Bendix Automotive of Canada Ltd. v. The Queen, 78 DTC 6137, [1978] CTC 194 (FCA)

Heald, J (concurred in by Jackett, CJ and Ryan, J) (judgment delivered from the Bench):—This is an appeal from a judgment of the Trial Division 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 determination of the value expressed in money of a dividend of shares paid by appellant on August 7, 1969 to its parent company in the USA, the Bendix Corporation (hereinafter Bendix). Such a determination is necessary for the purpose of calculating the 15% withholding tax payable under paragraph 106(1a)(a), subsection 109(1) and paragraph 139(1)(a) of the Income Tax Act, RSC 1952, c 148. Those sections read as follows:

106. (1a) 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 payment 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 corporation’s surplus determined in prescribed manner for taxation 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 USA 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 CDC). Such shares represented 66.75% of the issued and outstanding shares of CDC. On May 1, 1969 Bendix entered into an agreement with Control Data Corporation (hereafter Control Data), a US resident corporation with which it dealt at arm’s length, pursuant to which Bendix agreed to exchange its shares of CDC (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 CDC.

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 CDC 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 CDC to all shareholders of CDC, but was made subject, inter alia, to Control Data acquiring 90% of the outstanding shares of CDC. 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 outstanding shares of CDC had been tendered pursuant 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 agreement with Control Data. This involved:

(a) convening a meeting of the board of directors of the appellant (of which five of six directors were employees of Bendix;

(b) causing it to declare a dividend in kind of the CDC shares; and

(c) immediately tendering the CDC 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 unrestricted shares of Control Data on August 7, 1969 was US $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 US $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 CDC shares, the only restriction being on Bendix with respect to some of the Control Data shares which it received in exchange for CDC shares. The appellant itself made no agreement with Control Data as to the disposition of the shares of CDC which it was declaring and paying as a dividend to Bendix.

CDC shares traded actively on the Toronto Stock Exchange between January 1 and August 31, 1969, the closing prices ranging from a low of 23 /s on February 28, 1969 to a high of 34 on August 20, 1969. Sales volume of the CDC 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 CDC were sold at $31 on the Toronto Stock Exchange. Although the market was thin after July 11, 1969, prices for CDC 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 CDC were not evaluated before Bendix commenced nego tiating with Control Data and no evidence with respect to the value of the CDC 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 CDC shares that comprised the dividend and he expressed no opinion as to their value.

In valuing the dividend in kind of the CDC 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 CDC 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 CDC traded on the Toronto Stock Exchange on August 7, 1969 (ie, Canadian $31 per share), by the 517,313 shares of CDC 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 paragraph 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 majority of the shares in a relatively closely held company 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 appellant 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 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.

I would allow the appeal with costs and refer the matter back for reassessment on the basis that the value of the dividend distributed as reported by the appellant should not have been increased.