership in Peterborough, Ontario.
The Canadian Tire Dealers Association (hereinafter referred
to as "the Association") is an Association of Canadian Tire
dealers.
C.T.C. Dealer Holdings Limited (hereinafter referred to as
"DHL") is a corporation which was incorporated in 1963 under
Ontario law, with head offices in St. Catharines, Ontario. DHL
was used as a vehicle by Canadian Tire dealers to invest in
Canadian Tire Corporation Limited (CTCL), a public corpora
tion the common shares of which were listed on the Toronto
stock exchange.
From time to time Canadian Tire dealers subscribed for
shares in DHL. The subscription price for DHL shares was
always the stock market value of common shares of CTCL.
At various times from 1963 to 1971 the Plaintiff subscribed
for a total of 3,345 DHL shares.
In 1971 the Association decided that it would be in the best
interests of all members that there be an agreement limiting the
ownership of DHL shares to members of the Association and
governing the buying and selling thereof.
To that end the Association prepared an agreement entitled
"Declaration of Trust". (See Exhibit 2 at trial.) The agreement
provided, inter alia, that
(a) beneficial ownership of all DHL shares would henceforth
be vested in the Association as trustee;
(b) beneficial owners of DHL shares would be issued a
Voting Trust Certificate representing the number of DHL
shares held for their account;
(c) holders of Voting Trust Certificates would receive distri
butions equal to the amount of dividends received by the
trustee on DHL shares; and
(d) Voting Trust Certificates could only be sold on the terms
and conditions permitted by the Declaration of Trust.
On October 29, 1971 the Plaintiff executed the Declaration
of Trust and was issued a Voting Trust Certificate representing
the 3,345 DHL shares of which it was the former beneficial
owner.
On July 1, 1975 the Plaintiff disposed of Voting Trust
Certificates, including the Certificate it had acquired on Octo-
ber 29, 1971.
To compute the capital gain on this 1975 disposition, in
conformity with paragraph 39 (1) (a) of the Income Tax Act
and subsection 26 (3) of the Income Tax Application Rules,
inter alia, it was necessary that the Plaintiff know the fair
market value of the Voting Trust Certificate it had held on
December 31, 1971 (Valuation Day).
Recognizing that dealers who had acquired Voting Trust
Certificates before 1972 would be required to determine the
Valuation Day value thereof when Certificates were subse
quently disposed of, the Association had requested its auditors,
Partridge, Skene & Company, to determine the Valuation Day
value of the Voting Trust Certificates.
The auditors considered that to compute the Valuation Day
value of Voting Trust Certificates, each dealer should use
$40.50 as the Valuation Day value of each DHL share repre
sented by a Certificate.
The Plaintiff claims that $40.50 was the Valuation Day value
of each DHL share represented by a Certificate.
By Notice of Reassessment dated July 28, 1977 the Defend
ant reassessed the Plaintiff's 1975 tax. The reassessment rede-
termined the taxable capital gain on the 1975 disposition on the
basis that $33.35 was the Valuation Day value of each DHL
share.
The reassessment also redetermined the Plaintiff's cumula
tive deduction account. This redetermination was consequential
upon the redetermination of the taxable capital gain mentioned
... above.
"Fair market value" has been judicially defined
in the Canadian courts. See for example, Re Mann
Estate'.
The plaintiff adduced evidence: oral evidence
was given by Lawrence Allan Warren, an owner of
a Canadian Tire Associate store in North Bay,
Ontario and one of the main persons instrumental
in causing to be incorporated C.T.C. Dealer Hold
ings Limited and in causing the declaration of
trust, Exhibit 2, to be executed, and who was and
is an active member in the Canadian Tire Dealers
Association; by Mr. Wallace C. Partridge, char
tered accountant, who since 1963 has been doing
the accounting work for C.T.C. Dealer Holdings
Limited and for the Association and who is famil
iar with all the transactions involving the acquisi
tion and disposal of these certificates, and who
personally valued them at $40.50 as the valuation
day value of each D.H.L. share represented by a
certificate; by Mr. Hugh F. Waddell, the control
ling shareholder of the plaintiff; and by Mr. Ian
' [1972] 5 W.W.R. 23 (B.C.S.C.) McIntyre J.; affirmed
[1974] C.T.C. 222 (S.C.C.).
Ronald Campbell, a valuator who prepared the
report, Exhibit 56. The Minister of National Reve
nue called no evidence.
Mr. Campbell suggested three approaches to
valuation day valuation which he referred to in his
report as Approaches A, B and C and came to the
conclusion that:
Re Approach A, if it is appropriate to consider
only immediate sale when determining fair
market value (see paragraph 23 of Exhibit 56)
$33.34 to $35.89 per share;
Re Approach B, if it is appropriate to consider
the formula price derived on retirement or death
when determining fair market value (see para
graphs 26 and 27 of Exhibit 56) $36.50 to
$37.59 per share;
Re Approach C, if it is appropriate to consider
value beyond the valuation formulas in the dec
laration of trust when determining fair market
value (see paragraph 34 of Exhibit 56) $40.50 to
$46.62 per share. _
The Minister of National Revenue says that
Approach A made by Mr. Campbell in his report
is the only possible fair market value as of Decem-
ber 31, 1971 because based on it, it envisages a
closing of the purchase and sale of the certificates
at December 31, 1971, all the conditions repre
senting the number of D.H.L. shares held and
requirements of the trust agreement having been
fulfilled; and that based on this approach and on
such premises, the fair market value contemplating
such a sale on December 31, 1971 results in a
valuation day figure of $31.34 per share.
The plaintiff submits that the formula price as
determined by paragraph 9 of the trust agreement,
Exhibit 2, is not the fair market value at valuation
day that this Court is required to determine.
The submission is that all that the formula deals
with voluntarily sales of certificates to Canadian
Tire dealers (according to the evidence there have
been none of such sales since the execution of the
trust agreement, Exhibit 2) and sales on retire
ment or death of Canadian Tire dealer vendors,
but the arithmetic computation of price pursuant
to the formula does not prove what a dealer would
pay for the certificate representing the subject
shares so as to "step into the shoes" so to speak, of
Hugh Waddell Limited on December 31, 1971 by
purchasing such certificate. The submission
instead is that such a dealer/purchaser would pay
a premium sometimes referred to in the cases as
based on a "retention value" because on acquisi
tion such a dealer could keep such shares until he
disposed of his Canadian Tire store business or
died and that this premium value would be the
amount over and above that which arithmetically
would be the price computed pursuant to the
formula under paragraph 9 of the trust agreement,
Exhibit 2.
As part of the evidentiary basis to support such
submission, the plaintiff refers to schedule 5 of the
report of Campbell, Exhibit 56, to establish that in
five (5) of the years from 1963 to 1972 dealers
purchasing these certificates did in fact pay a
premium for them, a premium equivalent to the
amount above the Toronto Stock Exchange price
for Canadian Tire Corporation Limited shares on
the relevant closing date of purchase and sale.
In my view, the evidence of Warren, Partridge
and Campbell is also supportive of this submission
that Canadian Tire dealers were at all material
times prepared to pay such a premium to acquire
such certificates when made available to them
pursuant to the trust agreement, Exhibit 2.
The valuator Campbell puts a range of this
premium as the amount equivalent to the excess
over $40.50 to $46.62, a difference of $0.00 to
$6.62 per share ($40.50 to $46.62). In part, he
gives his reasons as follows:
Based on the history of the initial acquisition and trading in
Voting Trust Certificates to December 31, 1971, and based in
particular on those matters set out in paragraph 31 (d) (of his
Report, Exhibit 56), I believe that at December 31, 1971 the
fair market value for Dealer Holdings shares represented by
Voting Trust Certificates determined having regard to value
beyond the Valuation Formula in the Declaration of Trust may
appropriately be taken in a range of $40.50 to $46.62 per
Dealer Holdings share represented by Voting Trust Certifi
cates.
This concept of retention value resulting in a
premium price is enunciated in Commissioners of
Inland Revenue v. Crossman 2 . The headnote in
that case reads in part:
A testator at the time of his death was entitled to a number
of ordinary shares of 100/. each in a company the articles of
association of which imposed rigid restrictions upon the aliena
tion and transfer of the shares in the Company:—
Held, by Viscount Hailsham L.C., Lord Blanesburgh and
Lord Roche (Lord Russell of Killowen and Lord Macmillan
dissenting), that the value of the shares for the purpose of
estate duty was to be estimated at the price which they would
fetch if sold in the open market on the terms that the purchaser
should be entitled to be registered and to be regarded as the
holder of the shares, and should take and hold them subject to
the provisions of the articles of association, including those
relating to the alienation and transfer of shares in the company.
Green's Death Duties, 7th ed. 1971, refers to
this concept in this way [at page 4211:
Accordingly the right to transfer shares in a public company
may be and often is restricted. From the point of view of
valuation for Estate duty, the most important of these condi
tions is that relating to restrictions on transfer.
The principle to be applied where, under the articles of the
company, the right to transfer shares is restricted (e.g., because
they cannot be sold in the open market without being first
offered to other members at a price which is either fixed in
advance or to be fixed in a prescribed manner, or merely
because the directors have power to veto a transfer) was finally
laid down by the House of Lords in Inland Revenue Commis
sioners v. Crossman, Inland Revenue Commissioners v. Mann
([1937] A.C. 26; [1936] 1 All E.R. 762, approving A.-G. v.
Jameson, [1905] 2 I.R. 218, and Salvesen's Trustees v. Inland
Revenue Commissioners, 1930 S.L.T. 387. Cf. Holt v. Inland
Revenue Commissioners, [1953] 2 All E.R. 1499, 1508). The
Act imperatively postulates a sale in the open market, and a
sale connotes delivery with a good title. On the other hand the
restrictions on transfer must not be ignored, because they are
an inherent element in the property which is to be valued. The
principal value is therefore the price which the shares would
fetch in the open market on terms that the purchaser would be
duly registered as holder, but would hold subject to the provi
sions of the articles, including the restriction on (subsequent)
alienation. In other words, it is the price which a purchaser
2 [1937] A.C. 26 (H.L.).
would pay to stand in the shoes of a deceased shareholder, with
good title to get into them and to remain in them, and to
receive all the profits, subject to all the liabilities, of the
position (A.-G. v. Jameson, supra, at p. 230). Even on this
footing, the effect of the restrictions on transfer is not neces
sarily wholly depreciatory. Among the possible profits is the
chance of acquiring the shares of other members of the com
pany under the articles on advantageous terms, e.g., at a fixed
price.
Beament v. M.N.R. 3 is not an authority contrary
to this concept. In the Beament (supra) case, on
the death of Beament, the executors were bound
by the agreement which Beament in his lifetime
entered into with his children. "Pursuant to [that]
agreement, the deceased covenanted with his chil
dren to provide in his will for the dissolution of the
company and the distribution of its assets in
accordance with the provisions of the letters
patent. His estate received $10,725.98." Accord
ingly, as Cartwright C.J. said [at page 687]: "It is
plain ... that no sensible person would have paid
more for them than $10,725.98, and that on a
winding-up the executors could not receive more
than that amount."
In other words, there was no retention value in
the subject shares in that case which would result
in the probability of a premium being paid.
That is not the situation in this case. Instead,
the probable purchaser of the subject certificate
would buy it to retain it while he continued to be a
Canadian Tire dealer or until he died and so for
that time interval such a dealer/purchaser would
be prepared to pay a premium because such cer
tificate had a retention value within the meaning
of this concept.
West Estate v. Minister of Finance for the
Province of British Columbia 4 is also not an au
thority contrary to this concept. That decision had
nothing to do with the application of this concept
of retention value but solely with the application of
the relevant section of the Succession Duty Act of
British Columbia, R.S.B.C. 1960, c. 372. With
respect it would seem that Michael B. Jameson in
his book entitled Canadian Estate Tax illustrates
3 [1970] S.C.R. 680.
4 [1976] C.T.C. 313 (B.C.S.C.).
the approach to determine the main issue which
required determination in the West (supra) case.
At pages 110-111 of this treatise the following
appears:
... Property transferable on or after death
Transactions which enable a person to have the use of
property during his lifetime and to sell it at his death are dealt
with by s. 3 (1) (i) as follows:
S. 3 (1). There shall be included in computing the aggre
gate net value ...
(i) property transferred to or acquired by a purchaser or
transferee under the terms of an agreement made by the
deceased at any time providing for the transfer or
acquisition of such property on or after his death, to the
extent that the value of such property exceeds the value
of the consideration, if any, in money or money's worth
paid to the deceased thereunder at any time prior to his
death;
These types of transactions or agreements are equivalent to
testamentary dispositions and therefore the amount received by
the decedent's estate under the agreement is included as part of
his estate.
The section however goes further and states that the amount
which is included is the amount by which the value of the
property, as valued under the Act, exceeds the money or
money's worth paid to the decedent during his lifetime. Thus, A
during his lifetime agrees with B to sell his farm to him for
$50,000, $5,000 payable then for the agreement, and $45,000
payable after death. When A dies the farm is valued at
$75,000; therefore, by s. 3 (1) (i) the $75,000 less the consider
ation paid of $5,000 is taxable, namely $70,000. But B only has
to pay A's executor $45,000 to acquire the farm, so s. 13 (3)
provides that the executor is only liable to the extent of the
contract price which is paid to him, or $45,000. As to the
difference between the $45,000 and $70,000 this is a benefit to
the purchaser and he is taxed on it under s. 14 as a successor.
The entire $70,000 will be included in the estate for aggrega
tion but the duty on $45,000 will be payable by the executor,
and on the remaining $25,000 by the purchaser. This situation
would only vary where the purchaser was also a beneficiary of
the estate and the executor might have property under his
control passing to the beneficiary.
In my view, there was a retention value in the
subject certificate and therefore a premium would
be paid for the subject certificate representing
3,345 shares of D.H.L. being an amount in excess
of the price of Canadian Tire Corporation Limited
shares on valuation day which as stated is $40.50
per share.
Since on the pleadings it is not necessary to find
precisely what that premium is so long as the
valuation day price is at least $40.50, accordingly I
find on the evidence that the fair market value of
the certificate representing 3,345 shares of D.H.L.
on valuation day within the meaning of and in
conformity with paragraph 39(1)(a) of the Income
Tax Act and subsection 26(3) of the Income Tax
Application Rules, 1971, held by the plaintiff on
December 31, 1971 (valuation day) is $40.50 mul
tiplied by 3,345.
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.