Citation: 2012 TCC 457
Date: 20121231
Docket: 2008-1842(IT)G
BETWEEN:
ELENA SHULKOV,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D’Arcy J.
[1]
The Appellant has
appealed a reassessment issued by the Minister of National Revenue (the
“Minister”) on March 6, 2008. The reassessment was made pursuant to section 160
of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (the “Act”),
in respect of shares transferred to the Appellant by her spouse.
[2]
The Appellant argues
that the Minister overstated the fair market value of the shares and failed to
take into account consideration paid by her to her spouse for the shares.
[3]
I heard the appeal over
17 days. In addition to being given a 39-page Partial Agreed Statement of Facts
(the “PASF”), the Court heard from 8 witnesses (including 3 who were offered as
expert witnesses) and was provided with 17 joint books of documents (containing
over 400 exhibits), over 30 exhibits filed by the Appellant and over 110
exhibits filed by the Respondent.
Summary of
Facts
[4]
The Appellant was the
common‑law spouse of Mr. Tom Hinke from 1999 until they were married in
September 2005.
[5]
Mr. Hinke was the
founder of Thermal Energy International Inc. (“TEI”) a Canadian publicly-traded
company which provides custom energy and emission reduction solutions.
[6]
Between 1994 and
November 2004, Mr. Hinke was the president and chief executive officer of TEI.
TEI terminated his employment on June 21, 2005.
[7]
On February 23, 2006, the
Minister issued an assessment for $708,155, pursuant to section 160 of the Act,
in respect of the transfer of the following shares of TEI by Mr. Hinke to the
Appellant (the “Original Assessed Share Blocks”):
Transfer Date Assumed by the CRA
|
Number of Shares Transferred
|
Fair Market Value Determined by the CRA
|
|
|
|
May 27, 2005
|
678,500
|
$210,335
|
August 3, 2005
|
426,000
|
$136,320
|
October 12, 2005
|
800,000
|
$208,000
|
January 5, 2006
|
300,000
|
$55,500
|
February 15, 2006
|
490,000
|
$98,000
|
Total
|
2,694,500
|
$708,155
|
[8]
After receiving
representations from the Appellant, the Minister reassessed the Appellant,
reducing the amount of the assessment by $161,320 as follows:
-
The Minister excluded
the 426,000 shares of TEI that she previously assumed Mr. Hinke had transferred
to the Appellant on August 3, 2005 (the “August 2005 Shares”). This resulted in
the assessed amount being reduced by $136,320, being the amount the Minister assumed
was the fair market value of the August 2005 Shares on the date they were
transferred to the Appellant. When making this reduction the Minister assumed
the Appellant had purchased the August 2005 Shares directly from TEI using her
own funds.
-
The Minister concluded
that the Appellant paid a consideration of $25,000 for the transferred shares.
This consideration comprised amounts allegedly paid by the Appellant on behalf
of Mr. Hinke for legal services.
[9]
After making the above
adjustments, the Minister reassessed the Appellant $546,835 with respect to the
transfer of 2,268,500 TEI shares (the “Revised Assessed Share Blocks”) with a
fair market value of $571,835 less consideration of $25,000. The Revised
Assessed Share Blocks comprised the following share transfers:
Transfer Date Assumed by the CRA
|
Number of Shares Transferred
|
Fair Market Value Determined by the CRA
|
|
|
|
May 27, 2005
|
678,500
|
$210,335
|
October 12, 2005
|
800,000
|
$208,000
|
January 5, 2006
|
300,000
|
$55,500
|
February 15, 2006
|
490,000
|
$98,000
|
Total
|
2,268,500
|
$571,835
|
[10]
I heard testimony from
both the Appellant and Mr. Hinke. As I will discuss in these reasons for
judgment, the credibility of the Appellant and Mr. Hinke was destroyed during
the six days that Mr. Hinke was cross-examined.
The Issues
[11]
In Wannan v. the
Queen,
Justice Sharlow of the Federal Court of Appeal described subsection 160(1) as
follows:
Section
160 of the Income Tax Act is an important tax collection tool, because
it thwarts attempts to move money or other property beyond the tax collector's
reach by placing it in presumably friendly hands. It is, however, a draconian
provision. While not every use of section 160 is unwarranted or unfair, there
is always some potential for an unjust result. There is no due diligence defence
to the application of section 160. It may apply to a transferee of property who
has no intention to assist the primary tax debtor to avoid the payment of tax.
Indeed, it may apply to a transferee who has no knowledge of the tax affairs of
the primary tax debtor. However, section 160 has been validly enacted as part
of the law of Canada. If the Crown seeks to rely on section 160 in a particular
case, it must be permitted to do so if the statutory conditions are met.
[12]
Subsection 160(1)
applies where a person transfers property, either directly or indirectly, by
means of a trust or by any other means whatsoever, to the person’s spouse. The
Appellant accepts that Mr. Hinke transferred property to his spouse, that is,
the Appellant.
[13]
For the purposes of
this appeal, the amount payable by the Appellant under subsection 160(1) is
determined under paragraph 160(1)(e) and is equal to the lesser of:
(i) the amount, if any, by which the fair
market value of the property at the time it was transferred to the Appellant exceeds
the fair market value at that time of the consideration given by the Appellant
for the transfer of the property, and
(ii) the total of all amounts each of which is an amount
that Mr. Hinke is liable to pay under the Act in or in respect of the
taxation year in which the property was transferred or any preceding taxation
year.
[14]
There is no dispute
with respect to Mr. Hinke’s liability under the Act. The parties agree
that between May 2005 and February 2006 (the “Transfer Period”) Mr. Hinke’s
liability under the Act exceeded $1.4 million.
[15]
However, the parties do
not agree on the amount determined under subparagraph 160(1)(e)(i). The
parties raised the following three issues: the number of shares of TEI that
were transferred to the Appellant, the fair market value of the TEI shares on
their transfer date, and the consideration, if any, paid by the Appellant for
the TEI shares.
[16]
The Respondent argued
that the property transferred for the purposes of section 160 was the Original
Assessed Share Blocks. Counsel for the Respondent argued that the Minister’s
decision to remove the August 2005 Shares from the amount assessed under
section 160 was an error caused by misrepresentations made by the Appellant.
[17]
The Appellant disagreed.
Counsel for the Appellant argued that the only property transferred was the
Revised Assessed Share Blocks.
[18]
Counsel for the
Appellant argued that the fair market value of the property transferred was the
fair market value of the Revised Assessed Share Blocks, which she calculated as
being $271,895.
[19]
Counsel for the
Respondent argued that the fair market value of the property transferred was
the fair market value of the Original Assessed Share Blocks, which she
calculated as being $678,535.
[20]
Counsel for the
Appellant argued that the Appellant paid a consideration of $199,333 to Mr.
Hinke for the Revised Assessed Share Blocks.
[21]
The Respondent
disagreed. Counsel for the Respondent argued that the Appellant did not pay any
consideration to Mr. Hinke for the Original Assessed Share Blocks (which
include the Revised Assessed Share Blocks).
[22]
In summary, the
Appellant accepts that she is liable under section 160 of the Act. However
the Appellant believes the liability is $72,562 not the $546,835 assessed by
the Minister. The Respondent believes that the Appellant is liable under
section 160 for the $546,835 the Minister assessed.
Number of TEI Shares Transferred by Mr. Hinke to the
Appellant
[23]
The first issue I will
address is the number of shares transferred by Mr. Hinke to the Appellant
during the relevant period.
[24]
When reassessing the
Appellant the Minister excluded the August 2005 Shares from the transferred
property on the assumption that the Appellant purchased the August 2005 Shares
directly from TEI using her own funds.
[25]
It is the Respondent’s
position that the Minister erroneously excluded the August 2005 Shares because
of misrepresentations made by the Appellant. Counsel for the Respondent argued
that the Appellant did not purchase the August 2005 Shares directly from TEI,
rather the shares were transferred by Mr. Hinke to the Appellant. Further, counsel
for the Respondent argued that the Appellant did not pay any consideration for
the August 2005 Shares.
[26]
The Respondent accepted
that the Court cannot increase the tax payable beyond the amount assessed.
However, counsel for the Respondent argued that, pursuant to subsection
152(9), the Minister is entitled to present alternative arguments to justify
the amount assessed. In particular, counsel for the Respondent argued that I
should include the August 2005 Shares when determining whether the Appellant’s
liability under subsection 160(1) was at least $546,835, the amount assessed by
the Minister.
[27]
Both the Appellant and
Mr. Hinke testified that the Appellant received the August 2005 Shares directly
from TEI as a result of the exercise of a stock option held by Mr. Hinke, using
funds provided by the Appellant.
[28]
The following excerpt
from an affidavit sworn by Mr. Hinke before the Federal Court accurately
summarizes his and the Appellant’s sworn testimony before this Court with
respect to the 426,000 August 2005 Shares:
August
3, 2005: . . . On this date, I arranged for Ms. Shulkov to exercise stock
options I held to purchase 426,000 shares of TEI at .18/share. I am advised by
Ms. Shulkov, and believe, that she paid TEI the sum of $76,680 to acquire the
shares on or about June 6, 2005. I also arranged for a business associate to
exercise 50,000 options on that date, for the same price, who again paid TEI
the sums required for purchase.
[29]
After reviewing the
evidence, it is clear that the exercise of the option occurred as follows:
-
On May 31, 2005, the
CFO and treasurer of TEI wrote a letter to Mr. Hinke informing him that he
held one million stock options that would be expiring on June 6, 2005.
-
On June 6, 2005, Mr.
Hinke wrote a letter to the CFO and treasurer of TEI in which he stated that he
was exercising his option to acquire 500,000 shares of TEI for $0.18 per share
or $90,000.
The Appellant confirmed that the $90,000 was paid by a June 6, 2005 $70,000 TD
bank draft
and a June 7, 2005 cheque for $20,000 written on the Appellant’s TD bank
account.
-
On June 21, 2005, TEI
terminated Mr. Hinke’s employment.
-
Mr. Hinke stated the
following in a June 22, 2005 email to the CFO and general manager of TEI, “It
is now over two (2) weeks since June 6th/05 when I gave you $90,000
cash to exercise my $0.18 stock option to purchase 500,000 ‘free trading’
common shares of Thermal Energy International Inc.. Please advise when and
where my 500,000 shares will be provided to me?”
-
On June 22, 2005,
Computershare issued share certificate number 0748 in the name of Mr. Hinke for
500,000 shares of TEI.
Mr. Hinke confirmed that this share certificate represented the shares
purchased on the exercise of his option.
[30]
In summary, the option
for 500,000 shares was exercised on June 6, 2005 and the shares were issued in
the name of Mr. Hinke on June 22, 2005, as evidenced by the share certificate
numbered 0748.
[31]
On July 18, 2005, Mr.
Hinke provided Computershare with written instructions to transfer 700,000
shares of TEI, represented by nine consecutively numbered share certificates
(1758 to 1766). The nine consecutively numbered share certificates were all
dated February 19, 2004. Mr. Hinke instructed Computershare to transfer the
700,000 shares as follows:
-
426,000 shares were to
be transferred to the Appellant.
-
50,000 shares were to
be transferred to Mr. Proulx.
-
124,000 shares were to
be transferred, in various amounts, to two individuals and a law firm.
-
100,000 shares were to
be retained by Mr. Hinke.
[32]
Computershare complied
with Mr. Hinke’s instructions and, in particular, issued share certificate
number 0844 for 426,000 shares of TEI in the name of the Appellant on August 3,
2005.
Mr. Hinke agreed that the certificate for the 426,000 shares represented the
August 2005 Shares.
[33]
The objective
documentary evidence before the Court shows that, in August 2005, the Appellant
did not receive any of the 500,000 TEI shares issued by TEI on the exercise of
Mr. Hinke’s stock option. The 426,000 August 2005 Shares received by the
Appellant were a portion of the 700,000 that, as evidenced by the nine
consecutively-numbered share certificates, were issued to Mr. Hinke on
February 19, 2004.
[34]
Mr. Hinke eventually
transferred the 500,000 TEI shares that he received on the exercise of his stock
option to the Appellant. On October 7, 2005, Mr. Hinke instructed Computershare
to transfer the 500,000 TEI shares, together with 300,000 other TEI shares, to
the Appellant.
[35]
During cross-examination,
counsel for the Respondent asked Mr. Hinke to reconcile his testimony that
the Appellant received the August 2005 Shares directly from TEI with the
evidence before the Court that Mr. Hinke transferred the August 2005
Shares to the Appellant using shares he had held since at least February 2004.
[36]
He first explained this
discrepancy as follows:
I
explained that because of the amount of time that had lapsed between the June
6th exercise date to when Thermal fired me on the 21st of June and then afterwards
issued the 500,000 shares from the stock option, the people that had advanced
funds to buy the shares [from] the stock option wanted the shares sooner and so
that’s why the date of this letter is July 18th, 2005.
[37]
Counsel for the
Respondent then took Mr. Hinke to the evidence I just discussed, which clearly
shows that he received the 500,000 shares on June 22, 2005, nearly a
month before he instructed Computershare to transfer the 426,000 August 2005
Shares to the Appellant. He stated that his memory was not correct with respect
to what occurred in June and July of 2005.
[38]
Mr. Hinke then provided
a second explanation of what had occurred: he stated that “There was a number
of transactions that had been arranged during this period and so to in the --
in terms of being efficient I did an all in one instruction letter to
Computershare.”
This does not explain the inconsistency between his testimony that the
Appellant acquired the 426,000 August 2005 Shares directly from TEI and the
objective evidence before me.
[39]
In summary, the
objective documentary evidence before me clearly shows that the Appellant did
not purchase the 426,000 August 2005 Shares from TEI. Rather, Mr. Hinke made the
transfer of 426,000 shares to the Appellant in August 2005 using shares that he
had owned since February 2004. As a result, for the purposes of subsection
160(1), the property transferred from Mr. Hinke to the Appellant during the
relevant period included the 426,000 August 2005 Shares. Therefore, the total
property transferred by Mr. Hinke to the Appellant was the Original Assessed
Share Blocks.
[40]
The Appellant’s and Mr.
Hinke’s testimony with respect to the Appellant’s acquisition of the August
2005 Shares seriously damaged (if not destroyed) their credibility.
Fair Market
Value of the Original Assessed Share Blocks
[41]
I must now determine
the fair market value of the Original Assessed Share Blocks, that is, the
property transferred by Mr. Hinke to the Appellant during the Transfer Period.
[42]
The Court received the
following statements and reports from persons put forward by the parties as
expert witnesses:
-
Affidavit of Mr.
Lindsay Malcolm sworn on March 29, 2011.
-
Affidavit of Dr. Jamal
Hejazi sworn on March 28, 2011 (referred to as “Dr. Hejazi’s First Report”).
-
Letter of Ms. Cheryl
McCann dated April 12, 2011 filed in rebuttal to Dr. Hejazi’s First Report.
-
Letter of Ms. McCann
dated April 12, 2011 filed in rebuttal to Mr. Malcolm’s affidavit.
-
Valuation Report of Ms.
McCann filed on April 18, 2011.
-
Affidavit of Dr. Jamal
Hejazi sworn on May 2, 2011 (referred to as “Dr. Hejazi’s Second Report”).
-
Letter of Ms. Cheryl
McCann dated June 3, 2011 filed in rebuttal to Dr. Hejazi’s Second Report.
[43]
The letters and reports
relate to both the Revised Assessed Share Blocks and the Original Assessed
Share Blocks (jointly referred to as the “Share Blocks”).
[44]
The Appellant put
forward Mr. Lindsay Malcolm as an expert witness.
[45]
Mr. Malcolm did not
provide the Court with a c.v.. He stated in his affidavit that he has been
self-employed as a corporate development and investor relations consultant for
27 years.
[46]
Counsel for the
Appellant argued that Mr. Malcolm had special knowledge and experience that
qualified him to tell the Court what the effect was of placing large blocks of
TEI shares on the public market. He argued that Mr. Malcolm was qualified to
offer an opinion with respect to whether a price discount applied on the sale
of the Share Blocks and regarding the quantum of that discount.
[47]
Mr. Malcolm agreed on
cross-examination that the opinion he intended to provide was an estimate of
the value of the Share Blocks.
[48]
Counsel for the
Respondent did not accept Mr. Malcolm as an expert witness. It was the
Respondent’s position that Mr. Malcolm does not possess special knowledge or peculiar
knowledge that would assist the Court in estimating the value of the Share
Blocks. In addition, the counsel for the Respondent argued that Mr. Malcolm
does not possess the independence required of an expert witness.
[49]
I reserved my decision
with respect to whether I should qualify Mr. Malcolm as an expert witness. I
did not feel that reserving my decision prejudiced either party. More
importantly, it respected the Appellant’s right to put forward the most
complete evidentiary record possible that was consistent with the rules of
evidence.
[50]
After hearing Mr.
Malcolm’s oral testimony and observing his conduct during that testimony, I
have concluded that he was not a credible witness. For this reason alone I have
given no weight to either his testimony or his report. I have also concluded
that Mr. Malcolm lacked the expertise and impartiality required to provide the
Court with an opinion on the fair market value of the Share Blocks.
[51]
I will first address
his credibility. I do not believe that Mr. Malcolm was completely forthcoming
during his testimony. One reason for my conclusion is his close personal
relationship with the Appellant and her spouse. More importantly, in numerous
instances he was simply not as forthcoming in his testimony as the Court would
expect from an expert witness.
[52]
The following two
examples illustrate my concerns with respect to Mr. Malcolm’s testimony:
[53]
The first example
relates to his testimony with respect to TEI shares that he received as
compensation for his services. Mr. Malcolm stated in his affidavit that, in
2004, he received shares of TEI on two occasions: 32,998 shares on April 30, 2004
and 23,943 shares on September 24, 2004. He stated that he received these
shares in satisfaction of amounts he was owed by TEI.
[54]
During cross-examination,
counsel for the Respondent asked Mr. Malcolm if those were the only TEI shares
that he received. Mr. Malcolm replied that they were the only shares he
received.
[55]
The Respondent then
filed two exhibits (R-3 and R-4) which show that TEI issued 100,000 shares to
Mr. Malcolm on July 2, 2003 and that Mr. Malcolm received 60,000 TEI shares on
February 20, 2003.
[56]
When confronted with
this evidence, Mr. Malcolm stated that he did not beneficially receive the
100,000 TEI shares issued on July 2, 2003. He did not explain who received the
shares. He acknowledged that he did receive the 60,000 TEI shares on February
20, 2003. He then changed his testimony. Whereas he had previously stated that
he had only received the 56,941 shares noted in his affidavit, after reviewing Exhibits
R-3 and R-4 he stated that the shares noted in his affidavit were only examples
of shares that were transferred to him. His testimony in this regard seriously
damaged his credibility.
[57]
A second example of Mr.
Malcolm’s evidence that I found troubling was his testimony with respect to the
work he performed for TEI. He stated in his affidavit that he provided services
to TEI during the period from December 2002 to December 2004. During
his testimony, he stated that he operated his consulting business as a sole
proprietor for 27 years. After reading his affidavit and listening to his
examination-in-chief, I thought he was telling the Court that he provided his
services to TEI personally through his sole proprietorship.
[58]
However, on
cross-examination it became clear that he also carried on his business through
a corporation, Compliant Capital Corp. Mr. Malcolm owned 100% of the shares of
this corporation. Further, the Respondent produced a consulting agreement
between Compliant Capital Corp. and Mr. Hinke (as president of TEI) dated
October 1, 2004. The agreement states that Mr. Malcolm will provide consulting
services to TEI through Compliant Capital Corp. There
is no evidence before me with respect to when the parties terminated the
contract.
[59]
It is not clear to me
why Mr. Malcolm attempted to hide the fact that he provided services to TEI
through Compliant Capital Corp. The fact that he did try to hide this fact
further damaged his credibility.
[60]
In addition to not
finding Mr. Malcolm a credible witness, I believe he did not possess the
requisite expertise to provide an opinion on the value of the Share Block.
[61]
“Expertise” is a modest
status that is achieved when the “expert… possesses special knowledge and
expertise going beyond that of the trier of fact.” The
witness may have acquired this special knowledge through either study or
experience. It is important that the expert’s special knowledge and expertise
be in respect of the subject matter of his or her opinion.
[62]
Mr. Malcolm indicated
that much of his value to a company was in corporate development and dealing
with investors in the company. He stated that he has provided services to
hundreds of companies listed on the TSX Venture Exchange (and its predecessor
exchanges). His services primarily involved the writing of news releases,
advising companies on the timing of such releases in order to “have a positive
effect on share prices” and acting as the primary public spokesperson for the
company. He also testified that he was involved in creating presentations for
investors and annual reports.
[63]
He testified that his
role with his clients did not involve valuing shares. He also confirmed that he
was not a chartered business valuator, a chartered accountant, a chartered
financial analyst, or a certified general accountant. In addition, he has not
taken any valuation courses offered by any of the institutions that govern those
professions.
[64]
Counsel for the
Appellant argued that Mr. Malcolm was qualified to give expert evidence on the
value of the Share Blocks given his special knowledge and expertise with regard
to the operation of the TSX Venture Exchange and his specific knowledge of TEI
and the pricing of its shares on the TSX Venture Exchange.
[65]
I do not agree. In my
view, his personal experience does not provide him with the expertise required
to value the Share Blocks. Mr. Malcolm certainly acquired knowledge of the TSX
Venture Exchange and TEI through his work experience. However, this experience
did not cause him to acquire the skills of a valuator. He acknowledged that he
does not have any formal training as a valuator.
[66]
Mr. Malcolm recognized
a number of the approaches used to value shares, however, he admitted that he
did not apply any of the accepted valuation approaches in valuing the Share
Blocks. After listening to his testimony, I have concluded that, while he was
aware of the valuation approaches, he did not possess the requisite skill to
apply these approaches to a specific fact situation.
[67]
Mr. Malcolm’s affidavit
(Exhibit A-3) reflects his lack of expertise. I found the affidavit to be a
superficial attempt to value the shares.
[68]
In summary, because of
Mr. Malcolm’s lack of expertise and the nature of his report, I do not find
either the report or his testimony to be reliable.
[69]
My third concern with
respect to Mr. Malcolm is his objectivity.
[70]
The party presenting
the proposed expert witness must satisfy the trier of fact that he or she
possesses not only the necessary expertise, but also the requisite independence
as well.
An expert witness should provide independent assistance to the court and should
not assume the role of an advocate.
[71]
It is clear from the
testimony of Mr. Malcolm and Mr. Hinke that Mr. Malcolm and Mr. Hinke are
close friends. Mr. Malcolm prepared his report because of that friendship.
[72]
Mr. Malcolm testified
that the Appellant did not retain him to provide the report. Rather, he prepared
his report “on a gentleman’s basis” for a friend. He
noted that he was asked to prepare the report one week before it was filed with
the Court.
[73]
Mr. Malcolm’s
relationship with Mr. Hinke is not, in and of itself, sufficient to disqualify
Mr. Malcolm as an expert. However, that relationship, when combined with his
testimony during the hearing, is sufficient for me to conclude that he did not
have the requisite independence to provide an expert opinion to the Court.
[74]
A great deal of Mr.
Malcolm’s testimony was in the nature of advocacy. He clearly felt that his
primary purpose in testifying was to support his close friend Mr. Hinke.
[75]
For the foregoing
reasons I have given no weight to Mr. Malcolm’s affidavit.
[76]
The Appellant also put
forward Dr. Jamal Hejazi as an expert witness. The majority of Dr. Hejazi’s
report and testimony related to the expert report filed by the Respondent. As a
result, I will consider Dr. Hejazi’s evidence after I have considered the
evidence of the Respondent’s expert.
[77]
The Respondent put
forward Ms. Cheryl McCann as an expert witness. Ms. McCann is a certified
general accountant and certified business valuator. After hearing submissions
from counsel, I qualified Ms. McCann as an expert witness for the valuation of
the TEI shares at issue.
[78]
Ms. McCann testified
that her valuation report
is a comprehensive valuation report prepared in accordance with the
practice standards of the Canadian Institute of Chartered Business Valuators
(CICBV).
Her report provides a fair market value for the Original Assessed Share Blocks
and the Revised Assessed Share Blocks at three separate groups of dates, namely,
the transfer dates assumed by the CRA, the transfer dates assumed by the
Appellant and the SEDI valuation dates.
[79]
Ms. McCann first, in
accordance with CICBV standards, considered the economic environment at the
time of the valuation, the industry in which TEI operated, and the business
carried on by TEI itself, including the history of that business.
[80]
After reviewing the
history and overall operations of TEI, she determined that the going concern
basis should be used for the purpose of valuing the shares. She then decided
upon the market approach as the technique to apply in valuing the shares. She
based this decision on the assumption that markets generally determine the
value of a publicly-traded company’s shares.
[81]
She began her valuation
by examining the trading data of the company. She reviewed trading data for two
years prior to the first valuation date and for two years beyond the last
valuation date.
She felt that a review of the trading data helped her understand the market for
the shares and “it ultimately spoke to the nature of the shares”.
[82]
She organized her
review of the trading data into three sections: trend line and average trading
volumes and prices, daily trading volume in excess of 250,000, and the nature
of the shares. That review formed the basis of her valuation.
[83]
The first section of
her valuation report relating to trading data considered TEI’s average daily
trading price and daily trading volumes. After analyzing the data, Ms. McCann
reached the following conclusions:
1.
There was no reason to
expect share prices to decrease over the valuation period due to the placement
of the Share Blocks on the open market.
2.
Because there was
regular trading activity and increasing share prices, there was no reason to
expect share prices to decrease over the valuation period as a result of the
placement of the shares on the open market.
[84]
The second section of
her valuation report relating to trading data considered trading volumes in
excess of 250,000 shares. Ms. McCann stated that she wanted to see how the
market reacted to trades of large volumes of TEI shares. She wanted to
determine if she could use this information to ascertain whether a blockage
discount
applied to the sale of the Share Blocks and, if it did, what the amount of the
discount was.
[85]
After considering the
trading volumes in excess of 250,000 shares, she reached the following
conclusion:
Based
on my observations, I would not expect that the Share Blocks would be subjected
to a blockage discount imposed by open market trading during the valuation
period because there were average increases in the Company’s share price during
the 2 years preceding the valuation period on dates where trading volumes
exceeded 250,000.
[86]
She noted that, with
the benefit of hindsight, a maximum blockage discount of 4.86% could be
considered that would be based on the average decrease in the share price over
the previous day during the valuation period. However, during her testimony she
stated that she did not apply the discount because she did not think it was
warranted and because she did not use hindsight. She
stated that, if hindsight were to be used, consideration would have to be given
to the fact that there were average increases in share prices observed in the
two years subsequent to the valuation period.
[87]
In the third section of
her valuation report relating to trading data, Ms. McCann considered the
nature of the TEI shares. She reached the following conclusions:
1.
The TEI shares were penny
stock since the shares traded at less than $1.00 per share during the
review period.
2.
The TEI shares were speculative
stock since the shares were listed on the TSX Venture Exchange and because
of TEI’s history of losses and the actual trading price of the shares.
3.
The TEI shares were not
highly illiquid as they were listed on the TSX Venture Exchange (as
opposed to shares of a private company or shares that are traded over the counter)
and were not thinly traded. She based her conclusion that the shares were not
thinly traded on her review of the public float versus insider holdings, and
the trading volumes of the shares.
4.
The TEI shares
exhibited normal to moderate volatility. Ms. McCann used the Black-Scholes option
pricing model to arrive at this conclusion. This model, which won its
developers a Nobel Prize, calculates a hypothetical stock option price. Ms.
McCann noted that a high calculated price relative to the stock price indicates
that volatility is high. Conversely, a low option price indicates low
volatility.
The calculation showed that the cost to guarantee the selling price of one of
TEI’s shares was .005 cents, which represented 1.8% of the volume-weighted
average trading price.
[88]
Ms. McCann concluded
that her findings with respect to the nature of the shares did not support a
finding that a blockage discount was required.
[89]
After examining the
trading data of TEI, Ms. McCann considered private placements and exchanges of
TEI shares. She conducted this analysis in order to determine if the difference
(if any) between issue prices and trading prices and the fact that there were
restrictions on many of the issued shares could be used to determine whether a
blockage discount should apply to the Share Blocks.
[90]
After examining 22
transactions, she concluded that there was no recognizable relationship between
the quantities of shares issued, the associated restrictions, the issue prices
and the trading prices. As a result, she could not use the data to determine if
a blockage discount was warranted.
[91]
The next portion of Ms.
McCann’s expert report considers the sale of TEI shares by and on behalf of the
Appellant and her spouse. She wanted to see how the market reacted to
dispositions of large blocks of shares over time. She
considered open market sales, privately arranged sales and the sale by the
Minister of seized shares.
[92]
Ms. McCann first
considered open market sales by the Appellant and her spouse for the two years
prior to the first valuation date and during the valuation period. During that
period, the Appellant and her spouse sold 4.9 million shares, including 2.7
million shares between May 2005 and February 2006 (that is, during the Transfer
Period).
[93]
After reviewing the sales,
Ms. McCann reached the following conclusion:
. .
. it appears that dispositions of large blocks of shares, over a short period
of time, did not generally result in a decrease in the market price. That is to
say that where there were dispositions of large blocks of shares over a short
period of time, the share prices were not subjected to a blockage discount
imposed by open market trading.
[94]
Ms. McCann then
considered private market sales by the Appellant and her spouse. She reviewed
two private market sales made by the Appellant: one of 100,000 shares and the
second of 111,000. She determined that no blockage discount was imposed on these
share sales.
[95]
The third set of sales
of the Appellant’s and her spouse’s shares considered by Ms. McCann was the
sale of shares seized by the Minister. Ms. McCann noted that this was hindsight
information that she used to test the assumption that a blockage discount was
not required.
[96]
Sales of these shares
occurred at discounts of between 20% and 29% of the TSX trading price. Ms.
McCann noted that one would expect such sales to draw a blockage discount since
the seized shares represented a sizable block, considerably larger than any of
the Share Blocks. She also considered the fact that the seized shares were not
sold on the open market, but rather were sold in private sales. She concluded
that the private sales would be subject to factors that would have affected the
selling prices but not the trading prices and not fair market value.
[97]
After considering the
trading data of TEI, the private placements and exchanges of TEI shares, and
the sale of TEI shares owned by the Appellant and her spouse, Ms. McCann
considered certain jurisprudence relating to the valuation of shares.
[98]
I have ignored that
portion of her report. While it is perfectly acceptable for an expert to
consider numerous factors coming within the scope of that expert’s training as
a chartered business evaluator, it is not acceptable for the expert to provide
me with an opinion on the application of certain jurisprudence to the valuation
of shares. That, in my view, is an attempt by the expert to provide an opinion
on domestic law.
[99]
My decision to ignore
that portion of Ms. McCann’s report has no impact on the conclusions reached in
her report. The intent in that section of the report was to add additional support
to her expert finding. Such additional support was not, in my view, required.
[100]
After considering the
results of her work, Ms. McCann reached the following conclusions:
1.
A blockage discount is
not warranted in determining the fair market value of the shares.
2.
A discount may be
warranted to represent the cost of selling the shares on the open market over a
reasonable period of time.
3.
In order to avoid
potential distortions in a single day’s trading, the fair market value of the
Share Blocks should be based upon the volume‑weighted average trading
price of the Company’s shares, calculated by dividing the total value by the
total volume of shares traded for the five trading days immediately preceding
the relevant date.
[101]
Ms. McCann then
determined that a discount in the range of 1.3% to 3.6% would represent the
cost of selling the shares on the open market over a reasonable period of time.
She used actual sales of TEI shares by the Appellant and her spouse to estimate
a reasonable period of time to dispose of the shares (between 16 and 44 days)
and used TEI’s weighted average cost of capital (30% annual interest rate) to
represent the cost of selling the shares over a period of time.
[102]
Counsel for the
Appellant argued that Ms. McCann made an error in her determination of the
discount by not incorporating days when the TSX was closed (i.e. weekends). If
weekends were taken into account, the discount would be in the range of 2% and 5.5%.
I would not expect such a small change to have a material impact on Ms.
McCann’s conclusion.
[103]
On the basis of those conclusions
Ms. McCann calculated the following valuations for the Share Blocks:
|
Revised
Assessed
Share
Blocks
|
Original
Assessed
Share
Blocks
|
Transfer dates assumed by CRA
|
$540,496
|
$678,535
|
Transfer dates assumed by Appellant
|
$525,867
|
$643,676
|
SEDI valuation dates
|
$532,964
|
$639,771
|
|
|
|
[104]
During
cross-examination, the Appellant’s counsel asked Ms. McCann a number of questions
with respect to her report. He raised a number of issues, including her use of
the Black-Scholes model, her determination of a reasonable time period for the
disposition of the TEI shares, her conclusions with respect to the proceeds
realized by the CRA on the sale of the seized shares, whether TEI shares were
thinly traded shares, and the use of a blockage discount. Ms. McCann was, in my
view, able to address each issue raised by counsel.
[105]
After considering Ms.
McCann’s report and her testimony, I have concluded that her conclusions
provide a reasonable valuation for the Share Blocks.
[106]
Dr. Hejazi was put
forward by the Appellant on the basis that he is “qualified to analyze and
interpret statistical data and studies dealing with both arm's length and
related party business transactions and to express an expert opinion whether
and to what extent the data and the studies support or do not support
conclusions based on the same.”
[107]
Dr. Hejazi holds a
Ph.D. in Economics and works in matters relating to transfer pricing and taxation.
After hearing submissions from counsel, I qualified Dr. Hejazi as an expert
witness with respect to the analysis and interpretation of statistical data.
[108]
Dr. Hejazi presented
two reports to the Court (Dr. Hejazi’s First Report and Dr. Hejazi’s
Second Report).
[109]
During his testimony, Dr.
Hejazi stated that his expertise did not extend to valuing shares, and his
reports did not attempt to value the Share Blocks. He
agreed that his reports did not provide any evidence or opinion with respect to
key valuation issues such as whether a blockage discount should apply to the
transfer of the Share Blocks
and whether the stock of TEI was thinly traded. He also
testified that he did not perform any analysis with respect to the number of
shares of TEI held by insiders as opposed to being publicly floated, or the
open market sales of TEI shares by Mr. Hinke and the Appellant.
[110]
Dr. Hejazi’s First
Report is a two-and-one-half-page report that discusses a study referred to in a CRA
estimate valuation report. Mr. Gilles Lapointe of the CRA prepared the estimate
valuation report. It appears that the CRA used this estimate valuation report
at the objection stage to support the assessment. The Minister did not rely on
the report when she assessed the Appellant. Further, the Respondent is not now
relying on the estimate valuation report. The Respondent is relying on the comprehensive
valuation report prepared by Ms. McCann.
[111]
Dr. Hejazi’s First
Report is not helpful to the Court. Dr. Hejazi stated that his first report
does not opine on the value of the shares at issue and is not a rebuttal of Ms.
McCann’s comprehensive report. It is a report addressing a study used by a CRA
valuator in preparing an estimate valuation report. As I have just noted, the
Minister did not rely on the estimate valuation report when she assessed the
Appellant, and the Respondent is not relying on it in this appeal. Dr. Hejazi
stated, on cross-examination, that he was not aware of the fact that the
Respondent was not relying on the estimate valuation report.
[112]
I will now consider Dr.
Hejazi’s Second Report.
[113]
The nature and
admissibility of Dr. Hejazi’s Second Report was an issue during the hearing. Counsel
for the Appellant argued that the second report was a supplemental report filed
in response to the report of the Respondent’s expert, Ms. McCann. He felt
that it could best be described as a rebuttal report.
[114]
Counsel for the
Respondent argued that the second report was not a rebuttal report but rather a
report that provided an estimated value for the shares. In either case, the
Respondent objected to the filing of the second report on the basis that the
Appellant did not file the report within the time limit set out in the Court’s
rules.
[115]
The difficulty for the
Appellant was that she filed Dr. Hejazi’s Second Report less than 15 days
before the commencement of the hearing. Thus, if it was a rebuttal report then,
pursuant to subsection 145(3) of the Tax Court of Canada Rules (General
Procedure), it could only be filed late if the Court so directed.
[116]
After a great deal of
discussion, the Respondent withdrew her objection to the admission of Dr.
Hejazi’s Second Report, provided that she have the right to file a rebuttal
report no later than fifteen days before the hearing resumed in June 2011. The
Court then allowed the Appellant to file Dr. Hejazi’s Second Report. The
Respondent filed a rebuttal to the second report on June 3, 2011.
[117]
Dr. Hejazi’s Second
Report is three and one-half pages long and begins by quoting paragraph 119 of
Ms. McCann’s valuation report, as follows:
I
have used information concerning actual sales of the shares of the Company by
the Appellant and her spouse to ascertain a reasonable period of time to
dispose of the Share Blocks. At an average of 18,312 shares per day (see
paragraph 109) it would take between 16 and 44 days to sell each of the Share
Blocks…
[118]
The selling period of
16 to 44 days was one of two assumptions Ms. McCann relied upon when she
concluded that a discount in the range of 1.3% to 3.6% would represent the cost
of selling the shares on the open market over a reasonable period of time. She
also concluded that the fair market value of the Share Blocks should be based
on the weighted average selling price of the shares for the five trading days
immediately preceding the relevant valuation date, with no blockage discount.
[119]
After quoting Ms.
McCann, Dr. Hejazi’s Second Report calculates, using actual TEI market selling prices,
the proceeds that would have been realized if a person had sold the Share
Blocks in blocks of 15,000, 17,500 or 20,000 shares in the days immediately
subsequent to the days the shares were transferred by Mr. Hinke to the
Appellant. The report states that this calculation was performed to analyze the
disposition over time of small blocks of TEI shares.
[120]
After performing these
calculations, Dr. Hejazi notes the following at paragraph 14 of his report:
These
data indicate to me that when blocks of TEI shares are sold in the assumed
quantities, over time, at published market prices, that a discount of
approximately 15% will apply. The close grouping of the three results from the
different block sizes indicates a robust conclusion. The conclusion I draw from
this analysis is that if TEI shares were sold in this fashion at published
market prices a 15% discount would apply
[121]
These comments do not
represent a valuation of the Share Blocks. As noted previously, Dr. Hejazi
testified that he was not an expert in valuing shares and his report was not a
valuation of the shares.
[122]
During
cross-examination, he stated that his second report does not conclude that a
15% discount should apply to the sale of the Share Blocks. He testified his
conclusion was that the hypothetical sale of the TEI shares in blocks of
15,000, 17,500 and 20,000 would result in a 15% discount.
[123]
The purpose of the
hypothetical calculation contained in Dr. Hejazi’s Second Report is not clear
to me. It does not represent a blockage discount since Dr. Hejazi
testified that his report did not provide any evidence or opinion with respect
to whether a blockage discount should apply to the transfer of the Share
Blocks.
[124]
If the purpose of Dr.
Hejazi’s Second Report is to question Ms. McCann’s conclusions with respect to
the cost of selling TEI shares over a certain period of time, then I have two
concerns:
[125]
First, it is a hindsight
determination of a discount. Hindsight information is typically inadmissible
unless it is being used to test the reasonableness of an assumption. Dr.
Hejazi was not able to explain to the Court how the 15% discount on the
hypothetical sale of the Share Blocks related to either the valuation of the
Share Blocks or Ms. McCann’s expert report. In particular, he did not relate the
calculation to any assumptions used by Ms. McCann when valuing the Share
Blocks. It appears to me that the hypothetical calculation is attempting to
value the Share Blocks on the basis of hindsight.
[126]
My second concern
relates to the nature of the calculations that form the basis of the report.
They are simple mathematical calculations based upon evidence that is on the
record. In my view, I do not require an expert witness to explain a simple
mathematical calculation.
[127]
For the foregoing
reasons I find that Dr. Hejazi’s First Report and Second Report contain no
expert information that is helpful to the Court, and I have given them no
weight.
[128]
In summary, the only
expert evidence the Court received that was credible and helpful to the Court
was the expert report of Ms. McCann.
[129]
During his closing
argument, counsel for the Appellant raised a number of concerns he had with
respect to Ms. McCann’s report. These concerns relate primarily to the manner
in which Ms. McCann applied her expertise. In my view, if the Appellant wished
to challenge Ms. McCann’s expert conclusions, she should have produced her own
expert valuator.
[130]
Counsel for the
Appellant noted during his closing argument that the fact that the Appellant
did not bring a valuator was problematic. It is only problematic for the
Appellant. I must make my decision on the basis of the evidence before me. The
only expert evidence before me that is credible and useful to the Court is the
expert report of Ms. McCann. I accept her conclusion that the value of the
Original Assessed Share Blocks on their transfer dates was between $639,771 and
$678,535, depending on the transfer date.
[131]
The parties disagree on
the applicable transfer dates. The Minister assessed on the basis that Mr. Hinke
transferred the TEI shares to the Appellant on the date that appears on the
issued share certificates. Counsel for the Appellant argued that Mr. Hinke
transferred the shares on the date he physically delivered the share
certificates to the Appellant. I will only need to consider this issue if I
find that the Appellant paid a consideration to Mr. Hinke for the Original
Assessed Share Blocks.
The Consideration,
if Any, Paid by the Appellant
[132]
I will now consider the
issue of whether the Appellant paid any consideration to Mr. Hinke for the
Original Assessed Share Blocks.
[133]
It is the Appellant’s
position that the transfer of the TEI shares represented the repayment of a
debt owed by Mr. Hinke to the Appellant. Counsel for the Appellant argued that
this debt arose because of Mr. Hinke’s weak financial position, which resulted
in the Appellant assuming the personal obligations and liabilities of Mr.
Hinke. She noted that under this arrangement she made payments totalling
$199,334 to Mr. Hinke, or on Mr. Hinke’s behalf.
[134]
During his cross-examination,
Mr. Hinke summarized the arrangement as follows:
Q. And
you don't have an acknowledgment and release agreement with respect to that
indebtedness?
A. No.
That's how we were doing things during this period. She was assisting me as I
needed her to assist me when I couldn't generate enough cash flow, and I was
reimbursing her with shares. That is what we were doing all the way through
this period, when it was necessary to do so. It was not a formal arrangement
except that I had been doing it similarly with other creditors with Thermal
where I was getting written acknowledgments. But we were essentially husband
and wife. I was the man of the house and it was a traditional relationship, and
she expected to me to do what was necessary to make sure that we would survive
financially. And so I didn't feel there was anything needed in terms of
something to be in writing between us during this time.
[135]
Counsel for the Respondent
argued that, in point of fact, the Appellant did not make any loans to Mr.
Hinke. The Appellant did not have the independent financial resources to make
the alleged advances to Mr. Hinke.
[136]
It is the Respondent’s position that the monies used to pay the family
expenses were derived from the various TEI shares that Mr. Hinke transferred to
the Appellant between February 3, 2000 and February 15, 2006. Further, counsel
for the Respondent argued that Mr. Hinke retained control over these shares
after he transferred them to the Appellant.
[137]
Counsel for the Respondent also
argued that, even if the Appellant made a loan to Mr. Hinke, the repayment
of the loan did not constitute consideration for the purposes of subsection
160(1).
[138]
During the seventeen hearing days,
I heard a great deal of testimony with respect to the personal and financial
history of the Appellant and Mr. Hinke between 1999 and 2006. The parties
referred to the following three sets of share transfers made during that period:
-
The 500,339 TEI shares that Mr.
Hinke transferred to the Appellant between February 3, 2000 and October 31,
2004 (the “pre-November 2004 share transfers”).
-
The 1,242,507 TEI shares that Mr.
Hinke transferred to the Appellant in November 2004 (the “November 2004 share
transfer’).
-
The 2,694,500 TEI shares that were
the subject of the subsection 160(1) assessment and were transferred to the
Appellant between May 27, 2005 and February 15, 2006, i.e., the Original
Assessed Share Blocks.
[139]
Each of these transfers is
relevant to the issue of whether or not the Appellant paid Mr. Hinke a consideration
for the Original Assessed Share Blocks. Before discussing these transfers, I
will first summarize the Appellant’s financial position during the period in
question.
[140]
The Appellant and Mr. Hinke began
a common-law relationship in September 1999. The evidence before me was that at
the time the relationship started the Appellant had limited financial
resources. For example, the Appellant and Mr. Hinke testified that Mr. Hinke
gifted 100,000 TEI shares to the Appellant in November 2000. Mr. Hinke
testified that he gifted the shares to assist the Appellant in bringing her
mother to Canada. He stated that the Appellant needed the shares “to show
sufficient financial means to be permitted by Canada immigration to sponsor her
mum to come to Canada”.
[141]
The Appellant earned modest income
between July 2000 and May 2005 (the month in which Mr. Hinke transferred the
first shares of the Original Assessed Share Blocks). The Appellant and Mr.
Hinke’s son was born on July 12, 2000. The Appellant then took a one-year
maternity leave.
[142]
In the summer of 2001, the
Appellant established a company called Elena’s Creations Inc. She was the sole
employee of the company. The Appellant testified that she sewed clothes to
order, repaired clothes, designed clothes and had a line of ready-made clothes.
She reported total income of $7,040, $4,213 and $18,290 for the 2002, 2003 and
2004 taxation years respectively.
[143]
During that period, Mr. Hinke was
the subject of substantial income tax assessments. It appears he first became
aware in March 2000 that he faced a potential tax liability as a result of his
failure to file income tax returns for the 1996, 1997 and 1998 taxation years.
[144]
On May 23, 2001, the Minister
assessed Mr. Hinke $439,296 for the 1996 to 1998 taxation years. On July 11, 2002, the
Minister issued an additional assessment for Mr. Hinke’s 1999-2001 taxation years.
After the second assessment, Mr. Hinke owed over $1.5 million. The CRA began to take
collection actions in May 2002, which continued throughout 2003 and 2004.
The Pre-November 2004
Share Transfers
[145]
Between February 2000 and November
2004 Mr. Hinke made the pre‑November 2004 share transfers. Specifically,
between February 3, 2000 and October 31, 2004, Mr. Hinke transferred 500,339
shares to the Appellant as follows:
- 20,000
shares on February 3, 2000 (the “February 2000 transfer”)
- 100,000
shares on November 6, 2000 (the “November 2000 transfer”)
- 200,000
shares on April 22, 2002 (the “April 2002 transfer”)
- 180,339 shares on February 19,
2004 (the “February 2004 transfer”).
[146]
The Appellant described the
pre-November 2004 share transfers as gifts from Mr. Hinke. Mr. Hinke provided
numerous explanations for the transfers.
[147]
His first explanation was that
only the November 2000 transfer was a gift. He stated that he transferred the
remaining shares to repay the Appellant for the advances and assistance she
provided to him to help cover his expenses. Mr. Hinke testified that during
this period he was not generating “enough cash flow”. He could not provide any
specific details of the financial assistance he allegedly received from the
Appellant.
[148]
Mr. Hinke then stated that the
February 2000 transfer was not the repayment of a loan made by the Appellant to
Mr. Hinke, but rather was actually a loan Mr. Hinke made to the Appellant.
[149]
Mr. Hinke also changed his story
with respect to the February 2004 transfer. He stated that it was not a
“share-for-debt” transaction but rather a spousal contribution to an RSP. Upon
further cross-examination, he changed his story one more time and stated that
the February 2004 transfer was indeed a “share-for-debt” transaction.
[150]
Once the share
certificates for the pre-November 2004 share transfers were issued in the name
of the Appellant, the shares were deposited into one of the following
investment accounts of the Appellant:
-
A CIBC Wood Gundy
self-directed registered retirement savings plan account, which was referred to
as the “CIBC 938 account”. It was opened in February 2000.
-
A CIBC Wood Gundy
brokerage account, which was referred to as the “CIBC 525 account”. It was
opened in November 2000.
-
A CIBC personal Asset
Advantage Account, which was referred to as the “CIBC 521 account.” It was
opened in May 2001.
[151]
On cross-examination,
Mr. Hinke was asked whether he had a power of attorney over any of the
Appellant’s CIBC investment accounts. At first, he was evasive; however, he
then indicated that he never had a power of attorney over the Appellant’s CIBC
investment accounts.
[152]
The Respondent’s
counsel then produced powers of attorney that the Appellant had executed
granting Mr. Hinke full power and authority over her CIBC investment accounts.
The Appellant executed the powers of attorney in respect of the CIBC 525
account and the CIBC 521 account at the time she opened the accounts. She
executed the power of attorney for the CIBC 938 account on Nov 3, 2000,
nine months after she opened the account, and immediately before Mr. Hinke
transferred the 100,000 TEI shares on November 6, 2000.
[153]
Mr. Hinke’s story
changed after he was shown the powers of attorney. After acknowledging that
they did exist, he stated that he only used the powers of attorney when the
Appellant instructed him to use them. In his words, they were not used
“willy-nilly”.
[154]
In fact, Mr. Hinke used
the powers of attorney on a continuing basis to effect all of the trades that
were made in the Appellant’s CIBC investment accounts.
[155]
The Court heard
testimony from Mr. Glen Evans, the CIBC investment advisor who was primarily
responsible for the Appellant’s CIBC investment accounts. Mr. Evans testified
that only Mr. Hinke provided instructions to the CIBC with respect to share
transactions in the Appellant’s CIBC accounts. He did not receive any
instructions from the Appellant.
[156]
Mr. Evans referred to
the transactions in the Appellant’s CIBC investment accounts as being mostly
“unsolicited” trades, meaning that they were trades where Mr. Evans did not
provide any recommendations with respect to either the sale or purchase of
shares. The client initiated all transactions. In the case of the Appellant’s
CIBC accounts, Mr. Hinke initiated all of the transactions, using the powers of
attorney.
[157]
He described Mr. Hinke
as being very knowledgeable with respect to the market for TEI shares. He
stated that the Appellant was not particularly knowledgeable with respect to
the trading of securities.
[158]
In my view, the
evidence before me clearly shows that the pre-November 2004 share transfers
were neither a gift nor “share-for-debt” transactions. While Mr. Hinke
transferred the shares into the name of the Appellant, this was done in an attempt
to defeat his creditors, including the CRA. Through the powers of attorney, Mr.
Hinke retained control over the shares. He used the proceeds from the sale of
the shares to help fund his personal and family expenses and meet his
ongoing financial obligations.
[159]
Mr. Hinke’s testimony
with respect to the pre-November 2004 share transfers, particularly his denial
of the existence of the powers of attorney, destroyed what little credibility
he had retained after his previous testimony.
The November
2004 Share Transfer
[160]
By the second half of
2004, the financial pressures that Mr. Hinke had been facing since 2001 had
intensified. His income tax liability exceeded $1.6 million. On June
30, 2004, the Ontario Superior Court of Justice, Family Court, issued an order
requiring Mr. Hinke to pay substantial amounts to his former spouse in respect
of support payments.
On November 2, 2004, the CRA issued a requirement to pay to TEI for 50% of
amounts owed to Mr. Hinke;
on November 5, 2004, the CRA issued a requirement to pay to the investment
firm Bolder Investment Partners
(“Bolder”), and in November 2004 the CRA issued a requirement to pay on Mr.
Hinke’s CIBC Wood Gundy brokerage accounts. Further, in November 2004, Mr. Hinke ceased
to be president of TEI.
[161]
During that period, Mr.
Hinke completed the November 2004 share transfer. Specifically, on November 17,
2004, Mr. Hinke instructed Computershare to transfer 1,242,507 TEI shares to
the Appellant.
[162]
Both the Appellant and
Mr. Hinke testified that the November 2004 share transfer represented the
settlement of a $40,000 debt that Mr. Hinke owed the Appellant. In support of
their testimony, the Appellant produced a handwritten acknowledgment and
release document dated October 20, 2004 that was signed by both the Appellant
and Mr. Hinke. This acknowledgment states that the Appellant “hereby agrees to
accept 1,242,507 Common Shares of Thermal Energy in a ‘Spousal Rollover of
Shares’ as full and final settlement of the $40,000 owed.” The acknowledgement
also notes that the debt was incurred to meet personal and business expenses
over the preceding three and a half years (i.e. from mid-2001 to the end of
2004), primarily car expenses and babysitting expenses for their son.
[163]
Notwithstanding Exhibit
A-4, the evidence before me does not support a factual finding that Mr. Hinke
transferred 1,242,507 TEI shares to the Appellant to satisfy a $40,000 debt.
[164]
At the end of October
2004, Mr. Hinke held 2,242,507 TEI shares in his Bolder investment accounts.
During his evidence-in-chief, Mr. Hinke testified that, in order to effect the
transfer of the 1,242,507 shares to the Appellant, he instructed his broker at
Bolder, a Mr. Jeske, to stop selling those shares, to convert them to
certificate form and to send him the certificate. He testified that he provided
these instructions sometime between October 14, 2004 and the last week in
October 2004.
[165]
The documentary evidence
before me shows that Bolder did not provide instructions to its supplier of administrative
services (Haywood Securities Inc.) to convert Mr. Hinke’s 2,242,507 TEI shares
to certificate form until November 5, 2004.
[166]
Mr. Hinke testified
that the delay was normal and that he had reminded Mr. Jeske in late
October to convert the shares.
[167]
The evidence before me does
not support Mr. Hinke’s testimony that he provided the instructions to Mr.
Jeske in October 2004 to convert the shares into certificate form. Rather, on the
evidence before me, I have concluded that Mr. Hinke provided the instructions
to Mr. Jeske on November 5, 2004, the day the CRA served Bolder with the
requirement to pay.
[168]
In reaching this
conclusion I have relied upon the following series of internal Bolder communications
that were all sent on November 5, 2004 (the communications are listed in
chronological order):
-
An internal Bolder
email in which the author states that Bolder has received a requirement to pay
from the CRA in respect of Mr. Hinke’s $1.7 million tax debt. Mr.
Jeske forwarded this email to Mr. Hinke.
-
An internal Bolder
email in which Mr. Jeske states that Mr. Hinke “wants to withdraw [sic.] his
position on a rush transfer basis.”
-
An internal Bolder
email noting that Bolder cannot pay Mr. Hinke in cash due to the CRA
requirement to pay; however Bolder can physically deliver the shares to Mr.
Hinke.
-
A fax from Bolder to
Haywood Securities directing them to prepare a share certificate for the 2,242,507
shares in the name of Mr. Hinke.
[169]
In my view, Mr. Hinke’s
decision to convert the 2,242,507 shares to certificate form had nothing to do
with an alleged debt that he owed the Appellant, but rather was done solely to
defeat the CRA requirement to pay that was issued to Bolder on November 5,
2004.
[170]
With respect to Exhibit
A-4, it is a self-serving document that does not evidence an actual debt between
the Appellant and Mr. Hinke.
[171]
After receiving the
share certificate for the 2,242,507 TEI shares, Mr. Hinke, on November 17,
2004, provided the share certificate to Computershare and directed them to
transfer 1,242,507 shares to the Appellant and prepare 10 share certificates,
each for 100,000 shares, in his name.
[172]
The Appellant then
deposited the 1,242,507 TEI shares into a Bolder investment account that she
had opened in August 2004. This was the first transaction in the account.
[173]
Mr. Hinke also denied
that he had a power of attorney over the Appellant’s Bolder investment account.
The Respondent did not produce a power of attorney for this account. However,
on cross-examination, Mr. Hinke acknowledged that “on occasion” he provided
instructions to Mr. Jeske with respect to the Appellant’s Bolder investment
account.
In other words, Mr. Hinke was able to exert the same control over the
Appellant’s Bolder investment account that he exerted over the Appellant’s CIBC
investment accounts.
[174]
The evidence before the
Court with respect to the November 2004 share transfer seriously damaged the
Appellant’s credibility.
Original
Assessed Share Blocks
[175]
Mr. Hinke’s financial
difficulties continued after November 2004. As a result of CRA garnishments of
his employment income, the requirements to pay on his investment accounts and a
garnishment issued in respect of his family support payments, he had very
little cash.
Then, on June 21, 2005, TEI terminated his employment.
[176]
During the Transfer
Period (May 27, 2005 to February 15, 2006), Mr. Hinke transferred the
Original Assessed Share Blocks (2,694,500 TEI shares) to the Appellant.
[177]
As discussed
previously, it is the Appellant’s position that she paid consideration of $199,335
for the shares in the Original Assessed Share Blocks. The Appellant argues that
this consideration consisted of the repayment of loans previously made by the
Appellant to Mr. Hinke by way of cash advances to him and payments to third
parties made on behalf of Mr. Hinke. Specifically, the Appellant claims to have
made the following payments between December 1, 2004 and March 2006 to Mr.
Hinke and to third parties on behalf of Mr. Hinke:
o
Cash loans to Mr. Hinke
o
Car insurance payments
o
Monthly car lease
payments
o
Mortgage payments for
the family home
o
Spousal and child
support payments (previous marriage)
o
Legal fees (employment
litigation, family law litigation and tax matters)
o
Accounting fees (tax
and income analysis)
o
Wedding expenses
o
Business trip and family
visit
o
Various household
expenses
o
Various payments to
third parties.
[178]
The cash advances to
Mr. Hinke made up $69,900 of the alleged loan.
[179]
In The Queen v. Livingston,
the Federal Court of Appeal noted the following when discussing the criteria
contained in subsection 160(1):
. .
. In Medland v. Canada 98 DTC 6358 (F.C.A.) (“Medland”) this Court
concluded that “the object and spirit of subsection 160(1), is to prevent a
taxpayer from transferring his property to his spouse [or to a minor or
non-arm’s length individual] in order to thwart the Minister’s efforts to
collect the money which is owned [sic] to him.” See also Heavyside v.
Canada [1996] F.C.J. No. 1608 (C.A.) (QL) (“Heavyside”) at paragraph
10. More apposite to this case, the Tax Court of Canada has held that the
purpose of subsection 160(1) would be defeated where a transferor allows a
transferee to use the money to pay the debts of the transferor for the purpose
of preferring certain creditors over the CRA (Raphael v. Canada 2000
D.T.C. 2434 (T.C.C.) at paragraph 19).
[180]
The evidence before me
shows that Mr. Hinke began transferring TEI shares to the Appellant in 2000 in
an attempt to ensure that he had monies available to pay his personal expenses.
Mr. Hinke transferred legal title to the relevant TEI shares to the Appellant
while retaining control over the shares. This included the pre‑November
2004 share transfers, the November 2004 share transfer and the Original
Assessed Share Blocks (collectively referred to as the “Transferred TEI Shares”).
[181]
During closing
argument, counsel for the Respondent took me to a detailed summary of the
evidence on the record with respect to the activity in the Appellant’s CIBC and
Bolder investment accounts between February 3, 2000 (the date of the first
transfer) and June 2006. The summary detailed withdrawals made from these
accounts, transfers to the Appellant’s personal bank account (held at the
Toronto-Dominion Bank) and payments made out of the Toronto-Dominion Bank account
and one of the CIBC accounts.
[182]
I agree with counsel
for the Respondent that this summary shows that the Appellant paid the $199,334
of expenditures and advances to Mr. Hinke that make up the alleged loan by
using the money generated from the sale of the Transferred TEI Shares. In many
instances the funds can be traced directly to the sale of TEI shares. In others,
the source of the funds was the sale of non-TEI shares. However, these non-TEI
shares were purchased using proceeds from a previous sale of TEI shares.
[183]
In short, Mr. Hinke
controlled the very shares that the Appellant and he used to fund the third-party
expenses and make the advances to Mr. Hinke.
[184]
For example, between
November 2004 and February 14, 2006, approximately $643,000 was realized from
the sale of the Transferred TEI Shares.
This represented nearly all of the Appellant’s financial resources during that period.
[185]
Mr. Hinke did the very
thing subsection 160(1) was intended to prevent. In an attempt to give preference
to certain creditors over the CRA, he transferred property to his spouse. This
property was then, at Mr. Hinke’s direction, sold, with the proceeds being used
to pay his debts and fund his personal expenditures.
[186]
The Appellant and Mr.
Hinke have tried to characterize the transfers as the repayment of loans. In my
view, there were no loans. All of the funds originated from the Transferred TEI
Shares, shares that Mr. Hinke continued to control after they were transferred
to the Appellant.
[187]
For the foregoing
reasons, I have concluded that the Appellant did not pay any consideration for
the Original Assessed Share Blocks.
Conclusion
[188]
Between May 27, 2005
and February 15, 2006 Mr. Hinke transferred to the Appellant 2,694,500 TEI
Shares with a fair market value of between $639,771 and $678,535. The Appellant
did not give any consideration for these shares. As a result, the amount
determined under paragraph 160(1)(e) is at least $639,771. Since this
amount exceeds the $546,835 assessed by the Minister, the appeal will be
dismissed, with costs to the Respondent.
Signed at Ottawa, Canada, this 31st day of December 2012.
“S. D’Arcy”