Grimes – Tax Court of Canada finds that holding company shares should not be discounted for shareholder level exit taxes, and applies a minority discount re a NAL party’s voting control

In determining the fair market value of a trust’s shares of a Holdco wholly-owning an Opco, the Tax Court found that there should be no discount to the FMV of the Holdco shares to reflect income taxes that would be payable by the trust on a redemption by it of its Holdco shares.

One of the two individuals who was a trustee of the trust also held special voting preferred shares of Holdco in her personal capacity that represented 69% of the total Holdco voting rights. Lafleur J found that it was appropriate to apply a 12.5% minority discount to the Holdco common shares held by the trust in this light, stating that she was required to assume in the valuation exercise that only the non-controlling shares of the trust were being sold, and not the special voting shares not held by it. She also applied a further 15% “marketability discount” to the common shares’ valuation.

Finally, advances made by Opco to an individual director were treated as having a nil value because of a regular practice of eliminating such advances by way of annual bonuses.

Neal Armstrong. Summary of Grimes v. The Queen, 2016 TCC 280 under General Concepts – FMV.