Date: 20001228
Docket: 97-3094-IT-G; 97-3095-IT-G
BETWEEN:
MARION E. HALLATT, HERBERT E. HALLATT,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Bowman, A.C.J.
[1]
These appeals were heard together. The notices of appeal raise a
number of issues but at trial the sole issue was the value of the
shares of Brantwood Manor Nursing Homes Limited
("Brantwood") on December 31, 1971 (V-day). It is
agreed that Mr. Hallatt's appeal for 1986 is to be
allowed without costs in accordance with a consent which, so far
as I am aware, has not been filed. None of the other issues are
being pursued.
[2]
In the result, the assessments for 1988 of both Mr. and
Mrs. Hallatt are to be litigated. There may or may not be
consequential adjustments to Mrs. Hallatt's assessment
for 1989 in respect only of instalment interest as the result of
any variation to her 1988 assessment that the court may
order.
[3]
On December 31, 1971 Mr. and Mrs. Hallatt each owned
50% of all of the shares of Brantwood. In December 1988 they each
sold their shares to 712101 Ontario Limited for $2,417,753. The
total sales commission was $25,000. In filing their returns of
income each appellant declared an adjusted cost base of
$1,250,000 for their shares.
[4]
The respondent assessed the capital gain of each appellant on the
disposition of their shares on the basis that their adjusted cost
base was $250,000.
[5]
The appellants obtained from Campbell Valuation Partners Limited
a valuation of the shares on V-day. That valuation put the value
of all of the shares at between $1,650,000 and $1,900,000 for a
median valuation of $1,775,000 or $887,500 for each appellant. It
is this figure upon which the appellants now rely.
[6]
Mr. Alan Jones, an appraiser called by the respondent, put
the V-day value of the Brantford shares within a range of
$476,000 to $530,000, for a median amount of $503,000, or
$251,500 for each appellant.
[7]
Mr. Wayne Eagle, a real estate appraiser employed by CCRA,
appraised the real property owned by Brantwood at $610,000 as of
December 31, 1971.
[8]
Mr. Gamble took the position that since Mr. Eagle and
Mr. Jones were employees of CCRA their testimony as experts
should not be accepted, because of the apparent lack of
independence. I did not accept this contention. If a person who
is otherwise qualified as an expert happens to be employed by the
party who calls him or her, this is not a basis for excluding
that person's evidence. If there is any ground for believing
that their evidence may be tainted by bias or lack of
independence, this is something that can be explored on
cross-examination. Essentially I agree with the observations on
this point of Bowie J. in Gilvesy Enterprises Inc. v. The
Queen, 97 DTC 811 at 815.
[9]
On May 10, 1999, counsel for the appellants filed with the
court a valuation report prepared by Nora V. Murrant.
The certificate of counsel states that counsel is satisfied that
the report of Nora Murrant represents the evidence that
Howard Johnson is prepared to give.
[10]
Mr. Gamble explained that he was not able to call
Ms. Murrant as a witness because she had left Campbell
Valuation Partners Limited and was working for the Ontario
Institute of Chartered Accountants. Under the terms of her
employment she was absolutely prohibited from providing expert
evidence and he was reluctant to subpoena her. Instead he
attempted to put her report in by calling Mr. Howard Edward
Johnson, an expert valuator with Campbell Valuation Partners
Limited, who sought to introduce Ms. Murrant's
report.
[11]
Obviously, I did not permit Ms. Murrant's report to go
in through Mr. Johnson. One expert of course cannot put in
another's report. I realized that in excluding the report I
was totally cutting the ground out from under the appellants'
case because there was otherwise no evidence to rebut the
Minister's assumption that the V-day value of the shares was
$500,000. Generally, the purpose of any litigious proceeding is
to ensure that justice is done. I did not believe that the ends
of justice would be served by simply dismissing the
appellants' appeals on the basis of non-compliance with a
rule. There was some attempt, albeit imperfect, to comply with
the rule.
[12] The
resolution that I came up with was, on reflection, imperfect but
it was preferable to the alternative of simply dismissing the
appeals. I allowed Mr. Johnson to express his opinion orally
and I ordered that the transcript of his testimony be prepared
and given to the respondent at the expense of the appellants and
that the hearing be adjourned to permit counsel for the
respondent to prepare his cross-examination.
[13] I turn
now to the only issue, the V-day value of the shares of
Brantwood.
[14] Mr. and
Mrs. Hallatt bought the shares of Brantwood in 1966. It was
a private nursing home consisting of one building on a parcel of
1.6 acres, 350' x 200'. Exhibit A-1,
a plan of the property, shows an extension to the building on the
west side of the property cross-hatched in yellow. This extension
was not constructed until long after V-day.
[15] The
portion of the building shown on Exhibit A-1 and described
in evidence as the "central core" was used as a private
nursing home. The construction of the portion to the east of the
central portion was commenced in September 1971, although the
plans for the addition were prepared in the fall of 1970. The
plans were submitted to the Ministry of Health for approval.
Ultimately the plans for a total of 140 beds were approved on
October 26, 1971. However at the end of 1971 only
129 beds were operating.[1] Indeed this situation continued until 1980. In
cross-examination counsel for the respondent put to
Mr. Hallatt a letter that he wrote to the Honourable George
Kerr on September 25, 1980. It reads as follows:
In 1972 we devised and had approved plans for the renovation
of our 60 bed Nursing Home, together with the addition of a new
105 bed wing. The new wing together with the renovated existing
facility had a total capacity of 140 beds, which were approved by
the Ministry, who signed and stamped the finished working
drawings.
Construction was commenced in the late fall of 1970 with the
whole project being completed in March of 1972. The initial
construction of the 105 bed wing was completed in August of 1972,
and in order to bring the beds into active use as quickly as
possible, we requested an inspection by the Ministry for approval
at that time. Renovations on the existing Nursing Home had only
just commenced. Accordingly, the Inspector approved the 105 new
beds together with the existing 24 beds, giving us a total
licenced capacity at that time of 129 beds. She (the Inspector)
stated that when all renovations in the existing wing were
completed the additional 11 beds would be approved for occupancy.
We were to advise the Ministry accordingly and they would then
carry out a supplementary inspection for the purpose of approving
the additional 11 beds. On completion of renovations we requested
the required inspection for the purpose of approving the 11
beds.
However, we were promptly advised of a freeze on the licencing
of new Nursing Home beds – apparently for budgetary reasons
– and our request was denied. We pointed out that we were
not asking for new licenced beds, but simply confirmation of the
Originally approved capacity of 140 beds. Up to the present time
we have received no satisfaction, and feel that the
Ministry's position is not only legally untenable but also
sets a most dangerous precedent. That is the Ministry after
formally agreeing to the construction of a definite number of
beds on which the owner and financial people have related all
feasibility studies, the Ministry on completion of the project
can then arbitrarily abrogate its commitment thus endangering or
possibly sabotaging the entire project.
For this reason we feel appropriate action should be taken
even to the point of legal proceedings, and for this purpose we
wish to retain your services.
[16]
Mr. Hallatt testified that the construction of the east wing
was between 85% and 90% completed and that they began moving many
patients into it in late February 1972. He also testified that
there were no vacancies in the nursing home at this time.
[17]
Mrs. Hallatt is a professional long-term care administrator
and she ran the nursing home. She was an impressive witness and
her memory was excellent. She confirmed that there were no
vacancies in Brantwood at the relevant time. Indeed there was a
waiting list for people who wanted to be admitted.
[18] Although
the evidence on this point is not as clear as it might be, given
that we are attempting to reconstruct a situation that prevailed
almost 30 years ago, I think the better view is that on
December 31, 1971, Brantwood had the potential capacity to
operate 140 beds but legally it could operate only 129. It was at
that time however reasonable to expect that the additional 11
beds would be licensed, even though that expectation had not
materialized by 1980. I base this substantially on
Mrs. Hallatt's testimony.
[19] In 1972
the Nursing Homes Act, 1972 came into force. It replaced
the earlier Nursing Homes Act and represented a
substantial revision of the previous law. One significant change
took into account the Health Insurance Act, 1972.
Section 14 of the Nursing Homes Act, 1972 read as
follows:
Where a licensee provides services that are insured services
under The Health Insurance Act, 1972, payment therefor
under the said Act, together with such co-payment, if any, as is
prescribed by the regulations, shall be deemed payment in full
for the services.
[20] Neither
of these acts was in force on December 31, 1971. They came
into force in 1972. Evidently their imminent passage was
anticipated in 1971.
[21] It would
seem reasonable to conclude that a major overhaul of the health
care system in Ontario effected by the Health Insurance Act,
1972 and the Nursing Homes Act, 1972 was anticipated
and that expectation might have affected the price at which
nursing homes were bought and sold. Mr. Jones, an appraiser
called for the respondent, mentioned in his report that on
April 26, 1971 the Province of Ontario announced that as of
April 1, 1972 care in nursing homes would be an insured
service and that on May 17, 1971 the Minister of Health
announced that further expansion and approval of new nursing
homes would be granted based on a guideline of 3.5 beds per 1,000
of population. Neither Mr. Jones nor any other witness
commented on what effect, if any, these announcements might have
had on the price of nursing homes in the province.
[22] The
result is that on December 31, 1971 Brantwood owned a
substantially completed nursing home with a potential 140 beds of
which 129 were legally operable.
[23]
Mr. Johnson was called as an expert for the appellants. He
stated that he was satisfied that the shares of Brantwood had a
value between $1,650,000 and $1,900,000. I shall attempt to
summarize his basis for this conclusion. He used what may be
described as the discretionary cash flow capitalization method as
opposed to the earnings capitalization method used by
Mr. Jones.
Number of beds available 140
Vacancy rate 5% 7
133
Annual revenues based on a report
by Chambers & Company Limited[2] $681,000
(The Chambers report was not put in evidence.)
Operating expenses: 70% of revenues
$681,000 x 70% = $476,700 rounded
to
$477,000
Normalized operating cash flow
(earnings before interest, taxes and
depreciation and amortization based
on Chambers
report)
$204,000
Less income taxes
(estimate)
$90,000
$114,000
Less sustaining capital
reinvestment
$14,000
less
CCA
$5,000
$9,000 $9,000
Maintainable discretionary cash
flow
$106,000[3]
[24] Assume a
9.43% weighted average at the end of 1971 as the cost of a
conventional mortgage. Since this cost is tax deductible the tax
deduction must be factored in as follows:
9.43 x [1-49%] = 4.8093 x .75 (ratio of debt to total capital) =
3.6%
3.6% is therefore the after tax cost of the debt component of
the weighted average cost of capital.
[25] The
second part of the calculation is to determine the cost of
equity, bearing in mind that 75% will represent debt and 25%
equity. Mr. Johnson assumed a leveraged cost of equity of
23.4% (on the assumption that there is no debt). 25% of that
amount (the debt to equity ratio) is 5.9%. This, added to the
after tax cost of debt as calculated above of 3.6%, gives a total
of 9.5%. From this one deducts inflation of 4.5% to arrive at a
weighted cost of capital of 5%.
[26] One then
takes that as the capitalization rate of 5% and divides the
$106,000 (the maintainable discretionary cash flow) by it to
arrive at $2,120,000. To this certain adjustments are made:
(a)
add the $71,000 shareholder loan receivable;
(b)
deduct the interest bearing debt of $392,000 at the end of
1971;
(c)
deduct $400,000 estimated construction costs to complete the new
wing, net of $98,000 being the present value of CCA on such
capital expenditure;
(d)
add the present value of the CCA on the existing assets, in the
amount of $72,000;
(e)
add the value of the excess land — about one-half acre (or
22,000 square feet) — at $8.66 per square foot, or about
$190,000.
[27] The
result is the following:
$2,120,000 + $71,000 - $392,000 – [$400,000 - $98,000] +
$72,000 + $190,000 = $1,759,000 rounded to $1,760,000.
[28] Mr.
Johnson concluded that the approximate mid point between
$1.65 million and $1.9 million, or $1.76 million, is an
appropriate fair market value for the shares of Brantwood.
[29] Mr.
Johnson spoke of "post-acquisition synergies" that
might affect the value, but it is not clear to me, even assuming
I know what they are, how such synergies — essentially
possible administrative cost savings — could have a
significant bearing on the price a purchaser would pay.
[30] I have no
particular difficulty in understanding the mathematical
calculations provided by Mr. Johnson. It must however be
borne in mind that what the court has to do in a valuation case
of this type is to attempt to arrive at the price upon which
willing and knowledgeable vendors and purchasers would settle.[4] This is a
relatively mundane task in which common sense and commercial
reality necessarily play a large part. In general the shares of a
private closely held corporation must be valued on the assumption
that the corporation will continue to carry on business as a
going concern. In other words the breakup value is not an
appropriate criterion where the company is carrying on an active
business. Mr. Johnson's valuation is of course premised
on the assumption that the company would continue to carry on the
nursing home business.
[31] The
difference between Mr. Jones' appraisal and
Mr. Johnson's appraisal is, to put it mildly, startling
— $503,000 versus $1,760,000.
[32] The
respondent put in evidence two expert witness reports.
Mr. Eagle valued the nursing home at $610,000 as real estate
within an ongoing business. Mr. Jones used some of
Mr. Eagle's conclusions in his report.
[33] The
following appears in the Jones report:
As at December 31, 1971 the company, in addition to the assets
required for the operation of a 55 bed nursing home, owned
adjacent land upon which construction had commenced for premises
that would be capable of containing an additional 85 licensed
beds. Application for the license had been made as at the
valuation date and it was expected to be approved by the time the
construction was completed.
A formal appraisal was obtained from an accredited Real Estate
Appraiser to determine the value of the operating nursing home as
well as the excess land owned by the corporation and the value of
the uncompleted construction as at December 31, 1971.
Correlation of Methodologies
Comparative Market
Approach
$476,000
Capitalized Earnings
Approach
$530,000
Value indicated by "Rule of
Thumb"
$476,000
[34] The
comparative market approach figure of $476,000 is made up as
follows:
Brantwood Manor Nursing Homes Limited
Share Valuation
As At December 31, 1971
Comparative Market Approach
Shareholder's
equity
$41,509
Value estimate of existing nursing
home
341,000
Cost to date of east wing addition 149,900
Value estimate of land for addition 58,000
Value estimate of surplus
land
60,000
$650,409
License application ($2,000 x 90% x
85)
153,000
Total $803,409
Less:
Book value of real
property
$317,206
Book value of intangibles
9,804
327,010
Adjusted net book
value
$476,399
Rounded
$476,000
[35] The
$530,000 figure is arrived at as follows using the earnings
capitalization approach.
Brantwood Manor Nursing Homes Limited
Share Valuation
As At December 31, 1971
Capitalized Earnings Approach
Estimated annual revenues
55 beds @ $12.50 x 365
$250,938
85 beds pending
@ $12.50 x 365 x
90%
349,031
$599,969
*
Less: estimated vacancy rate (7.5%)
44,998 $554,971
*Projected expenses
(70%)
388,480
Projected net income before
tax
$166,491
Income
tax
70,746
Estimated maintainable
earnings
$95,745
**
Capitalized @
11%
870,412
Less: construction costs to be
incurred
400,000
$470,412
Add value estimate of surplus
land
60,000
Fair market value of
shares
$530,412
Rounded
$530,000
*
Estimations compiled by Ontario Ministry of Health
**
Capitalization rate based upon our review of
economic indicators as at December 31, 1971.
[36] I have
difficulty in accepting either appraisal in its entirety.
Mr. Johnson's opinion of value is based upon a number of
unsubstantiated hypotheses. For example the annual revenues of
$681,000, based on the Chambers report which was not put in
evidence, is not supported. Indeed the revenue for the year ended
December 31, 1971 was $241,616. This of course does not take
into account the anticipated revenue from the additional beds.
The total expenses before income tax were $226,985.73. If one
removes from this figure the interest expense of $22,435 and
depreciation of $18,056, the expenses before interest,
depreciation and income tax become $186,494, or 77% of gross
revenue, not 70% as assumed by both Mr. Jones and
Mr. Johnson.
[37] The
deduction of inflation of 4.5% from the 9.5% as calculated above
to arrive at a capitalization rate of 5% was not explained.
Mr. Jones used a capitalization rate of 11%. His choice of
this figure is not explained either and he deducts nothing for
inflation. I assume that the difference in capitalization rates
may be attributable in part to the fact that they were
determining capitalization rates for the purposes of and within
the context of different valuation methods.
[38] One of
the things about Mr. Johnson's opinion that I find
particularly hard to accept is that he is of the view that an
informed purchaser would on December 31, 1971, pay upwards
of 1.7 million dollars for a company whose profit and loss
statement for the year ended December 31, 1971 shows a net
profit after tax of $11,318.27. This strikes me as unrealistic.
It is true that it could reasonably be anticipated that once the
new wing was completed and all the beds fully operational the
revenues would increase, and a purchaser might very well consider
the profit and loss statements to be of little significance.
Nonetheless it would be surprising if a prospective purchaser
were to be totally oblivious to the financial results in the year
of acquisition. Moreover, although I have decided that the
comparative market approach in this case is unreliable it does
seem that the $1.7 million figure is very much out of line when
one considers that a 51 bed home on Victoria Street in Hamilton
(discussed below) sold in 1974 for $386,000.
[39] One
significant difference between Mr. Johnson and
Mr. Jones is the deduction by Mr. Johnson of a 4.5%
factor for inflation. Mr. Jones makes no such deduction. The
problem is that I have no evidence in either direction that would
justify the inclusion or exclusion of a factor for inflation.
Mr. Johnson's computation of the capitalization rate is
reasonably comprehensible right up to the deduction of the 4.5%
component for inflation. The treatment of inflation in the
valuation of a business is a complex matter. In some
circumstances its exclusion may be justified and in others its
inclusion may be appropriate. Whatever may be the treatment by a
particular appraiser it requires a detailed and comprehensive
explanation. No such explanation was provided.
[40] Before I
express my conclusion some preliminary explanations and
observations are in order. The primary onus of proof is on the
appellants. There is, however, an unfortunate tendency in income
tax appeals to put an undue emphasis on onus of proof. We all
know what was said in by Rand J. in Johnston v. Minister
of National Revenue, [1948] S.C.R. 486 and
Cattanach J. in M.N.R. v. Pillsbury Holdings Ltd.,
64 DTC 5184. In the former case, Rand J. spoke of
"demolishing" the basic fact upon which the taxation
rested. The term "demolish" is somewhat infelicitous in
that it connotes a wholesale annihilation of the factual
underpinning of the assessment and a concomitantly high standard
of proof.[5] The
standard is a civil one and requires proof on a balance of
probabilities. A prima facie case suffices if it is
unrebutted. This view is supported by the judgment of
Duff J. in the Supreme Court of Canada in Anderson
Logging Co. v. The King, [1925] S.C.R. 45 at 50.
[41] A recent
and comprehensive exposition of onus of proof in tax cases is
contained in Hickman Motors Ltd v. Canada, [1997]
2 S.C.R. 336 at 378 to 380, per
L'Heureux-Dubé J., with whose general approach
and conclusions McLachlin, LaForest and Major JJ. agreed. It
is interesting to compare the statements in Hickman Motors
with the statement in Communauté Urbaine de
Québec et al v. Corp. Notre-Dame de Bon-Secours,
[1994] 3 S.C.R. 3, where Gonthier J. said at
p. 15:
The burden of proof thus rests with the tax department in the
case of a provision imposing a tax obligation and with the
taxpayer in the case of a provision creating a tax exemption.
He was of course considering an exemption provision of the
Quebec Municipal Taxation Act.
[42] The
"demolition" of a simple fact is one thing. The
demolition of an expert opinion on which an assessment is based
is somewhat more complicated. The fair market value of a piece of
property is a matter of expert opinion but it is ultimately a
question of fact in which the court must derive such assistance
as it can from the conflicting opinions of the experts, but in
which the court must ultimately make its own decision on value.
Grove Crest Farms Limited et al. v. The Queen,
96 DTC 1166; Western Securities Limited v. The
Queen, 97 DTC 977; Erb et al. v. The Queen,
2000 DTC 1401; Bibby Estate v. The Queen,
83 DTC 5148 at 5157. In Western Securities I
said at page 979:
One further problem arises in valuation cases of this type.
Typically both parties call expert witnesses. In many cases,
these witnesses are not divided on any serious question of
principle, although occasionally they may differ on the highest
and best use of the property being appraised. The major
difference usually lies in the choice of comparables used and the
positive or negative adjustments to be made to particular
comparables based on such factors as location, the timing of the
sale, or other physical characteristics of the property. It
frequently happens that the judge determines a value somewhere
between the opposing positions of the experts, not because of any
desire to reach a Solomonic compromise, but because of a
recognition that the positions adopted by the experts represent
the polarized extreme ends of value. There is a danger that
experts, albeit in good faith, may become advocates and their
positions may become adversarial. For this reason a disinterested
arbiter must often conclude that it is unwise to adopt entirely
the position of one or the other and that it is more likely that
a fair — I hesitate to use words such as "right"
or "correct" in the necessarily imprecise area of
valuation — value is likely to be somewhere between the two
extremes.
[43] In cases
where the determination involves questions of fact, law and
opinion (as, for example, in scientific research cases such as
Northwest Hydraulic Consultants Limited v. The Queen,
98 DTC 1839) the matter becomes even more complex. It
is important to recognize what the role of the expert is.
Robertson J.A. in RIS-Christie Ltd v. The Queen,
99 DTC 5087, put it as follows at p. 5089:
[11] As a
preliminary matter, the parties raised the issue of the proper
role of expert witnesses in interpreting the scientific research
provisions of the Act. In light of Dr. Razaqpur's conclusion
that repeatability is an essential element of scientific
research, some guidance on this issue is required.
[12] What
constitutes scientific research for the purposes of the Act is
either a question of law or a question of mixed law and fact to
be determined by the Tax Court of Canada, not expert witnesses,
as is too frequently assumed by counsel for both taxpayers and
the Minister. An expert may assist the court in evaluating
technical evidence and seek to persuade it that the research
objective did not or could not lead to a technological
advancement. But, at the end of the day, the expert's role is
limited to providing the court with a set of prescription glasses
through which technical information may be viewed before being
analyzed and weighed by the trial judge. Undoubtedly, each
opposing expert witness will attempt to ensure that its focal
specifications are adopted by the court. However, it is the
prerogative of the trial judge to prefer one prescription over
another.
[44] From the
foregoing it is clear that the court is not bound to accept any
expert opinion. Indeed, since the function of the expert is to
assist the court in arriving at its own conclusion, the
expert's conclusion is frequently of less importance than the
reasoning that lies behind the conclusion.
[45]
Mr. Jones mentioned three possible approaches: comparative
market approach, capitalized earnings approach and the "rule
of thumb approach". The last of these involved essentially
multiplying the number of beds by a figure that ranged from
$3,500 to $7,800 based on information obtained from the Ontario
Nursing Home Association. The evidence of the accuracy of these
figures is insufficient for me to find the approach useful.
[46] The
comparative market approach mentioned by Mr. Jones involved
a comparison of the sales of four nursing homes. I discuss them
briefly below but I do not find any of them sufficiently
comparable to afford a meaningful basis of valuation. Three of
them are in Hamilton and one is in Mount Forest.
7 Blake St., Hamilton: this was an 80 year old building
with 8,900 square feet and 40 beds. It was sold in 1973 for
$227,000 or $5,675 per bed. It appears to be an older residential
building converted at some point to use as a nursing home.
176 Victoria St. North, Hamilton: this was a relatively
new building with 9,700 square feet and 51 beds. It was sold in
1974 for $386,000 or $7,569 per bed. It is perhaps the most
comparable, but the somewhat skimpy evidence would indicate that
Brantwood's location and general amenities are superior.
57 Proctor Blvd, Hamilton: this was sold in 1975. It
was a 50 year old converted residential house with 20 beds. The
sale here was $102,000 or $5,100 per bed. I do not see it as in
any way comparable.
465 Dublin St., Mount Forest: Mount Forest is about 2
hours north of Hamilton. The property was an 80 year old building
with 77 beds and was sold in 1972 for $465,000 or $6,039 per
bed.
[47]
Mr. Eagle concluded that the existing 55 bed nursing home
had a value of $6,200 per bed or $341,000.
[48] If I were
to use this approach I would have taken the $7,569 per bed sale
price of the Victoria Street, Hamilton property. There is no
evidence upon which I could adjust this figure to take into
account the fact it was sold in 1974. This would give a value for
the existing 55 bed nursing home of $416,295.
[49]
Mr. Eagle concludes that the value of the 74 additional beds
(a total of 129, not 140) was $207,900 (rounded to $207,000 by
Mr. Jones), based on the cost of a land assembly for a
nursing home in Hamilton. This is in my view a realistic albeit
somewhat conservative figure. Roughly the same result would be
achieved if one took the same per bed value of $7,569, to arrive
at a value of $243,365: 85 x $7,569 = $643,365 less estimated
construction costs of $400,000. If the calculation were premised
on only 74 new beds the figure would be somewhat lower than that
arrived at by Mr. Eagle. This approach would result in a
figure of $719,660 ($416,295 (existing 55 beds) + $243,365 (85
bed addition) + $60,000 (vacant land)). This is about $109,000
higher than Mr. Eagle's figure of $610,000.
[50] There is
nothing the matter with the comparative market approach where
there is sufficient data to warrant its use. On the evidence
here, however, it is not reliable.
[51] I am
therefore left with a choice between Mr. Jones'
capitalized earnings approach and Mr. Johnson's
discretionary cash flow capitalization approach. Both appear to
be accepted methods of valuing privately owned businesses. Why
then should I choose one over the other? Clearly the two
approaches result in vastly disparate conclusions. My common
sense tells me that $1.7 million is unrealistic. If I were a
prudent purchaser who wanted to buy Brantwood, and I consulted
Mr. Jones who told me I should not pay more than $500,000
and Mr. Johnson who told me I could comfortably pay
$1,700,000, whose advice would I accept? My instinctive reaction
would be not to pay anywhere near $1,700,000 for a company whose
real estate was not worth much more than $600,000.
[52] It is for
this reason that I am more inclined to accept Mr. Jones'
report simply because it results in a figure that is more
consistent with my common sense and idea of reality.
[53] I am
prepared to accept Mr. Jones' calculation of the annual
revenues of $554,971, subject to one difference. I think his
estimated vacancy rate of 7.5% is high, in light of the evidence
of both Mr. and Mrs. Hallatt. To use a zero vacancy rate in
valuing the business would be commercially unrealistic. Possibly
2.5% is more in accordance with reality, given the uncontradicted
evidence that there were no vacancies at Brantwood. I think a
conservative and careful purchaser would likely use 2.5%.
[54] These
adjustments would have the following results.
Annual gross revenues of $599,969
less a 2.5% vacancy rate
of
$15,000
$584,969
Less projected expenses of 70%
(a percentage adopted by both
appraisers)
$409,478
Net income before
tax
$175,491
Less income tax at 42.5% (Mr. Jones'
figure)
$74,583
Estimated maintainable
earnings
$100,908
Capitalized at 11%[6]
$917,345
Less construction costs to be incurred
(both appraisers used this
figure)
$400,000
$517,345
Add value of surplus
land
$60,000
(This was Mr. Eagle's figure adopted by
Mr. Jones. Mr. Johnson assumed a
figure of
$8.66 per square foot, or $190,000, but the
evidence does not support such a figure.)
$577,345
Add shareholders'
loan
$71,000
(Added by Mr. Johnson but not by Mr. Jones)
$648,345
Rounded
to
$650,000
V-day value of all shares of
Brantwood
$650,000
Value of shares of each
appellant
$325,000
[55] The
appeals are allowed and the assessments are referred back to the
Minister of National Revenue for reconsideration and reassessment
on the basis of the reasons for judgment.
[56] Success
is divided. There will be no order for costs.
[57] The
parties are directed to file the consent to judgment referred to
at the beginning of these reasons in respect to the years and
issues not dealt with in these reasons and to submit to the court
a draft of the formal judgment.
Signed at Toronto, Canada, this 28th day of December 2000.
"D.G.H. Bowman"
A.C.J.
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