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Citation: 2003TCC259
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Date: 20030502
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Docket: 2000-4185(IT)G
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BETWEEN:
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WILLIAM J. McCLINTOCK,
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Appellant,
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and
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HER MAJESTY THE QUEEN,
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Respondent.
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REASONS FOR JUDGMENT
Rip, J.
[1] William J. McClintock
appeals from an income tax assessment for 1991 claiming that the
Minister of National Revenue ("Minister"), in
assessing, erred in valuing the 24,338 common shares of Alias
Research Inc. ("Alias") sold by him in 1991 in excess
of $6.00 each as of April 25, 1990 and
July 5, 1990.
[2] The Minister was also of the view,
which is disputed by the appellant, that after July 17, 1990
Alias was not a Canadian controlled private corporation
("CCPC") within the meaning of subsection 125(7) of the
Income Tax Act ("Act") and, therefore,
the appellant is not eligible to apply subsection 7(1.1) of the
Act with respect to the disposition of shares of Alias in
1991. A CCPC is a private corporation that is a Canadian
corporation that is not controlled by a non-resident or by a
public corporation.
[3] Whether the common shares of Alias
had a value above $6.00 per common share[1] as at April 25, 1990 and July 5,
1990,[2] will
determine whether the Minister was correct in reassessing the
appellant's income for 1991 in which she
a)
increased his reported other employment income by $36,358;
b)
reduced the appellant's reported taxable capital gains by
$27,269; and
c)
reduced the appellant's claim for a stock option deduction
pursuant to
paragraph 110(1)(d) of the Act by $69,560.
[4] Mr. McClintock is a chartered
accountant. Both before and after May 24, 1990, he was a senior
officer of Alias; he was the company's Chief Financial
Officer and later on, its Senior Vice-President, Finance.
He was also a director of Alias until mid-May 1990.[3]
[5] At all relevant times Alias
carried on the business of creating and marketing advanced
computer aided industrial design ("CAID") software
products. Its year-end is January 31. The Minister concedes
that up to July 17, 1990, when Alias made an initial public
offering ("IPO") of its common shares through the
NASDAQ stock exchange in the United States, Alias was a
CCPC. After July 17, 1990 the majority of Alias' shares
were owned by non-residents of Canada and, in the view of
the Minister, Alias was controlled by non-residents and
ceased to be a CCPC.
[6] The Federal Court of Appeal in
Silicon Graphics Limited v. The Queen[4] held that Alias was a CCPC
throughout its 1992 and 1993 taxation years. The Federal
Court held that there was no evidence that the non-resident
shareholders of Alias acted together to exert control over Alias;
the non-resident shareholders did not exercise de jure
control of Alias. On the evidence before me, Alias'
non-resident shareholders after July 17, 1990 did not act
differently than they did in 1992 and 1993. Alias was a CCPC
after July 17, 1990 and at all relevant times for the purposes of
this appeal.
[7] Therefore, with respect to any
employee stock options he had from Alias, Mr. McClintock
would be able to avail himself of the provisions of
subsection 7(1.1) of the Act on the basis only that
Alias was a CCPC, that is, any employee benefit on the sale of
shares he received from a stock option plan of Alias would be
deemed to have been received by him in the year in which he
disposed of the shares, not in the year he acquired the
shares.
[8] During 1988, 1989 and 1990,
Mr. McClintock was granted options by Alias to purchase
common shares of Alias. On July 5, 1990 he exercised
some of his options and acquired 6,544 common shares of Alias as
follows:
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Option
Date
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Shares
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Share
Price
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Total
Cost
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April 20, 1988
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2,500
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$1.70
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$ 4,250.00
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April 20, 1988
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2,500
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$2.50
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6,250.00
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May 1, 1989
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1,544
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$2.50
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3,860.00
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6,544
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$ 14,360.00
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[9] On May 31, 1991,
Mr. McClintock exercised some more of his options and
acquired 17,794 common shares of Alias as follows:
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Option
Date
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Shares
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Share
Price
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Total
Cost
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April 20, 1988
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2,500
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$6.00
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$ 15,000.00
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May 1, 1989
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1,544
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$6.00
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9,264.00
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April 25, 1990
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13,750
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$6.00
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82,500.00
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17,794
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$ 106,764.00
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[10] Mr. McClintock, on May 31,
1991, sold the 6,544 Alias common shares he acquired on July 5,
1990 and the 17,794 Alias common shares he acquired on May 31,
1991.
[11] The Minister states that the fair
market value of the 13,750 Alias shares on April 25, 1990
and July 5, 1990 was $11.556 per share; the appellant says the
value of each share on those dates was $6.00. The appellant
requires that the shares of Alias have a value of $6.00 on April
25, 1990 and July 5, 1990 for purposes of
paragraph 110(1)(d) of the Act. Paragraph
110(1)(d) provides a mechanism that enables a
taxpayer's stock option benefit to be taxed at capital gains
rates. In 1991, this was accomplished by a deduction of
25 per cent of the benefit deemed by subsection 7(1) to
have been received by the taxpayer in the year in respect of the
shares acquired under the stock option agreement.[5] Among the conditions for the
deduction in paragraph 110(1)(d), as it read in 1991, was
that the amount payable by the taxpayer to acquire a share under
a stock option agreement may not be less than the amount by which
the fair market value of the share at the time of the agreement
was made exceeds the amount, if any, paid by the taxpayer to
acquire the right to purchase the share. The Minister assessed
Mr. McClintock for 1991 by reducing the stock option
deduction.
[12] Each year, Mr. McClintock
explained, the directors of Alias determined the fair market
value amount for each common share of Alias as of April in that
year ("determination year") for purposes of the several
employee stock option or ownership plans of Alias.[6] The amount so
determined would be the price at which the members of each of the
employee stock ownership plans may acquire the shares in the year
following the determination year; i.e. a participant in an
employee stock ownership plan would purchase shares in 1990 at
the price determined in April 1989.
[13] At a meeting on April 25, 1990 the
Board of Directors determined the amount of $6.00 as the fair
market value of each common share of Alias as of April 1990 for
purposes of the various employee stock ownership plans. A
Memorandum of Agreement, effective April 25, 1990, between
Mr. McClintock and Alias confirmed the determination of the
fair market value of the shares for stock option plans of which
he was a participant at $6.00 per share for exercise in 1991,
1992 and 1993.
[14] According to Mr. McClintock, the
determinations of the share values of Alias during the years were
based, among other things, on Alias' financial statements. In
his view, the directors "overestimated the value of the
company" in fixing a $6.00 value to an Alias share in 1990
since there was "too great an increase [in profits] from the
year before".
[15] Mr. McClintock testified that on
April 25, 1990 Alias was considering and investigating, as it had
for a while, the possibility of offering its shares to the
public. Several of its directors were employed with venture
capitalist firms and had experience with technology companies.
They were prepared to relate their experiences with "similar
stage companies". Two venture capitalist firms invested in
Alias in 1987, anticipating a public offering, said
Mr. McClintock.
[16] According to the minutes of the
directors' meeting of April 25, 1990 Alias management
was to "continue expeditious preparations for an initial
public offering" of shares in Alias. U.S. counsel had been
retained for this purpose. Mr. McClintock insisted, however,
no decision to go public had yet been made and in retrospect
"had no idea the IPO would proceed as quickly as it
did". He recalled that the interim financial statements for
the period ending March 31, 1990 distributed to the
directors at the meeting was the first indication that Alias was
profitable. A meeting with underwriters did not take place until
May 1990. A draft preliminary prospectus filed with the
Securities and Exchange Commission ("SEC") in
Washington for comments, is dated May 24, 1990. No underwriting
agreement was signed until July 16, 1990, on the eve of the
sale of the shares, Mr. McClintock recalled.
[17] Risk factors in investing in Alias are
set out in the draft preliminary prospectus. The CAID market in
1990 was new and technological cheques were rapid. The
company's success would be dependent on its principal
software product and related hardware and services. Its main
software operated only on a Silicon Graphics workstation and
developments affecting Silicon Graphics could affect Alias. Alias
had a short history of profitability; it had been profitable for
each of its last eight fiscal quarters since the quarter ending
July 31, 1988 but there was no assurance profits and revenue
would continue.[7]
Alias was dependent on the key management and technical personnel
for success and loss of service of key people may adversely
affect the company. Alias was also dependent upon its proprietary
software technology. All these risks and others,
Mr. McClintock suggested, reduced the share value.
Mr. McClintock did concede that notwithstanding Alias'
poor financial past, it did have a "hot product". In
any event, notwithstanding these and other risk factors, the
underwriters were estimating an IPO price of between US$9.00 and
US$11.00 per common share in the draft preliminary prospectus.[8]
[18] Mr. McClintock explained that the
company planned to employ underwriters to do a "road
show" in July 1990, that is, to introduce the company to
institutional and other major investors and brokers. It was hoped
that any deficiencies in the draft preliminary prospectus would
be corrected by then.
[19] It was only on July 15, 1990 that the
board of directors met with the underwriters and accepted their
recommendation to issue the shares at US$13.00 each. Trading on
NASDAQ commenced on July 17 at that price.
[20] Mr. McClintock explained that his
shares were not liquid and the value of the shares to him was
less than the amount valued by the Minister. As Chief Financial
Officer of Alias, his shares were "locked up" for
135 days. He also referred to a "April 1990"
meeting of the Board of Directors of Alias that provided that in
the event of an IPO, participants in the 1990 employee stock
ownership plan and earlier plans were not to sell their shares
for 180 days after the offering. The 135 day period
terminated November 29, 1990; the 180 day period
terminated January 13, 1991. There would then be a period of
four days, January 14, 15, 16 and 17, 1991, when
Mr. McClintock could exercise his options and sell shares.
Mr. McClintock said he was unaware of the four-day
selling period. He was concerned as well that the release of
Alias' financial reports would also influence when he could
sell his shares. He believed that the first day he could sell his
shares was April 5, 1991.
[21] In cross-examination,
Mr. McClintock said a valuation report of Alias' common
shares was prepared before the directors' meeting took place
on April 25, 1990. He acknowledged there is no reference to the
valuation in the minutes of the meeting. He could not testify as
to the nature of the report. Mr. McClintock's witness,
Mr. Bohdan Myroskiv Mocherniak, testified that
he "understood" a draft valuation report of Alias
shares by Duff & Phelps Financial Consulting Company was put
before the directors of Alias at their meeting of April 25. But
Mr. Mocherniak has not seen the draft report nor does he
know what value was set out in the draft report. Both
Mr. McClintock and the respondent included, among their
documents, a copy of the actual valuation report dated June 1,
1990, prepared by Duff & Phelps ("Duff & Phelps
report"). Mr. McClintock and respondent's counsel
advised that the author of the report would not be called as a
witness. Because both parties refer to the Duff & Phelps
report, I allowed its production. However, I did caution the
parties that in the circumstances, the weight I would give to the
report would be limited. The report lacked evidentiary value.
[22] In its annual report to the SEC for its
fiscal year ended January 31, 1991 ("Form 10-K"), Alias
reported that stock options were granted and the exercise price
of options determined by the directors on April 25, 1990
fixed at $6.00 per share, ". . . was less than the fair
market value for purposes of financial reporting under generally
accepted accounting principles in the United States".
[23] RBC Dominion Securities, on behalf of
an investor group, on April 24, 1990 offered to purchase
50,000 shares of Alias for $3.15 per share, or $6.30 after
consolidation. The offer also contained an option to purchase
other shares of Alias owned by the offeree for a 2 1/2 year
period. The offer was structured so that if Alias became a public
company, the difference between the proceeds of disposition of
any shares sold up to the issue price and the adjusted cost base
of the shares would be divided equally between the offerer and
offeree. The transaction was not completed.
[24] The RBC Dominion Securities offer was
signed by Gary Peter Selke, a vice-president and director
of RBC Dominion Securities at the time. He testified at trial for
the appellant. At time of trial he was president of a private
investment firm. He considers himself a knowledgeable and prudent
investor.
[25] Mr. Selke could not recall
"over the passage of time" how the $3.15 per share for
Alias was determined. It was not an amount he discussed with the
offeree but was determined "on our own account". He
considered the offer to be fair to both sides. He was aware of
Alias, its expertise and reputation. He knew Mr. McClintock
and had met officers of Alias. Mr. Selke was not aware of
any potential IPO for Alias at the time of the offer; he
considered the price adjustment clause in the offer
"innovative". As far as Mr. Selke was concerned,
he thought Alias was a similar but superior company to Softimage,
a corporation acquired by Microsoft Corporation. If the offer had
been accepted the purchaser, who directly owned 24.47 per cent of
Alias' issued shares, would have owned more than
25 per cent of the capital stock of Alias.
[26] Mr. McClintock did not produce a
valuation report supporting his view that the shares of Alias had
a value of not more than $6.00 on the relevant dates. Rather, he
called Mr. Mocherniak, C.A., a Chartered Business Valuator
with Grant Thornton Corporate Finance Inc., to comment on, and
rebut, the findings of a valuation of the Alias shares prepared
by Mr. Tim Dunham for the Canada Customs and Revenue
Agency ("CCRA").
[27] Mr. Dunham is Manager of the Business
Equity and Securities Valuation Section of the CCRA in Toronto.
He is a Chartered Business Valuator and a Chartered Financial
Analyst. He has prepared over 200 business valuations and in
preparing some valuations has considered discounts and sale
restrictions in marketing shares; he also valued about a dozen
corporations considering IPO's.
[28] Mr. Dunham concluded that the amount of
$11.55 was a "reasonable indication" of fair market
value of the shares of Alias on July 5, 1990 and that the value
of the shares on April 25, 1990 was in excess of $6.00
per share. He testified that he did not prepare a valuation as
such, but an "independent critique report of the Alias fair
market value". He used the word "critique" because
the information he "reviewed was largely provided by Alias,
the company's valuation reports and the prospectus . . .
I'm commenting on . . . the calculation they provided".
Mr. Dunham stated from his "perspective the market has
made the valuation and I haven't revalued the market's
price". He accepted the IPO valuation of US$13.00 (or
CDN$15.00) as indicative of the fair market value of Alias'
shares. There was no significant or fundamental change in the
company's operation during the two to twelve weeks preceding
the IPO. The focus of his report, he stated, therefore, was how
much of a marketability discount from the $15.00 is appropriate.
He concluded that a discount of 25 per cent was
appropriate.
[29] Among the information Mr. Dunham
received from Alias was the Duff & Phelps report,
which gave a total equity valuation to Alias of between
$34,000,000 to $39,000.000. Duff & Phelps opined that $3.00
per share of common stock "falls within the range of fair
market value" as of April 25, 1990. The authors of the
report assumed a 25 per cent discount for the lack of
marketability of the shares. Mr. Dunham reviewed the analysis
contained in the Duff & Phelps report concerning other market
comparables, such as companies whose shares traded "over the
counter", and described that information as not relevant to
the valuation of Alias. The eventual IPO price of $15.00
reflected an "IPO value" in excess of $75,000,000, he
noted.
[30] In July 1989 Sony Corp. offered
$10,000,000 to acquire a ten per cent minority interest
in Alias; the offer was rejected as inadequate according to Duff
and Phelps and Mr. Dunham concurred. The Sony offer was
considered by Mr. Dunham who conceded that there may have
been strategic considerations in both the offer and its
rejection. In his report, he found the Sony offer relevant in
that the $6.00 per share value in the Duff & Phelps report
was below the Sony offer.
[31] The Duff & Phelps report also
referred to Crownx, the largest holder of Alias stock, letting
50,000 options, with an exercise price of $2.75 per share, expire
in November 1989.
[32] Mr. Dunham also commented on the
SEC filing by Alias that indicated an issue price per share at
above $6.00, even on May 24, 1990. He said there was no evidence
of changes in the fundamentals of Alias between April 25, 1990
and the IPO date of July 17, 1990. On that day the shares of
Alias were first exchanged in an open market, at arm's
length: the price of the shares was therefore its fair market
value. He therefore concluded that discounts and risk relating to
marketability would be the only factors impacting the value of
Mr. McClintock's investment.
[33] According to Mr. Dunham, the
"concept of marketability is the ability to convert the
property to cash quickly, with minimum transaction costs, with a
high degree of certainty of realizing the expected amount of net
proceeds". He explains that the rationale for a
marketability discount for shares in a company proceeding to an
IPO includes factors, among others, such as the uncertain time
horizon to complete the offering, risk concerning the eventual
sale price and the inability to borrow against the estimated
value of the stock.
[34] In Mr. Dunham's view the
marketability discount would be the difference between a liquid
public shareholding and a private shareholding with a highly
probable IPO. The IPO should be incorporated into the value
estimate as the arm's length transfers on the IPO date meet
the traditional fair market value definition.[9]
[35] In Mr. Dunham's view an arm's
length party would not have been able to purchase an interest in
Alias for $6.00 on the relevant dates. An IPO was moving forward.
On July 17, 1990, the offering was well received by
investors at $15.00 per share and this price, he declares,
represents the fair market value of the shares, less an
appropriate discount for lack of marketability insofar as
Mr. McClintock's shares are concerned.
[36] Mr. Dunham states that the Duff &
Phelps valuation to support a $6.00 value per share reviewed the
same elements as the IPO prospectus that fixed a $15.00 value:
market analysis, product development, historical financial
performance and competitive position. Since nothing changed
between April 25, 1990 and July 17, 1990 insofar as
Alias' operations and outlook are concerned, the underlying
value of the company should be about the same. He summarized the
Duff & Phelps valuation (pre-consolidation):
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Value per Marketable Share based on Comparables
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$3.95
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$4.54
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Less - Marketability Discount
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25%
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25%
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Discounted Share Value
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$2.97
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$3.40
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[37] The Duff & Phelps valuator
determined a pre-consolidation value of $3.00 for each of
the shares owned by Mr. McClintock, including a
25 per cent discount for lack of marketability.
[38] At $6.00 per share, there is a discount
of 60 per cent from the IPO price of $15.00;
Mr. Dunham believes such a discount is too great. Calculated
from April 25, 1990, he observed, there would be a total
return of 150 per cent in less than three months, an annual
rate of return greater than 600 per cent. Such a rate
of return is "implausible", given returns on
alternative investment classes. The implied rate of return from
the exercise date of the options on July 5, 1990, twelve days
before the IPO, would be even greater. He concluded that were
arm's length parties allowed to purchase Alias shares within
weeks of the IPO, they would not be looking at an annual rate of
return of 600 per cent. Mr. Dunham agreed a marketability
discount was appropriate at the relevant dates, but not in the
range of 60 per cent. In his report Mr. Dunham adopted the
Duff & Phelps marketability discount rate of
25 per cent and applied the 25 per cent to
the IPO price of $15.00 as a reasonable and fair market value on
the relevant dates.
[39] During his cross-examination,
Mr. Dunham stated that the 25 per cent discount
from July 5, 1990 would include some compensation for trading
restrictions imposed on Mr. McClintock after July 17, 1990.
"Otherwise", he explained, "the annualized rate of
return would be an improbable 1,000 per cent". He did
concede that from April 25, 1990 a different discount would be
appropriate.
[40] Mr. Dunham reluctantly suggested a
discount amount of 40 per cent to 50 per cent for
completely liquid shares in a private company with no prospects
of an IPO, as of the April 25, 1990 valuation date. In the course
of that exchange, it was noted that Alias had been moving towards
an IPO since 1987, that it had rejected the Sony offer of
$10,000,000 for a 10 per cent stake, that its
underwriters were badgering them, that the preliminary prospectus
of May 24, 1990 suggested an IPO price of US$9.00 to $11.00 and
that in April an IPO was not imminent.
[41] Later on, Mr. Dunham qualified the
40 per cent to 50 per cent discount amount by
remarking that the rate would decline significantly the closer
one got to the date of the IPO. He was influenced by the fact the
IPO proceeded without any apparent problems and sold out in a
"hot IPO market". To him, that indicated the market had
done its own fundamental analysis and more than agreed with the
share price of $15 share.
[42] Mr. Dunham also observed that as
far as the directors of Alias fixing a fair market value of $6.00
a share is concerned, motives for granting employee stock
options, such as for incentive or compensation purposes would
include an intended benefit. In his view, this may partially
explain the difference between $6.00 and $11.556 per share.
[43] One of Mr. Mocherniak's main
criticisms of Mr. Dunham's report is that
Mr. Dunham did not perform any fundamental earnings or asset
based analyses, examine many relevant documents, or talk to many
key directors, officers and employees of either Alias or its
underwriter. Thus, Mr. Dunham was not in an informed
position to value or comment on Alias' common stock.
[44] Mr. Dunham's rejection of the
market comparison valuation in the Duff & Phelps report is
challenged by Mr. Mocherniak. In the latter's view the
comparison companies[10] chosen by Duff & Phelps were appropriate, as they
were in the same line of business as Alias and therefore had a
similar economic profile. The latter is evidenced, he insists, by
the similarity in 1989 pretax margins between the companies'
average and Alias.
[45] Mr. Mocherniak also argues that
Mr. Dunham's valuation of the Alias shares based on the
IPO price is inappropriate, since it is hindsight and hindsight
valuation is "expressly rejected" by the courts, as
expressed in National System Baking v. The Queen.[11] Further, he
adds, the realization, success and price of the IPO would have
been unknown at the valuation dates and thus irrelevant.
[46] The Sony offer of $10,000,000 for a
10 per cent stake is irrelevant, Mr. Mocherniak
declared, since it was rejected on strategic grounds. Further,
Mr. Dunham did not examine the supporting documents and so
cannot accurately comment on the offer. Mr. Mocherniak
suggests that one could infer that Crownx failed to exercise its
option for $2.75 per share because it believed the shares were
worth less than $2.75. Mr. Dunham stated the fact the option
expired does not necessarily indicate the shares had no value.
There may have been reasons why Crownx allowed the options to
expire. But, as Mr. Mocherniak observed, Mr. Dunham
failed to speak to Crownx officials and therefore cannot comment
accurately for the reasons Crownx allowed the option to
lapse.
[47] Another contention by
Mr. Mocherniak is that IPO price is not equal to fair market
value, since, contrary to the definition of fair market value,
IPOs exclude certain buyers, namely retail investors. An IPO does
not constitute an open market sale of shares. Thus
Mr. Dunham's reliance on the IPO price renders its
valuation opinion inaccurate.
[48] Mr. Mocherniak also suggests that
reference to the meeting of directors of April 25, 1990
regarding "expeditious preparations" for an IPO is
irrelevant since contemplation and preparation are not synonymous
with a realized or successful IPO at $15 per share. Also
irrelevant, he says, is reference from the April 27, 1992 SEC
Form 10-K filing describing the option exercise price as
"less than fair market value", since the remark was
made after the valuation dates.
[49] Mr. Mocherniak also criticized
Mr. Dunham for failing to consider post-IPO trading
restrictions since they would impact the risk and liquidity of
the shares.
[50] In Mr. Mocherniak's view, high
rates of return over short periods of time are not uncommon for
private equity investments near IPO. Further, he said, venture
capital portfolio returns should not be equated with individual
investment returns.
[51] Mr. Mocherniak also opined that an
"en bloc" discount should apply to
Mr. McClintock's shares since his shareholding was
minority in nature and thus he had no control over the
investment's rate of return.
[52] Finally, Mr. Mocherniak did point
out the obvious, that the directors of Alias could not have known
on April 25, 1990 what the IPO price would be, when it would
take place and if it would be successful. He observed that a
valuator should perform a fundamental analysis of earnings or
assets of a corporation and speak to its officers when preparing
a valuation and Mr. Dunham did neither. I agree.
[53] In his appeal the appellant is relying
on the determination by the Alias directors on April 25, 1990
that $3.00 per share (pre-consolidated) was the fair market
value for each Alias common share for "purposes" of the
various employee stock ownership plans. Except for the Duff &
Phelps report, there is no indication that for purposes other
than the employee stock option shares, the fair market value was
$3.00 (pre consolidated) on April 25, 1990. The author of the
Duff & Phelps report was aware when he wrote the report that
the directors of Alias had fixed the fair market value of an
Alias common share at $3.00 (pre-consolidated) on April 25,
1990. As I previously stated, the author of the Duff & Phelps
report was not a witness at trial and I have not had the benefit
of him or her being examined with respect to the report's
conclusions.
[54] Mr. Mocherniak has not convinced
me that Mr. Dunham erred significantly in his report. First
of all, it is the trial judge who must exercise his discretion
whether or not, in the particular facts of an appeal, to use
hindsight to assist in deciding whether a purported value of
property is correct or in setting a value.[12] This is particularly so when there
are no sales of any comparable property immediately prior to the
valuation date.
[55] Also, there is no evidence what factors
the directors of Alias considered when they determined fair
market value on April 25, 1990. Mr. McClintock said
financial statements were considered. He also suggested that a
valuation had been prepared. However, I do not have an iota of
understanding how the $6.00 value was gleaned from the financial
statements. Mr. McClintock did not produce a director of
Alias at the time or knowledgeable person who could at least shed
some light on how the $6.00 value was determined by Alias'
directors.
[56] Mr. Dunham's valuation effort
approximates the fair market values of the shares on the relevant
dates. I see no substantial error in Mr. Dunham's report
that, if I were to make an adjustment to his calculations,
granting a discount of, say, 40 per cent, would bring
his values on the relevant dates to $6.00 or less per share on
the relevant dates.
[57] The Alias shares were definitely worth
more than $6.00 each on the relevant dates. I am influenced by
the fact that there was no fundamental or significant change in
the operation of Alias between April 25, 1990 and
July 19, 1990. If this is correct, Mr. McClintock has
not explained the reason for the increase in value of the shares
during the period from $6.00 to the IPO price of $15.00. There is
no evidence, for example, that the prices on NASDAQ increased
proportionally during that period and the price of Alias shares
were adjusted accordingly. The draft preliminary prospectus,
dated May 24, 1990, one month after the directors'
meeting, estimates a price per share of between US$9.00 and
US$11.00, significantly higher than $6.00.
[58] Mr. Mocherniak's evidence was
firstly a challenge to Mr. Dunham's report and secondly,
an attempted defense of the Duff & Phelps report. But at the
end of his testimony, he has not convinced me that
Mr. McClintock's shares had a fair market value of $6.00
or less per share on the relevant dates. Even if I accept all the
criticism Mr. Mocherniak leveled at Mr. Dunham's
report, I would still have reason to conclude that
Mr. Dunham's view as to value is substantially
correct.
[59] I should also add that insofar as
Mr. McClintock's claim for a stock option deduction
under paragraph 110(1)(d.1) is concerned, he disposed of
the shares in issue within two years of their acquisition and is
therefore ineligible for the deduction.
[60] The appeal will be allowed only to
allow the Minister to reassess Mr. McClintock on the basis
that Alias was a CCPC in 1990 and 1991, and only if such a
reassessment would be of benefit to Mr. McClintock.
[61] The appellant shall pay the costs of
his appeal.
Signed at Ottawa, Canada this 2nd day of May 2003.
J.T.C.C.
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