Marina Québec Inc. v. Minister of National Revenue, [1992] 1 CTC 2015

Tremblay, T.C.C.J.:—This appeal was heard on October 11, 12 and 13, 988, in Montreal, Quebec, and argument was heard on October 27 and 28, 1988, in Quebec City, Quebec. The decision was taken under reserve on December 21, 1988 upon receipt of the transcript of the stenographic notes. As well, on May 9, 1989, the Court sent counsel two decisions which had been made after this appeal was heard and which might have an impact on it. I received their comments on these judgments on November 6, 1989.

1. Point at Issue

The point at issue is whether the appellant, a company which has been continued and was formerly known as Marine Robitaille (1978) Inc. (hereinafter referred to as “ Robitaille (1978)"), is correct in the computation of its income of 1979 to deduct the sum of $603,081. This sum constitutes the cost of inventory property acquired by Robitaille (1978) from Robitaille Marine Inc. (hereinafter referred to as "Marine"). Payment for this inventory was made by issuing 603,081 preferred shares, redeemable at the option of Robitaille (1978). Furthermore, the nominal value of these shares was established at $1 per share.

The appellant argues that there is a line of British case law, which has been followed by the Canadian courts, holding that the cost of property acquired by a corporation in consideration for shares having a nominal value cannot be lower than the value of such shares.

Accordingly, since the nominal value of the said shares was $1 per share, Robitaille (1978), which became Marina Québec Inc., argues that it acquired inventory property of a value of $603,081. This inventory purchase could therefore be deducted from the sales made during its fiscal year in calculating the company's profits (section 9 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act").

The respondent refused this deduction, arguing that the preferred shares which were used as payment had no market value. The acquisition cost of the said inventory was therefore nil.

In the alternative, the respondent submits that, given that Marine and Robitaille (1978) are related companies under subsection 251(2) of the Act, and that the value of the shares issued is considered to be nil, the transfer of inventory property constitutes a benefit of $603,081 taxable under subsection 245(2) of the Act.

Moreover, the respondent argues, and the appellant expressly denies, that Marine owed $500,000 to the Department of National Revenue, Customs and Excise, before the inventory was transferred to Robitaille (1978). This transfer would have been made in order to evade payment of the debt to the Department of National Revenue.

2. Burden of Proof

2.01 The burden of proof is on the appellant to show that the respondent's assessments are incorrect. This burden of proof results from several judicial decisions, including the judgment of the Supreme Court of Canada in Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182.

2.02 Also in that judgment, the Court decided that the facts used by the respondent in support of the assessments or reassessments are also assumed to be true until the contrary is proved. In the case at bar, the facts assumed by the respondent are described in subparagraphs (a) to (m) of paragraph 5 of the respondent's amended reply to the notice of appeal. This paragraph reads as follows:

[Translation]

5. In assessing the appellant for its 1979 taxation year, the Minister of National Revenue took the following facts into account, inter alia:

(a) The appellant is a company which was continued on April 24, 1981 under Part IA of the Quebec Companies Act, and which was known before November 9, 1982 by the business name Robitaille Marine (1978) Inc. [admitted];

(b) The company Placements A. et N. Robitaille Inc. is a company which was continued under Part IA of the Quebec Companies Act, and which was formerly known by the business name Robitaille Marine Inc. [admitted];

(c) The 1979 taxation year of Robitaille Marine (1978) Inc. started on March 1, 1978 and ended on January 31, 1979 [admitted];

(d) In March 1978, Robitaille Marine Inc. transferred inventory property, rolling stock, furniture, equipment and intangible assets to Robitaille Marine (1978) Inc, for the stipulated proceeds of disposition of $695,011, which the contracting parties allocated as follows:

Furnishings	$ 1,838
Equipment	$ 1,840
Sign	$ 7,045
Rolling stock	$ 9,288
Inventory	$675 ,000
Intangible assets	$ —
	$695,011
[admitted];

(e) At the time of this transfer and also subsequently, Robitaille Marine Inc. and Robitaille Marine (1978) Inc. were not dealing at arm's length, under the Income Tax Act [admitted];

(f) In consideration for the transfer of the above-mentioned items, Robitaille Marine (1978) Inc. assumed outstanding accounts payable of $179,956.30, and further issued to Robitaille Marine Inc. 515,235 preferred shares, each having a nominal value of $1 [admitted];

(g) Having regard to the characteristics of these 515,235 preferred shares, they had no market value [denied];

(h) During its 1979 taxation year, Robitaille Marine (1978) Inc. also received from Robitaille Marine Inc. other inventory property for stated proceeds of $87,846 [corrected at the hearing to $87,866] [admitted];

(i) In consideration for the property transferred, Robitaille Marine (1978) Inc. issued 87,846 [corrected at the hearing to 87,866] preferred shares each having a nominal value of $1 to Robitaille Marine Inc. [admitted];

(j) Having regard to the characteristics of these 87,846 [corrected at the hearing

to 87,866] preferred shares, they also had no market value [denied];

(k) In its statement of income and expenses for the 1979 taxation year, Robitaille Marine (1978) Inc. included in its purchases the sum of $603,081, as inventory property purchased in consideration for the 603,081 preferred shares referred to above [admitted];

(l) The inventory property, acquired in consideration for the 603,081 preferred shares referred to above, cost Robitaille Marine (1978) Inc. nothing, since the preferred shares had no market value [denied];

(m) The value of purchases made by Robitaille Marine (1978) Inc. in its 1979 taxation year was therefore reduced to $603,081, with a corresponding increase in net income [admitted].

AND, SUBJECT TO WHAT IS SUBMITTED ABOVE, THE RESPONDENT ADDS THE FOLLOWING:

6. In the alternative, Robitaille Marine Inc. conferred a benefit of $603,081 on Robitaille Marine (1978) Inc. by transferring property to it in consideration for preferred shares having no market value [denied];

7. During the periods in question, Robitaille Marine Inc. and Robitaille Marine (1978) Inc. were controlled by the same person or group of persons [admitted];

8. On December 31, 1977, before the transfers of property which gave rise to these proceedings, Robitaille Marine Inc. was indebted to the Department of National Revenue in the amount of nearly $500,000 [admitted with the clarification that there was a claim for nearly $500,000 relating to customs], but denies that the debt was Owing;

9. There was no written contract of sale setting out the transfers of property from Robitaille Marine Inc. to Robitaille Marine (1978) Inc. [denied];

10. The transfers of property in question were not made in good faith and were designed to evade payment of the debt of nearly $500,000 which Robitaille Marine Inc. owed to the Department of National Revenue [denied];

11. Following the transfers of property in question, Robitaille Marine Inc. made no attempt to have the preferred shares redeemed and so to recover the value of the property transferred to Robitaille Marine (1978) Inc. [denied];

12. On September 11, 1979, Robitaille Marine Inc. became Placements A. & N. Robitaille Inc. and, thereafter, no attempt was made to have the preferred shares redeemed [first part admitted, second part denied];

13. Having regard to the circumstances described above, Robitaille Marine Inc. conferred a benefit of $603,081 on Robitaille Marine (1978) Inc. as follows:

1st transfer:

Capital property	$ 20,011
Inventory property	$675,000
2nd transfer:
Inventory property	$ 87,846
TOTAL	$782,857
less: Accounts payable assumed by
Robitaille Marine (1978) Inc.	$179,956
Robitaille Marine (1978) Inc.
Value of the benefit:	$603 ,081
[denied];

14. In the circumstances, Robitaille Marine Inc. is deemed to have made a payment to Robitaille Marine (1978) Inc. which is equal to the amount of this benefit: $603,081 [denied];

15. This deemed payment of $603,081 must be included in the computation of the income of Robitaille Marine (1978) Inc. for its 1979 taxation year, for the purposes of Part I of the Income Tax Act [denied].

3. Facts

3.01 The appellants first witness was Paul Vézina. He was in charge of the affairs of André Robitaille and Nicole Robitaille since 1975, as their legal adviser. In 1975, Marine was the only corporate entity.

A. Examination-in-chief of Mr. Vézina

3.02 Marine, whose object was the sale and repair of pleasure craft, had its head office on the shore of the St. Lawrence River at the mouth of the Beauport River. This land was under the jurisdiction of National Harbours (Ports Canada) with which Marine had entered into a lease. In 1975, complications relating to the lease arose requiring that Mr. Vézina intervene, at the request of Mr. Robitaille.

3.03 On April 5, 1977, while the witness was still negotiating with National Harbours to resolve that problem, Revenue Canada, Customs and Excise carried out a general seizure of all of Marine's inventory. An assessment in the amount of $425,000 had been issued earlier. The witness had personally to take care of all the problems which resulted from this situation.

3.04 In a letter dated April 21, 1978 (Exhibit A-1), the witness informed Jean- Jacques Demers, accountant, of the amount of this claim, which came to $582,469.93 (taxes, interest and penalties) for the purposes of preparing financial statements.

3.05 In December 1977, three charges under the Criminal Code were laid against André and Nicole Robitaille. They were charged with having defrauded the Department of National Revenue of the sum of $425,000, with uttering forged documents and with falsifying documents.

In 1981, the Crown stated, following a preliminary inquiry which had gone on over several years, that it did not have any evidence to tender in respect of the first and third counts. Accordingly, the charges were withdrawn as they related to the charge of tax fraud because, in fact, all boat parts purchased in the United States are exempt from customs and excise. No tax fraud could be imputed to Mr. and Mrs. Robitaille.

The Robitailles had, however, pleaded guilty to the second count, of uttering forged documents. Mr. Vézina presented the reasons behind this offence: given that Revenue Canada's administrative process means that payment must be made for an item which is exempt from customs and excise taxes, which payment is then refunded, Marine simply intended, by changing the prescribed forms, to avoid this temporary loss of cash flowing toward Revenue Canada.

3.06 The inventory seizure was then released. After considering the proceeds that a trustee's sale of the seized property would have brought, as well as the administrative costs inherent in such an operation, it was finally agreed that it would all be released for $100,000.

However, Marine never acknowledged that it owed the amount claimed. Furthermore, on August 7, 1981, Marine brought proceedings in the Federal Court claiming $100,000 (Exhibit A-2: statement of claim and receipt for court fees paid). This case has not yet been heard.

3.07 It became necessary, as a result of the claim by Revenue Canada and the seizure of Marine's property, as well as of the requirements imposed by the bank, to bring another company into existence: Robitaille (1978).

Marine therefore sold its business and most of its assets to Robitaille (1978). The assets in question were described as follows:

That does not include accounts receivable (moneys on deposit in the bank). A list of accounts payable was supplied.

The sale contract established by a notarial deed was signed on June 26, 1978 (Exhibit A-3). The purchaser, however, took possession of the business on March 1, 1978. The 1979 fiscal year of Robitaille (1978) started on March 1, 1978 and ended on January 31, 1979. Paragraph 5 of the contract (Exhibit A-3) provides the following details as to the price paid:

[Translation]

This sale is made for the price of SIX HUNDRED NINETY-FIVE THOUSAND AND ELEVEN dollars ($695,011) payable as follows:

(a) By issuing to and allocating among the vendor and the people indicated by the vendor three hundred thirty-seven thousand seven hundred and forty-nine (337,749) fully paid-up preferred shares, having a par value of $1 each, of the capital stock of the purchaser, receipt whereof is hereby acknowledged.

(b) By issuing to and allocating among the vendor and the people indicated by the vendor 177,486 fully paid-up preferred shares, having a par value of $1 each, of the capital stock of the purchaser, to be issued when the purchaser obtains supplementary Letters Patent, receipt whereof is hereby acknowledged.

(c) By assuming accounts payable and owing by the vendor, totalizing a sum of one hundred seventy-nine thousand nine hundred fifty-six dollars and thirty cents ($179,956.30).

With respect to the claim by Revenue Canada, Customs and Excise, amounting to $500,000, paragraph 6(b) of the contract (Exhibit A-3) reads as follows:

[Translation]

The potential liability of about five hundred thousand dollars ($500,000) which seems to be claimed by the federal Department of Revenue and not assumed by the purchaser. Accordingly, this claim is not contemplated in this transaction, and Robitaille Marine Inc. will deal with it itself with the proceeds of the present transaction and the other assets that it owns.

3.08 It was admitted at the beginning of evidence that 603,081 preferred shares were transferred despite the fact that the contract (Exhibit A-3) seems to indicate that only 515,235 shares were in fact transferred. The difference may be explained by the fact that an amount of $87,846, relating to expenses connected with the business, was paid by Marine before the transfer of the inventory to Robitaille (1978). Accordingly, additional share capital was issued by Robitaille (1978) to ensure that this new debt could be settled.

3.09 The minutes of Marine and Robitaille (1978) relating to the transfer of the 87,666 shares were filed as Exhibit A-4. These minutes were dated December 4, 1978.

3.10 The witness explained that the fundamental reason for the transfer of the business to Robitaille (1978) was the bank's refusal to continue to supply credit to Marine: the seizure, the newspaper publicity which followed and the claim by Revenue Canada, Customs and Excise made any further credit to Marine impossible, while suppliers were demanding payment for goods upon delivery. This was the reason why Robitaille (1978) was brought into existence.

The Bank of Montreal again lent money to Robitaille (1978) after the new company was created. A letter from Mr. Vézina to Jean-Jacques Demers dated April 10, 1979 indicates that a revolving credit of $750,000 was granted by the bank. It was secured by, inter alia, a trust deed of $750,000 and the personal suretyship of André Robitaille for a sum of $300,000 (Exhibit A-5).

3.11 Suppliers continued to grant credit after Robitaille (1978) was brought into existence.

3.12 André Robitaille made all the decisions relating to the business. He was the person who had started the business and who had the experience in this area.

B. Cross-examination of Paul Vézina by counsel for the respondent

3.13 The respondent filed, as Exhibit 1-2, a table showing the changes which took place in Mr. Robitaille's business. This table reads as follows:

[Translation]

DIAGRAM OF CHANGES IN THE BUSINESSES

ROBITAILLE MARINE INC.		MARINE ROBITAILLE (1978)
		INC.
	APRIL—1978
Incorporated		Incorporated
August 20, 1970	Assets	February 9, 1978
	Transferred
(first company)		(second company)
September 11, 1979		November 10, 1982
BYLAWS CHANGED		BYLAWS CHANGED
(Name change)		(Name change)

LES PLACEMENTS A. & N.	MARINA-QUEBEC INC.
ROBITAILLE INC.
March 26, 1985	August 27, 1985
BYLAWS CHANGED	BYLAWS CHANGED
(Name change)	(Name change)
1204-8567 QUÉBEC INC.	1510-9283 QUÉBEC INC.
Bankruptcy—May 28, 1985
2173-4157 QUÉBEC INC.
(third company)

In 1985, Marina Québec Inc. transferred all of its operations, including inventory, to 2173-4157 Québec Inc. This latter company operates the business selling and repairing pleasure craft business today.

3.14 When the transfer took effect in 1985, Marina Québec Inc. (the appellant) received 1,550,000 class "G" preferred shares in 2173-4157 Québec Inc.

3.15 Counsel for the respondent then filed a series of documents bound in four volumes:

1. Eleven documents (letters patent, certificates of change, certificates of continuation) relating to various companies in which Mr. and Mrs. Robitaille are shareholders (Exhibit 1-3);

2. Nine documents concerning the claim by Customs and Excise (notice of seizure, letters from the law firm of Vézina, Sheehan & Pouliot) (Exhibit 1-4);

3. The appellants income tax returns for 1975 to 1983 (Exhibit I-5);

4. Documents from the collections section (Exhibit 1-6).

Mr. Gauthier objected to a large part of these documents, which he considered not to be relevant to the year in question. However, Mr. Laperrière stated that he would show their relevance during cross-examination of Mr. Vézina. The Court took Mr. Gauthier's objections under reserve and permitted the exhibits to be filed, holding that filing the exhibits did not make them admissible in evidence. The merit of the objections is subject to the evidence to be presented by counsel.

3.16 On cross-examination, Mr. Vézina confirmed (a) the seizure on April 5, 1977, under the authority of the Customs Act, R.S.C. 1970, c. C-41, as amended, of the property of Robitaille Marine Inc.; (b) the payment of $100,000 ($60,000 to Revenue Canada, Customs and Excise in May 1977 and $40,000 to the Royal Canadian Mounted Police in June 1977) which made it possible for the seized property to be released.

3.17 On cross-examination, Mr. Vézina disclosed the following facts:

(a) On September 28, 1977, Mr. and Mrs. Robitaille received a seven-page package of documents (Exhibit 1-4) from the Customs investigator, Mr. J.G. Archambault, establishing the claim at $550,571.97. This claim breaks down as follows:

[Translation]

ACCOUNT
Duty underpaid, Lists A & B	235 ,948.32
Sales tax underpaid A & B	187,742.55
Excise tax underpaid A & B	25,735.31
Penalty, Duty underpaid, List A	133,043.75
SUB-TOTAL:	582,469.93
LESS RCMP Seizure No. 77 DA-15	31,897.96
(See K.9 3/4, May 11/77)
TOTAL ACCOUNT:	$550,571.97

(b) The appellant received the official notice of seizure on November 8, 1977 (Exhibit 1-4, page 8);

(c) On December 16, 1977, Mr. Vézina sent a letter to Revenue Canada to inform it that his clients intended to contest the notice of seizure and the claim (Exhibit 1-4, pages 9 and 10);

(d) At the beginning of January 1978, Mr. Vézina had a good defence in respect of the claim for $550,571.97, which could not be presented, for lack of evidence. This defence consisted precisely in showing that if the appellant had not unlawfully forged the forms, no customs and excise tax could have been demanded.

(e) It appears from the short term liability on the balance sheet of December 31, 1984 that a sum of $482,470 was payable for"customs and excise tax" (Exhibit I-5, page 28). We also see that ” [Translation] the company received an assessment of customs and excise tax for 1972 to 1977 in the total amount of $582,470". It should be noted that the sum of $100,000 which had to be paid following the seizure explains why only $482,470 continued to show on the balance sheet in the company's liabilities.

(f) Charges were brought in December 1977 against Mr. and Mrs. Robitaille.

[Translation]

Q. So, the situation to which we are now referring, it was a transfer that occurred on March 1, 1978, about 10 months later?

A. When we received the charges in December, then the bank said: "It's over, no more", so what were we to do? Collapse? It was over. So we tried to start the business up again on a new footing, as the banker suggested. We said: "We are starting a new business. We are going to appraise boats for transfers". Then we issued preferred shares.

Q. Redeemable at the price of the issuer?

A. Well, because at that time—now I may be wrong on the law, I don’t want to testify to the law at that time, we were not entitled to make the shares redeemable at the option of the holder. We were not entitled to do that. (S.N. of 11/10/88, vol. 2, pages 43-44).

3.18 A large part of the cross-examination of Mr. Vézina dealt with the transactions carried out following the assessment of $582,470 imposed by Revenue Canada, Customs and Excise.

First, the directors of Marine were positive as to the fact that the company would have gone bankrupt if Customs and Excise had demanded payment of the $582,470. The alternative of the $100,000 deposit by Marine to release the seized property therefore seemed, in Mr. Vézina's eyes, to benefit both parties involved in this dispute. This passage from Mr. Vézina's testimony corroborates this observation:

[Translation]

A. (interrupting) What I said, is that this was done with the full knowledge of everyone, and it was done, I think, that it was also in the interest of Customs and Excise, who were not interested in finding themselves with sixty-four (64) halffinished boats—because that was the case—to be caught with that, since if it dragged on for a year or more before the debt was payable and liquid, if it is worth nothing then, I'll get nothing, they didn't even know where to put them. They asked us to keep them in our facilities. So then, the choice that we ourselves had, was to collapse and then disappear from the map, Robitaille Marine, or to start over parallel, alongside. Instead of that, we negotiated, we said: “ Ultimately, 100,000 bucks down, we negotiate with the people at the RCMP". They told us, "OK". They took all our papers, they gave us photocopies so we could go on with that.

Q. Now, at what point in time did this take place?

A. It happened, . . . well, it started in April.

Q. I am going to tell you, the $100,000 down payment, when it was made. It was in May and June.

A. That's right, that's right. (S.N. of 11/10/88, vol. 2, pages 41-42.)

Again according to Mr. Vézina's testimony, it appeared necessary to create a new company as a result of the pressure exerted by the bank and the various suppliers. Major differences as to the existence of a balance payable by Robitaille (1978) on the real value of the inventory property seized became clearly apparent on his cross-examination:

[Translation]

Q. So you started over?

A. We started over. We started over, what were we to do? The bank sells the boats because they had them as security, we buy them back for $100,000 and start over. You, you have your $100,000, you have got the entire value of the company, you have got it. Because in a quick sale, judicial or otherwise, the value of boats worth $600,000 which need expert work to finish them, to sell them, and so on, for $100,000, I thought the appraisal by Mr. Archambault was reasonable. Just to close—because I am confusing my explanations, in any event I can give them to you in full—at that point, that was what they had, Customs and Excise, a value of $100,000. And then unfortunately, if ever their claim of $485,000 was proved correct, they had three hundred eighty-five thousand ($385,000) bucks they would never have been able to recover. That was that.

Q. If Robitaille Marine had gone on at that point, the first corporation, was there a chance?

A. Well, you say, if it went on, and if it went well, if it made money, all these “ifs”, that wasn't in the company in 1978. You would have had to put yourself in that time. He had been charged, he was in court charged with fraud, that charge had not been resolved, he was charged with fraud in court, his wife was not very happy with that, eh, she was charged too. She told him: "You're the one who always managed, you always did it, then here I am being charged in court with fraud”. The suppliers were saying: “No, it's cash, or else no deal". The most important employees wanted to leave. They had to be given shares to make it attractive to them. I am going to tell you something, when you say to me, "If. . .if. . .if. . .then", that didn't mean much when we were right in the situation in 1978, it was worth what you got. (S.N. of 11/10/88, vol. 2, pages 56-57).

Me, I have done a lot of bankruptcies, it is one of the things I teach, it is one of the things I have understood, but maybe incorrectly: the past belongs to the creditors, but not the future. There is no obligation in the act, it is not frustrating the creditors to refuse to work for the future (the witness suffered a slip of the tongue, meaning to say “for the past"). That is called discharge. Discharged from the past for the future, you start over fresh.

Q. The difference, is that you were unilaterally discharged here.

A. Unilaterally, to the full knowledge and benefit of everyone.

Q. Are you suggesting that there was an agreement on the part of Customs or whomever in the federal government to this transaction?

A. There was at least agreement on the part of those who decided not to take action, who saw it, who knew about it, and who let it happen, and who collected our taxes the next year, who collected our customs duties from the new company the next year, who collected our customs duties the second following year, who collected income tax the second following year. Everyone saw the transaction, and everyone said: "The new company is operating, pay us customs duties”, we pay. “Pay us income tax". We paid. Then they are saying, "Hey, on top of that, you should have paid the old ones”. So what is that? That's how I I saw it.

Q. Clearly, Mr. Vézina, the property of a creditor. . . the property of a debtor is the common security for the creditors?

A. Absolutely. On that point, there was no frustration of the government. They were the ones who did the one hundred thousand ($100,000) valuation. They were the ones who said: “ OK, those boats, give us $100,000 instead”. They were the ones who did that. (S.N. of 11/10/88, vol. 2, pages 61-63.)

Q. And Customs found themselves with an empty shell?

A. Customs had emptied the shell by taking the one hundred thousand ($100,000), yes, that's right.

Q. They found themselves with an empty shell, sir?

A. It was worth one hundred thousand bucks ($100,000), then they took the one hundred thousand (100,000), they took it at the outset, the one hundred thousand bucks ($100,000). (S.N. of 11/10/88, vol. 2, pages 63-64.)

Q. How could Customs get paid out of that? Tell me that.

A. No more on March 1 than it could in May. When you have a debtor who owes you money, all that you can take is its property, you cannot put it in prison, you cannot set it to forced labour for you, that's impossible. You can take its property.

Q. One thing is possible, for example, which has happened before. That is to make an agreement with Her Majesty's collections service to arrange a payment schedule, that has happened before, sir.

A. Yes, but hold on a moment there. You are asking me what the creditor can do. The creditor, it did it, it looked at the value of the assets, it said: "Give me $100,000 for that. Then go ahead, go somewhere else.” (S.N. of 11/10/88, vol. 2, pages 64-65.)

It is also clear from Paul Vézina's testimony that for all practical purposes, if the sum of $100,000 had not been paid for release of the inventory property that had been seized, Marine would have had to declare bankruptcy. The Department would probably not have collected $100,000 from the sale of the assets once the administrative costs were paid (3.06). For this reason, Mr. Vézina felt that essentially Marine owes nothing further to the respondent. The people involved had been forced to create a new company, and so the new company no longer had to be concerned with the "supposed" debt owed by Marine to Customs.

[Translation]

Q. But to honour the difference, which is four hundred eighty-two thousand ($482,000). . .

A. (interrupting) To honour it, there was nothing more than the one hundred thousand ($100,000) before, and there was nothing more than the one hundred thousand ($100,000) after.

Q. Did one thing not remain: future business opportunities?

A. Yes.

Q. That remained?

A. That, future business opportunities, they were indeed taken away. But if you are telling me that future opportunities are an asset which belongs to a creditor at a given point in time, you will surprise me. Indeed, future business opportunities were taken away. We started a new business, as the bank told us. Future opportunities, they were that if we did not start a new business, there would be no future opportunities. The bank said: "We won't lend to you”. If it wouldn't lend to us, it was over, it was over, it stopped there. Without credit to buy, it was over, kaput.

Q. Mr. Vézina, you amaze me.

A. In any event, that's how I saw it. I am not trying to say whether it was right or not. I am telling you that at that time, if we had not started a new business, we could not borrow. If we did not borrow, operations would be finished. If operations were finished, the boats or the one hundred thousand ($100,000) that we had already borrowed would be gone. (S.N. of 11/10/88, vol. 2, pages 71-72.)

3.19 Mr. Vézina testified that the period of nearly three and a half months between when possession of the assets was taken (March 1, 1978) and the contract under which Marine sold its assets to Robitaille (1978) (June 26, 1978) is normal, given the circumstances surrounding the creation of the new company, in that the bank had to give its approval for the transfer, subject to consultation with its lawyers.

3.20 Counsel for the respondent asked why preferred shares rather than common shares were issued in consideration for the transferred assets:

[Translation]

A. Why not common shares?

Q. Transfer the boats and give the first corporation common shares?

A. Because we wanted shares . . .

Q. (interrupting) Because I assure you, for a creditor, common shares make all the difference.

A. Well yes, but here, the plus value of the new would have merged with the old in common shares.

Q. I am suggesting that is precisely what. . .

A. (interrupting) No, no. Common shares, I told you just now, the plus value of future years, we didn't want to put it in the old company, which was insolvent. Then we would have had to go bankrupt, according to what you tell me today. The old company, we didn't want to take out anything of value, but we didn't want to add future value to it. (S.N. of 11/10/88, vol. 2, pages 85-86.)

Further on, counsel for the respondent asked why the transferred assets had been appraised at $625,000 by Robitaille (1978) while before, for the same assets seized earlier, they had offered $100,000 to Revenue Canada, Customs and Excise to have the seized property released:

[Translation]

A. Listen, I am going to tell you one last time, because it seems to me you are making me repeat myself quite a bit, I am telling you that in a going concern, we had paid six hundred seventy-five thousand bucks ($675,000) for it, or thereabouts, and it was worth that as a going concern. But in a forced liquidation, it might not be worth more than one hundred thousand bucks ($100,000). (S.N. of 11/10/88, vol. 2, page 107.)

According to Mr. Vézina, a valuation of the inventory property was done when it was seized. The value was set at $675,000. Revenue Canada, Customs and Excise had the documents establishing the conclusions of this valuation. According to the witness, there was no possibility, at the time of the seizure, of reaching a mutual agreement for selling the seized items: the only normal way in which they could have been sold was as part of a going concern. That was impossible at the time, given the company's lack of credit.

3.21 The witness gave the following response to the suggestion by counsel for the respondent that by creating a new company any possibility of an agreement for paying the claim by Revenue Canada, Customs and Excise was taken away :

[Translation]

A. Listen, there were charges in court, there was no credit, the suppliers were demanding COD, the employees didn't want to work for us anymore. Do you think that a company like that has a future? It has no future. It has no future value and the bank understood that, it said: "No, we're not lending to it". So then, the choice we had, was to end there, kaput, or to try to create a new company. The bank said: If you create a new one, it is a new business, we are confident that you will be able to build something, we will lend to you.” That is what we did. (S.N. of 11/10/88, vol. 2, page 101.)

3.22 The witness also stated that the assessment issued against Marine in 1984 was incorrectly based on an increase in the value of the goodwill on the order of $800,000. Moreover, this assessment was appealed by the appellant to this Court.

The witness explained his criticism of the respondent as follows:

[Translation]

You see the situation. The purchaser [Robitaille (1978)] is told: “What you paid $600,000 for is worth zero”. Then the vendor [Marine] is told: "What you sold for $600,000, was worth $1,400,000”. Then both are assessed. That is the logic of your position as I understood it. (S.N. of 11/10/88, vol. 2, page 116.)

3.23 He also explained that, on January 31, 1984, Les Placements A. & N. Robitaille Inc. (formerly Marine) transferred to Mr. and Mrs. Robitaille personally 125,000 preferred shares of Marina Québec (formerly Robitaille (1978)). Mr. and Mrs. Robitaille transferred, as consideration, 125,000 preferred shares of Remeq Inc. to Les Placements A. & N. Robitaille Inc.

On March 26, 1985, Les Placements A. & N. Robitaille Inc. became 1204-8567 Québec Inc. That company went bankrupt on May 28, 1985. Counsel for the respondent also noted that at the time of the bankruptcy of 1204-8567 Québec Inc. there was a loss of some 125,000 preferred shares from Marina Québec Inc. and a surplus of 125,000 shares of Remeq Inc. was shown. As the witness stated [Translation]: ''477,901 were left instead of 602,902 . . . and 125,000 more of Remeq Inc.”. (S.N. of 11/10/88, vol. 2, page 120.) The two groups of preferred shares were given as security to Revenue.

The witness argues that the respondent's assessment claiming the $100,000 tax was the cause of the bankruptcy of 1204-8567 Québec Inc. The bankruptcy was filed on May 28, 1985.

3.24 In 1980, the appellant paid dividends on the order of $100,000 to Mr. and Mrs. Robitaille. They also each received $75,000 in dividends in 1981.

C. Re-examination of Paul Vézina by counsel for the appellant

3.25 On re-examination, the witness explained the reasons why shares of the appellant were transferred to employees in 1978, as follows:

[Translation]

. . . at the beginning of 1978, when the charges had just been laid against André Robitaille personally, there was worry in the air, including, of course, the most important people involved: a foreman, a couple of specialist employees who were there, who were obviously quite nervous. Then, in the new business, we interested them in giving them common shares. You have Dominique Bourqui, Jean Vianney Bai liargeon, who also had fifty (50) common shares, Gerard Aubert, who also had fifty (50) common shares, three important people in the business, to interest them in the new business. That also allowed us to reassure them and to keep them with us. (S.N. of 11/10/88, vol. 2, page 124.)

3.26 Two letters were sent on May 13, 1981 to Robitaille Marine Inc. The first letter came from Revenue Canada (Exhibit I- 4, page 12), and informed that company that an amount of $60,000 out of the sum of $100,000 deposited had been forfeited under section 163 of the Customs Act. The same letter claimed $368,897.15 from Robitaille Marine Inc.

The second letter referred to the amount of $37,346.89 forfeited out of the balance of the remaining money deposited and $2,653.11 returned to Robitaille Marine Inc. Mr. Vézina testified this money was never returned.

3.27 As the official contract, of June 26, 1978 (Exhibit A-3) confirms, Revenue Canada, Customs and Excise never contested in any way whatsoever the asset transfer of March 1978. No Paulian action was brought. The good faith of the appellant and its directors was never questioned. Only after the land was expropriated was a notice of a reassessment issued by the respondent, on December 23, 1983. (S.N. of 11/10/88, vol. 2, pages 126-27.)

3.28 The witness reaffirmed that the creation of a new company was motivated by the bank's demands. Furthermore, the bank would never have agreed to control of the company passing into the hands of anyone other than André Robitaille, who had the knowledge required, from his long experience in the field. Moreover, Mr. Robitaille personally guaranteed the loans. (S.N. of 11/10/88, vol. 2, pages 127-128.)

3.29 Following the general seizure of Marine's inventory, which ultimately led to the formation of Robitaille (1978) and to the transfer of Marine's assets to the new company, Robitaille (1978) carried on its activities despite its fragile financial situation.

However, it was the expropriation of the site of operations of Robitaille (1978), and more particularly of its right of access to the river, which was the primary factor in terms of its financial recovery. This expropriation was carried out by the Quebec ministère des Transports for the purpose of constructing highway 40 (Boulevard des Grèves).

In fact, the amount obtained was between two and three million. According to Mr. Vézina, the size of the compensation is explained by the fact that the appellant had done some work to make the Beauport River navigable and floatable.

3.30 Moreover, after the expropriation, the Quebec ministère des Transports required that Robitaille (1978) change its business name. This change led to the creation of Marina Québec Inc.

3.31 Part of the amount of two to three million was paid for goodwill. Revenue Canada claimed that in 1978 Marine transferred goodwill of a value of $800,000 to Robitaille (1978), a company with which it was associated, without receiving consideration. Marine is therefore deemed to have received $800,000. Accordingly, a reassessment was issued against Marine on January 31, 1984. The amount of this assessment was $118,000.

Faced with the possibility of making such a payment, Marine, which had become Les Placements A. & N. Robitaille Inc., which had itself become 1204-8567 Québec Inc., declared bankruptcy on May 28, 1985.

Moreover, a notice of assessment was issued on February 24,1987 against 2173-4157 Québec Inc. (Exhibit I-11) under subsection 160(2) of the Income Tax Act. This assessment related to the asset transfer which occurred on November 30, 1984, from 1510-9283 Québec Inc. (formerly the appellant Marina Québec Inc.) to 2173-4157 Québec Inc. The value of the assets transferred was $1,200,000. The respondent claimed tax of $522,630.07.

On February 15, 1988, upon receipt of a notice confirming the assessment, 2173-4157 Québec Inc. filed an appeal to this Court (Exhibit A-16) The respondent made the recipient of the transfer liable for the debt owed by the transferor.

Finally, the notice of the reassessment which is the subject matter of this appeal was issued on December 23, 1983, after the appellant had received compensation from the ministère des Transports for the expropriation for construction of the Boulevard des Grèves.

3.32 With respect to the withdrawn charges, the witness explained the scheme used by Marine in falsifying the forms establishing the value of the boats acquired, for taxation purposes. These forms were called MAs:

[Translation]

Then, there was an MA which arrived at Robitaille Marine for thirty thousand dollars ($30,000) for a boat, he calculated the parts, he put twenty thousand dollars ($20,000), he made a new MA for twenty thousand dollars ($20,000) for the boat. He was entitled to do that. Except that the $10,000 difference, when they examined the memos, counted the tariffs which applied to the customs, he would definitely have been entitled not to pay customs on that.

The witness explained that he had had to do a lot of research in the mass of documents he was given in order to determine that his clients were telling the truth when they said they did not have to pay any customs.

According to the witness, Revenue Canada never answered the statement of claim filed in Federal Court (Exhibit A-2) on August 7, 1981, claiming the $100,000 forfeited earlier. The witness stated [Translation]: "They never budged in establishing their right”.

D. Examination-in-chief of Richard Martin Wise

3.33 Richard Martin Wise was the appellant's second witness. He testified as an expert business and securities valuator. Mr. Wise's qualifications as an expert were not questioned by the respondent. Moreover, his curriculum vitae was filed and showed his credibility as an expert (Exhibit A-7). In addition to being a member of the Arbitrator's Institute of Canada and of the Institute of Business Appraisers, he is also a member of the American Society of Appraisers. As well, he has written more than 25 articles in specialized valuation publications. He has also given some thirty seminars relating to valuation.

3.34 His valuation report, which consists in a valuation of the 602,901 preferred shares issued by Robitaille (1978) to Marine, was filed as Exhibit A-8. The witness evaluated their fair market value and their value to the owner. These two values are defined as follows:

1.1 Fair Market Value

For purposes of our opinion, “ fair market value” is defined as the highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market, between informed and prudent parties acting at arm's length, neither party being under any compulsion to transact.

1.2 Value to the Owner

“Value to the owner” is defined herein as a subjective value which expresses in positive terms the present adverse value of the entire loss, direct and indirect, that the owner might expect to suffer if he were deprived of the property.

In his opinion, the fair market value of these 602,901 preferred shares (non- cumulative five per cent dividend; nominal value $1 each; redeemable at the option of the issuer) was $602,901. Moreover, he also established the value to the owner as $602,901.

3.35 The main facts on which he based his conclusions are as follows:

(a) the asset transfer on March 1, 1978 from Marine to Robitaille (1978) totalling $695,011;

(b) the transfer during 1979 by Marine to Robitaille (1978) of additional inventory of $87,846;

(c) Robitaille (1978) assumed accounts payable in the amount of $179,956 during 1979;

(d) the issuance by Robitaille (1978) of 602,901 preferred shares having a par value of $1 ($695,011 — $179,956 + $87,846);

(e) the business was engaged in selling and repairing boats; and

(f) at all times during the years involved, Marine and Robitaille (1978) were controlled by the same person or group of persons.

3.36 Valuation of the shares

3.36.1 According to Mr. Wise, the fair market value of the preferred shares in question is $1 per share, insofar as in the year following their purchase, that is, in the fiscal year 1979, Robitaille (1978) was financially capable of redeeming the shares.

In order to determine the ability of Robitaille (1978) to pay, the valuator prepared two pro forma balance sheets for Company A: the opening balance sheet at March 1, 1978 (Exhibit A-10) and the balance sheet at January 31, 1979 (Exhibit A-H):

Exhibit A-10 Schedule RW-1

MARINE ROBITAILLE (1978) Inc. OPENING BALANCE SHEET 1 March 1978

Per Books Adjustments Adjustments Pro-Forma

	ASSETS
Cash	$ 1,000	$ —	$ 1,000
Inventory	657 ,000	(515,055)	159,945
Fixed assets	20,011	—	20,011
	$678.011	$(515,055)	$180,956
	LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable	$179,956	$ —	$179,956
Capital stock:
— Preferred	515,055	(515,055)	—
— Common	1,000	—	1,000
	$696,011	$(515,055)	$180,956

With respect to Exhibit A-10, Mr. Wise testified that the $515,055 adjustment related to the decrease in assets resulting from the redemption of the preferred shares. Accordingly, after this decrease, $180,956 remained in assets.

[Translation]

A. After that, I asked the question: if the preferred shares are redeemed the next day, for example, at 5:00 in the evening, what would the balance sheet be? Is there a deficit? Pro forma. In adjustments, the second column, the amount of five hundred fifteen thousand and fifty-five dollars ($515,055) is the amount of the preferred shares at par which were issued that day in the transaction. (S.N. of 12/10/88 (morning), page 22.)

Mr. Gauthier: Q. Do you conclude that on March 1, 1978 the Robitaille company . . . Marine Robitaille (1978) Inc., could have redeemed its shares? Do you conclude that the company had the financial ability to redeem its preferred shares?

A. Oh yes, yes. And I showed that by this schedule, A-10. A-10 shows that the company had the ability on March 1, 1978—that is the date of the valuation—to redeem the preferred shares held by Marine. (S.N. of 12/10/88 (morning), pages 24-25.)

34.36.2
Exhibit A-T1				Schedule RW-2
		MARINE ROBITAILLE (1978) INC.
			PER BALANCE SHEET
			31 31 JANUARY 1979
		Per
		Balance
		Sheet		Pro-Forma
		31-1-79	Adjustments Adjustments	31-1-79
			ASSETS
Current assets $1,258,311			$(264,152)	$ 962,159
			(32,000)
Investments		179,023		179,023
Fixed assets		399,736		399,736
Other assets		750		750
		$1,837,820	$(296,152)	$1,541,668
			LIABILITIES
Current liabilities $587,853			$ -	$ 587,853
Long-term debt		342,348	500,000	842,348
Deferred taxes		34,056	—	34,056
		SHAREHOLDER’S EQUITY
Preferred		764,152	(764,152)	—
Common		1,000	—	1,000
Retained	earn
		108,411	( 32,000)	76,411
ings
		$1,837,820	$(296,152)	$1,541,668

Mr. Wise concluded that on January 31, 1979, Robitaille (1978) had the financial ability both to pay the dividend of $32,000 and to redeem the preferred shares for $764,152. It then had the power to borrow $500,000 in the long term and to take $264,152 out of working capital, that is, cash minus liabilities.

Relying on a study of the working capital of companies selling pleasure craft at retail (Exhibit A-12), which was done in the United States but which also took Canadian companies into account, the witness stated that the working capital of such companies varied from 1.2 to 1.5 in 1980. In the case of Robitaille (1978), the working capital on January 31, 1979 was 1.63 after using $264,152 to pay the preferred shares and $32,000 to pay dividends. The cash shown on the pro forma balance sheet is $962,159, while liabilities are $587,853. According to the witness, this ratio clearly illustrates that redeeming the shares would not put Robitaille (1978) in an unstable financial position. At page 6 of his report (Exhibit A-8), the witness referred to the income of Robitaille (1978) during its fiscal period ending on January 31, 1979, as follows:

For the eleven months fiscal period ended January 31, 1979, the company had net sales of $2,422,000 and earned a pre-tax profit of $147,000 (6.0 per cent of sales). Its after-tax profit was $108,411 (4.4 per cent of sales). Operating cash flow, out of which dividends could be paid on all of the issued and outstanding preferred shares, was $602,901.

3.36.3 The witness noted the importance of the fact that Marine and Robitaille (1978) are controlled by the same person or group of persons. The fact that such control is exercised must be taken into consideration in calculating the shares’ fair market value and value to the owner.

If a shareholder has control, he may force the issuer to pay, which was then contrary to the Quebec Companies Act.

3.36.4 The witness then referred to an article he wrote and published in Canadian Tax Journal, volume 32, number 2, pages 239 to 276 (Exhibit A-13) on preferred shares issued under section 85 of the Act. This article defines the position of the Department of Revenue with respect to“ retraction” (preferred shares are said not to be “retractable” when they are not redeemable at the option of the holder) as follows, at page 258:

Prior to the introduction and widespread use of the" retraction” feature attaching to preferred shares, the major issue concerning the valuation of preferred shares for income tax and estate planning purposes (in the late 1960’s and early 1970's) was basically twofold:

(1) If the shares were nonvoting and had a noncumulative (often very low) dividend, they might have been valued by the Department as a nominal amount.

(2) If the shares were voting, they might have been valued not at par, but at a premium equal to the surplus of the company. The Barber decision dealt with such a situation. [Italics indicates the passage emphasized by the witness.]

The witness also referred to the following note, in relation to the italicized passage above:

Provided that the holder thereof did not have control of the company through his holding of voting common shares.

Further on, at pages 262 and 263 of the same article, he referred to a memorandum issued in 1978 by the chief valuator at Revenue Canada:

At the Fourth Biennial Conference of the CABV in 1978, D. Alan Jones, Chief Valuator, Revenue Canada, clearly recognized the basic valuation issues:

The uses of preference shares as financing vehicles in estate freezes, in Section 85 rollovers, and so forth, are well established. What is not well established is the appropriate valuation method, and this is the result of a combination of:

(a) The nature of the share itself and the host of variations of rights and restrictions, including whether they are "retractable" at the option of the holder;

(b) The financial ability of the company to redeem; and

(c) Whether the holders of the preference shares should piggy-back on the holders of the common shares or are, indeed, the same people.

Other than the retractable feature which places the owner in almost a position of holding a demand note, and thus makes the value of his preferred shares dependent on the company's liquidity, the combination of the three variables boils down to one question: should preferred shares be valued on their own merits or are they simply an adjunct to the common issue?

Here, I think, we have to draw a line because, while the holders of the majority common shares may well act in concert to maximize common value, they do not have to do so to maximize preferred value, especially if the preferreds are in other hands. We propose to continue to value preferred shares as separate issues and on their own merits.

[The witness emphasized the italicized passage.]

3.36.5 In his valuation report (Exhibit A-8), after noting the good financial situation of Robitaille (1978) and its borrowing ability, Mr. Wise advanced an alternative argument at pages 6 and 7, as follows:

Alternatively, or in combination with the foregoing, the holder of the Shares could lend the redemption proceeds back to the Company at agreed-upon terms and conditions.

The Shares in and of themselves do not grant the holder the right to cause the redemption thereof, as they are neither (a) retractable (redeemable at the holder's option) nor (b) voting. Accordingly, while the Company was financially capable of redeeming the Shares, there would have been no compulsion on its part to redeem. However, the holder of the Shares, namely Marine, was controlled by the same group that controls the Company, ie, Marine is part of a related group controlled by the same persons. In this connection, we note that the members of the group which exercises such control are family members and have been acting, and have continued to act, in concert vis-a-vis their shareholdings and the direction of Marine, and the Company. On this basis, the Shares held by Marine, have a fair market value equal to their redemption price of $1 per Share.

Our view as expressed above is based upon our experience as valuators as well as generally accepted practice in the field of business valuation, such practice being derived, inter alia, from court decisions in valuation matters.

The report quotes at length the case law dealt with in Ahmanson Foundation (4.02(16)), Curry Estate (4.02(17)) and Ceylon v. Mackie (4.02(42)). We will return to these cases in discussing the submissions of counsel for the appellant in paragraph 4.03.3(4)(f) and of counsel for the respondent in paragraphs 4.04.2(d) (1), 4.04.2(d) (2) and 4.04.2(d) (3).

E. Cross-examination of Mr. Wise by counsel for the respondent

3.37 The valuation report of September 26, 1988 (Exhibit A-8) required seven to twelve hours of work. Mr. Wise did not meet with Mr. Robitaille. He had one meeting with Mr. Gauthier and examined the documents listed in the report: the financial statements, the notice of objection, the reply to the notice of appeal, the answer to the reply and the amended reply.

3.38 According to the witness, Mr. Vézina's testimony confirmed the facts on which the conclusions of his report are based.

3.39 According to him, it is common for a bank to require that a new company be formed.

3.40 He is unaware whether dividends were paid to holders of preferred shares, because he did not examine the financial statements subsequent to those of January 1979. With respect to the $500,000 borrowed, which was referred to above (3.36.2, Exhibit A-11), he noted that even after having contracted this loan, there were retained earnings of $76,411, as shown above, under shareholders' equity in the January 1979 balance sheet (Exhibit A-11).

3.41 For valuation purposes, it is of little importance whether the shares in issue are common or preferred, since neither can be sold without the others. The witness stated that for preferred shares of the nature of those in issue [Translation], “. . . there is no open market. . . . there is no situation where such shares can be sold without control”. (S.N. of 12/10/88, pages 65-66.)

F. Examination-in-chief of Michel Leblond by counsel for the respondent

3.42 Michel Leblond, of the firm of trustees Leblond, Buzetti et Associes, testified that 1204-8567 Québec Inc. (formerly Les Placements A. & N. Robitaille Inc., which had previously been Robitaille Marine Inc.) made a voluntary assignment of its property on May 28, 1985. All the documents concerning this bankruptcy were filed as Exhibit 1-6, pages 1 to 32.

3.43 The two creditors involved were Revenue Canada—income tax ($108,167) and Revenu Québec—sales tax ($241,581).

The assets were composed of 175,000 preferred shares of Remeq Inc. ($175,000) and 477,901 preferred shares of Marina Québec Inc. ($477,901). These preferred shares were redeemable at the option of the issuer (Exhibit I-6, pages 3-4).

The 175,000 preferred shares of Remeq Inc. had been given to Revenue Canada as security by Les Placements A. & N. Robitaille Inc.

3.44 On July 27, 1988, the trustee brought a motion for permission to put the preferred shares of Remeq Inc. up for sale for $3,500. This money would allow him to defray the cost of administering the 1204-8567 Québec Inc. bankruptcy file (Exhibit 1-6, page 11, para. 9). The trustee withdrew the motion when Revenue Canada objected (Exhibit I-6, pages 28-29).

G. Cross-examination of Mr. Leblond

3.45 Mr. Leblond confirmed that Revenue Canada, Customs and Excise never filed a claim in the bankruptcy. Allegedly, an offer of $75,000 was made, through Mr. Vézina, to redeem the preferred shares. Apparently, this offer was refused.

H. Examination-in-chief of Roch Martel by counsel for the respondent

3.46 Mr. Martel has worked in the field of valuation since 1966. He has been a member of the Canadian Association of Business Valuators since 1972. He has been the chief valuator at Revenue Canada, Income Tax, Quebec City District, since 1971. He testified that he supervises about 120 valuations per year. His curriculum vitae was filed as Exhibit 1-7.

Mr. Gauthier acknowledges Mr. Martel's status as an expert, although he noted that certain comments made by Mr. Martel made it necessary to have reservations about the objectivity of his valuation.

3.47 The valuation report dated March 21, 1986 (Exhibit I-8) was started in 1983.

This report concludes as follows (page 13):

[Translation]

We conclude that the fair market value of the preferred shares of Marine Robitaille (1978) Inc. was" nil", at March 1, 1978 (515,235 shares) and at January 31, 1979 (87,666 shares).

3.48 At page 6 of his report, Mr. Martel set out his approach to valuation as follows:

[Translation]

Approach to valuation

From past experience, we believe that in the case of a private company we can ignore the valuation method based on return on preferred shares. Dividends are rarely, if ever, high enough to justify such a valuation.

Our approach to the valuation is based on a thorough study of the following points:

1. Rights and privileges relating to the preferred shares.

2. Maintainable profits after tax.

3. Net tangible assets backing.

4. Rate of return.

5. Circumstances in which such securities were issued.

The witness also filed a package of six articles on valuation (Exhibit 1-9).

3.49 Rights and privileges relating to the preferred shares

After noting that these shares were (1) fixed dividend, preferred, non- cumulative at five per cent per year; (2) non-participating; (3) non-voting; and

(4) redeemable by the issuer at their nominal value of $1 per unit, the valuator concluded as follows:

[Translation]

. . . we believe that the preferred shares (. . .) have only very low value in relation to their nominal value. The following are the only rights attaching to such shares:

1. The right to a dividend, up to the rate set by the directors, if they set it, and on their conditions;

2. The right to receive the nominal value when the shares are abandoned if they

must be redeemed and if the directors decide to redeem them; and

3. The right to receive the nominal value of the shares before common shares, if the necessary majority of shareholders with voting shares voluntarily agree to liquidate.

It is therefore obvious that the holders of these shares cannot demand any return on their investment, or redeem their investment if it has been unproductive. It is of little importance that the preferred shareholder is part of a controlling group, since the fair market value must be established on the basis of an open market, or in the context of a transaction between persons dealing at arm's length. (Exhibit l-8, page 8.)

According to Mr. Martel, the preferred shares have no value, because they cannot be sold alone. Moreover, if they are sold with the common shares, the price established is primarily based on the latter shares.

3.50 Maintainable profits after tax

On this point, Mr. Martel reached the following conclusions:

[Translation]

lan Campbell states in his book Principles and Practice of Business Valuation that it is important to take into account the income protection given to holders of preferred shares in valuing the quality of such a share issue; this protection is determined by the number of times the dividend on the shares is earned or guaranteed during a year.

In Robitaille Marine Inc., it has been established that the maintainable earnings after tax of Marine Robitaille (1978) Inc. would be $148,440. Accordingly, we have protection of 4.39 times at March 1, 1978 and 3.88 times at January 31, 1979. This protection represents good coverage for preferred shareholders. (Exhibit 1-8, page 9.)

3.51 Net tangible assets backing

On this point, the respondent's valuator made the following comments at pages 9 and 10 of his report:

[Translation]

In his book The Valuation of Company Shares and Businesses, A.V. Adamson maintains that preferred shares should be supported by a fixed asset of $2 upwards for each $1 share, to provide safety to the level of the capital invested. This is not the case in Marine Robitaille (1978) Inc.: the ratio is 1.0 at March 1, 1978 and 1.14 at January 31, 1979.

A more thorough analysis of the assets shows us that the objective of issuing preferred shares was primarily to finance short term assets such as inventories and current purchases.

If we refer to the tangible asset backing and the composition thereof, it is quite obvious that the preferred share issue held no attraction for an investor on the valuation dates in question.

3.52 Rate of return on preferred shares

Referring to chapter 14 of the book Preference Shares by British author T.A.H. Baynes (Exhibit 1-9 F), the respondent's valuator stated:

[Translation]

In his book Shares Valuation, T.A. Hamilton Baynes states that permanent inflation makes a non-redeemable investment with a fixed dividend an unattractive investment for an investor.

If we examine the 1975 to 1978 statistics concerning preferred shares issued by public companies, we find that in a majority of cases it was considered normal to nave a rate of return of 8 per cent or more on this kind of security. An investor would surely be more inclined to purchase shares in this category rather than those of Marine Robitaille (1978) Inc., a private company, which offers a return of 5 per cent.

3.53 Circumstances of the preferred share issue

At pages 11, 12 and 13 of Exhibit 1-8, Mr. Martel makes the following comments:

[Translation]

In the process of valuing preferred shares, it is important to be aware of the circumstances and the purpose of the issue of this kind of securities. A brief background is necessary to understand the reasons which motivated Marine Robitaille (1978) Inc. to issue these preferred shares.

As a result of the discovery of a fraud relating to excise tax and customs duties, Robitaille Marine Inc. was the subject of a thorough investigation by the Royal Canadian Mounted Police. At the end of 1977, the investigation disclosed that Robitaille Marine Inc. had defrauded the Department of National Revenue, Customs and Excise Division, of a total of $449,426.18, to which a penalty of $133,045.75 was applied. Accordingly, the company was given a demand for payment of this amount.

As a result of this debt having to be paid, arising from the fraud, and a desire to protect the activities of its business, Robitaille Marine Inc. sold its operations to Marine Robitaille (1978) Inc. on March 1, 1978. By issuing 515,235 preferred shares having non-cumulative 5 per cent dividends, redeemable at the option of the issuer, to Robitaille Marine Inc., Marine Robitaille (1978) Inc. was assured that no stranger would be interested in the shares in question.

On January 31, 1979, Marine Robitaille (1978) Inc. issued 87,666 other preferred shares to Robitaille Marine Inc. in payment of an account payable of $87,666.

Before continuing, it is important to note that the shareholders who control Marine Robitaille (1978) Inc. are the same (85 per cent of them) as those who control Robitaille Marine Inc. These are therefore associated companies.

Accordingly, because Robitaille Marine Inc. was part of a controlling group, the value (to it) of the preferred shares might have been closer to the nominal value. However, the concept of the special value to the owner is formally excluded in determining fair market value since an approach must be considered in the context of a hypothetical market.

Assuming that a potential investor is informed that:

1. The shareholders who control Marine Robitaille (1978) Inc. are directly or indirectly involved in a dispute with the Department of National Revenue, Customs and Excise Division, and that

2. Those shareholders are establishing a scheme in order to evade paying an account of about $500,000 owing by Robitaille Marine Inc.

we are of the opinion that the preferred shares have no value to an investor.

The combined analysis of all the factors noted shows that (keeping in mind that fair market value is defined as the highest price in an open and unrestricted market, between informed and prudent parties who are under no compulsion to transact and are dealing at arm's length) the fair market value of these preferred shares is "nil".

I. Cross-examination of Mr. Martel by counsel for the appellant

3.54 Mr. Martel admitted that since he started his report in 1983 and finished it in 1986, he was deemed to be aware that the fraud charges against Mr. and Mrs. Robitaille had been withdrawn. These facts therefore alter the tenor of his approach with respect to the "circumstances" of the preferred share issue (3.53).

He also admitted that it is sometimes possible for the fair market value of a share and its value to the owner to be the same when both companies are controlled by the same group of persons. He then referred to Ian R. Campbell in Canada Valuation Service, Toronto, Thomson Professional Publishing, paragraph 4-14.

He also referred to the opinion of Mr. Cudjoe, to which we shall return in considering submissions.

J. Examination-in-chief of Jean-Guy Archambault by counsel for the respondent

3.55 Mr. Archambault, an employee of Revenue Canada, Customs and Excise, presided over the investigation which led to the seizure of the entire inventory and the documents relating to the importation which occurred on April 5, 1977.

The account relating to the customs underpayment was based on the fact that goods were declared using false invoices thereby leading to an incorrect assessment of the real value of the goods in question.

3.56 That account was also explained in detail at a meeting held on September 24, 1977 with Mr. and Mrs. Robitaille. For this purpose, documents (filed as Exhibit 1-4) establishing the derivation of the unpaid duties ($235,948.32) and the amounts relating to sales tax ($187,742.55) and excise tax ($25,735.31) which also had not been paid were presented to the Robitailles.

The $100,000 payment by Mr. Robitaille to release the seized goods was in no way, to Revenue Canada, a waiver of the account already established. Mr. Archambault testified that he offered to Mr. and Mrs. Robitaille to call in their lawyer or accountant following the seizure. They said they did not need them.

3.57 Mr. Archambault was not cross-examined.

K. Examination-in-chief of Jean Bérubé by counsel for the respondent

3.58 Mr. Bérubé, section chief at Customs and Excise, arbitration section, first explained the reasons for the customs seizure (form K30) carried out on November 18, 1977 (Exhibit I-4, page 8) and authorized by the Deputy Minister, Mr. J. Robin. He also referred to the letter of December 16,1977 (Exhibit 1-4, pages 9-10) which was sent to Mr. Robin, in which Mr. Vézina, on behalf of Robitaille Marine, disputed the customs seizure, in general terms, under section 165 of the Customs Act. A more detailed dispute was promised, after the lawyer had been informed of the documents seized by the Royal Canadian Mounted Police.

The witness also referred to Mr. Robin's reply dated January 24, 1978 (Exhibit I-4, page 11) advising Mr. Vézina that the Department's decision had not yet been made, that argument could still be presented and that the documents seized by the Royal Canadian Mounted Police would be sent to the Investigations division where they could be consulted.

3.59 The first deposit of $60,000 on account was forfeited by the Customs branch in accordance with form K29, issued on May 13, 1981 (Exhibit 1-4, pages 12-13). This forfeit was the result of a departmental decision issued on the same day (Exhibit I-4, page 14).

3.60 On December 8, 1977, criminal charges were laid against Mr. and Mrs. Robitaille. Three counts were involved: tax fraud, forgery and falsifying documents (Exhibit A-18). On September 10, 1981, the Crown stated that it had no evidence to tender on two counts, and the accused were convicted of forging the M.A. forms used for the purposes of Customs and Excise (Exhibit A-19).

3.61 The witness noted that a penalty of $133,043.75 had been imposed and was included in the total of $550,571.97 (Exhibit I-4, page 7). However, that penalty was abolished after the forfeiture and the departmental decision (Exhibit 1-4, pages 12-14), which claimed only $368,897.15.

3.62 Referring to the proceedings claiming a refund of the deposits totalling $100,000 brought by Robitaille Marine on August 7, 1981, and served on September 11, 1981 (Exhibit 1-4, pages 21-25) the witness indicated the response to these proceedings in a letter from Ben Berbrier at the Department of Justice dated September 17, 1981. Mr. Berbrier suggested that under subsection 158(2) of the Customs Act no proceedings against the Crown for the recovery of any such money shall be instituted, except within six months from the date of the deposit thereof”.

3.63 Jean Bérubé was not cross-examined.

L. Examination-in-chief of André Tremblay by counsel for the respondent

3.64 Mr. Tremblay, a senior collections officer with Revenue Canada, first referred to the minutes of a meeting of the directors of the company Marina Québec Inc. held on November 28, 1984 (Exhibit 1-6, pages 30-31). There we read that after noting the reassessments issued against Marina Québec Inc. by both Revenue Canada and Revenu Québec, adding $800,000 in goodwill to the value of the assets considered to have been transferred to Robitaille (1978) in March 1978, and so taxing Marina Québec Inc. on that amount, it was decided to object to the reassessments.

Mr. Robitaille had indicated his lack of interest in continuing to work in the business following what he called, inter alia, harassment by Revenue, and preferred to get involved in a new small business. He therefore withdrew from Marina Québec Inc. as an employee and director. Since Mr. Robitaille was the heart and soul of Marina Québec Inc, and this sort of business could not be continued without him, the assets had to be disposed of in the most advantageous manner for Marina Québec Inc. To this end, it was resolved that Marina would invest in Mr. Robitaille's new business in consideration for an undertaking to purchase or rent the company's buildings and specialized equipment for repairing and fabricating boats and a promise to dispose of stock, and so on.

Marina Québec Inc. borrowed $1,250,000 by giving the necessary security and invested that money by buying 1,250,000 preferred shares of Mr. Robitaille's new business. The new business took the name of 2173-4157 Québec Inc.

That same day, it was resolved that:

— Marina Québec Inc. would rent its building on Mgr Gauthier Street to 2173-4157 Québec Inc. for $1,500 per month;

— would supply it with motor boats, etc, in inventory, at a competitive price;

— would sell it the rolling stock at a price equal to the fair market value, to be established later;

— would buy the block of shares of Remeq Inc. held by André and Nicole Robitaille at the fair market value.

3.65 At the meeting of the sole director of 2173-4157 Québec Inc. held on November 30, 1984, the transactions planned at the meeting of the directors of Marina Québec Inc. on November 28, 1984 were substantially confirmed. The purchase of marine engines from the Mercury company for $200,000 and of pleasure craft from the Wellcraft company for $150,000 (Exhibit 1-6, pp 31-34) was also confirmed at that meeting.

3.66 At the meeting of the sole director of 2173-4157 Québec Inc. held on October 30, 1985, it was decided to buy the balance of the stock in inventory from 1510-9283 Québec Inc., in the context of the supply contract of November 30, 1984 with Marina Québec Inc. (which had become 1510-9283 Québec Inc. on August 27, 1985) at the price of $421,020. This transaction was payable by promissory demand note at an interest rate of 10 per cent, subject to the bank security (Exhibit 1-6, page 34). The promissory note was issued on October 31, 1985 (Exhibit 1-6, page 36).

3.67 On February 24, 1987, a notice of assessment was issued against the company 2173-4157 Québec Inc. for the 1985 taxation year in the amount of $522,630.07. This assessment was issued under subsection 160(2) of the Act, thereby making 2173-4157 Québec Inc. responsible for the tax debt of 1510-9283 Québec Inc., which had transferred its assets to it. An appeal to this Court was filed on February 25, 1988.

3.68 With respect to Robitaille Marine Inc. (which became Les Placements

A. & N. Robitaille Inc. on September 11, 1979 and 1204-8567 Québec Inc. on March 26, 1985), Mr. Tremblay, in giving evidence, emphasized on the fact that on December 20, 1982, Les Placements A. & N. Robitaille Inc. acquired 50,000 preferred shares (certificate No. 1982-2) of Remeq Inc. (Exhibit 1-6, page 22). On January 31, 1984, 125,000 shares (certificate No. 1984-2) of Remeq were also acquired by Les Placements A. & N. Robitaille Inc. (Exhibit I-6, page 24). On February 21, 1984 Les Placements A. & N. Robitaille Inc. also acquired 477, 901 preferred shares (certificate No. P-8) of the appellant Marina Québec Inc.

The three certificates were given as security to Revenue Canada: certificate P-8 on August 6, 1984 and the other two on September 21, 1984.

4. Statute—Case Law and Doctrine—Analysis

4.01 Statute

The primary provisions of the Income Tax Act in issue in this appeal are sections 3 and 9, subsections 80(1), 85(1), 245(1), 245(2), 245(3), 248(1) and section 251.

These provisions will be quoted in the analysis if necessary.

4.02 Case Law and Doctrine

The case law and doctrine cited by the parties or considered by the Court are as follows:

(A) Alternative facts

1. Brewster v. The Queen, [1976] C.T.C. 107, 76 D.T.C. 6046 (F.C.T.D.);

2. Tobias v. The Queen, [1978] C.T.C. 113, 78 D.T.C. 6028 (F.C.T.D.);

3. Johnston v. M.N.R., [1948] S.C.R. 486, [1948] C.T.C. 195, 3 D.T.C. 1182;

(B) Cost to be deducted in computing income—valuation of shares

4. Osborne v. Steel Barrel Co. Ltd., [1942] 1 All E.R. 634,24 T.C. 293;

5. Craddock v. Zevo Finance Co. Ltd., 27 T.C. 267;

6. Tuxedo Holding Company Ltd. v. M.N.R., [1957] 17 Tax A.B.C. 166; 57 D.T.C. 268 (T.A.B.); [1959] Ex. C.R. 390, [1959] C.T.C. 172, 59 D.T.C. 1102 (Ex. Ct.);

7. Murphy v. Australian Machinery and Investment Co. Ltd., 30 T.C. 244;

8. Tuxedo Holding's Silver Anniversary, Canada Tax Letter, by Robert Cou- zin, No. 336, May 10, 982;

9. Valuation of Businesses: A Practical Guide, by John P. R. Kingston and Peter E. McQuillan, 3rd Ed., 1986, CCH Canadian Ltd.;

10. “The Valuation of Preferred Shares Issued on a Section 85 Rollover", by Richard M. Wise, March-April 1984, Canadian Tax Journal, Vol. 32, No. 3;

11. The Journal of Business Valuation, Vols 1, 2, 3, 4, 1973-77;

12. West Hill Redevelopment Company Ltd. v. M.N.R., [1969] 2 Ex C.R. 441, [1969] C.T.C. 581, 69 D.T.C. 5385;

13. Revenue Canada Update, by M. A. Cudjoe, Revenue Canada, presented to CICBV Ninth Biennial Conference, Oct. 6 & 7, 1988, pages 21-27;

14. Proceedings of the First Bi-Annual Conference of the Canadian Association of Business Valuators, October 1972;

15. Fraser v. M.N.R., [1964] S.C.R. 657, [1964] C.T.C. 372, 64 D.T.C. 5224;

16. Ahmanson Foundation v. U.S., 64 Fed. 2d 761 (9th Cir. 1981);

17. Curry Estate v. U.S., 706 Fed. 2d 1424 (U.S.C.A. 7th Cir. 1983);

18. Friedman. D. and H. v. M.N.R., [1978] C.T.C. 2809, 78 D.T.C. 1599 (T.R.B.);

19. Brunet v. M.N.R., [1982] C.T.C. 2338, 82 D.T.C. 1308 (T.R.B.);

20. Stanton v. Drayton Commercial Investment Co., [1983] A.C. 501 (H.L.);

21. Cattermole Timber Ltd. v. Minister of Finance of British Columbia, [1978] 3 W.W.R. 121 (C.A.);

22. D. Keith McNair, The meaning of cost in Canadian Income Tax, Canadian Tax Foundation, 1982, pages 25-28 and 119-22;

23. D’Auteuil Lumber Co. Ltd. v. M.N.R., [1970] Ex. C.R. 414, [1970] C.T.C. 122, 70 D.T.C. 6096 (Ex. Ct.);

24. The Queen v. Canadian Pacific Ltd., [1977] C.T.C. 606, 77 D.T.C. 5383 (F.C.A.);

25. Souwato Broadcasters Ltd. v. M.N.R., [1974] C.T.C. 2112, 74 D.T.C. 1081 (T.R.B.);

26. Mandel v. The Queen, [1978] C.T.C. 780, 78 D.T.C. 6518 (F.C.A.); affd [1980] C.T.C. 130, 80 D.T.C. 6148 (S.C.C.);

27. McKee v. The Queen, [1977] C.T.C. 491, 77 D.T.C. 5345 (F.C.T.D.);

Section 245

28. Blais v. M.N.R., [1979] C.T.C. 2944, 79 D.T.C. 745 (T.R.B.);

29. Dufresne v. M.N.R., [1967] 2 Ex. C.R. 128, [1967] C.T.C. 153, 67 D.T.C. 5105 (Ex. Ct.);

30. David v. The Queen, [1975] C.T.C. 197, 75 D.T.C. 5136 (F.C.T.D.);

31. Boardman v. The Queen, [1986] 1 C.T.C. 103, 85 D.T.C. 5628 (F.C.T.D.);

32. Laxton v. The Queen, [1988] 1 C.T.C. 19, 88 D.T.C. 6008 (F.C.T.D.);[1989] 2 C. T.C. 85, 89 D.T.C. 5327 (F.C.A.);

33. Guthrie v. M.N.R., [1972] C.T.C. 2057, 72 D.T.C. 1070 (T.R.B.);

34. The Queen v. Immobilière Canada Ltd., [1977] C.T.C. 481, 77 D.T.C. 5332 (F.C.T.D.);

35. Craddock and Atkinson v. M.N.R., [1969] 1 Ex. C.R. 23, [1968] C.T.C. 379, 68 D. T.C. 5254 (Ex. Ct.); [1969] C.T.C. 566, 69 D.T.C. 5369 (S.C.C.);

General principles—fair market value

36. National System of Baking of Alberta Ltd. v. The Queen, [1980] C.T.C. 237, 80 D.T.C. 6178 (F.C.A.);

37. Lynall v. M.N.R., [1972] A.C. 680 (H.L.);

38. Beament Estate v. M.N.R., [1970] S.C.R. 680, [1970] C.T.C. 193, 70 D.T.C. 6130 (S.C.C.);

Fair market value of preferred shares

39. Levitt v. M.N.R., [1976] C.T.C. 2307, 76 D.T.C. 1047 (T.R.B.);

40. Terry v. The Queen, [1985] 1 C.T.C. 135, 85 D.T.C. 5179 (F.C.T.D.);

41. D./M.R. Québec v. 122392 Canada Inc., [1987] R.J.Q. 2245 (S.C.);

42. Ceylon v. Mackie, [1952] 2 All E.R. 775 (P.C.);

43. Wolfe D. Goodman, “Some current valuation problems raised by recent cases", [1985] The Journal of Business Valuation 93;

44. lan R. Campbell, Canada Valuation Service, Toronto, Thomson Professional Publishing, pages 4-14 to 4-17;

45. McGill v. Commercial Credit Co., 243 Fed. 637, at page 647 (D. Maryland, 1917);

General Principles—value to the owner

46. Gagetown Lumber Co. Ltd. v. The Queen, [1957] S.C.R. 44;

47. National Capital Commission v. Hobbs, [1970] S.C.R. 337;

48. The Queen v. Littler, [1978] C.T.C. 235, 78 D.T.C. 6179;

49. Black Estate v. M.N.R., [1969] C.T.C. 454, 69 D.T.C. 759;

50. Taylor Estate v. M.N.R., [1967] Tax A.B.C. 555, 67 D.T.C. 405;

51. Pillsbury Holdings Ltd. v. M.N.R., [1965] 1 Ex. C.R. 676, [1964] C.T.C. 294, 64 D.T.C. 5184;

52. Accounting recommendations—Canadian Institute of Chartered Accountants Handbook—May 1988, page 1111, section 3050.03, pages 1117-1118, sections 3050.29 to 3050.35;

53. Army Navy Department Store Ltd. and Army and Navy Department Store (Western) Ltd. v. M.N.R., [1953] S.C.R. 496, [1953] C.T.C. 293, 53 D.T.C. 1185;

54. Vineland Quarries and Crushed Stone Ltd. v. M.N.R., [1966] Ex. C.R. 417, [1966] C.T.C. 69, 66 D.T.C. 5092;

55. Grohne v. The Queen, [1989] 1 C.T.C. 434, 89 D.T.C. 5220 (F.C.T.D.);

56. Allfine Bowlerama Ltd. v. M.N.R., [1972] C.T.C. 2603, 72 D.T.C. 1502 (T.R.B.);

57. Franklin v. M.N.R., [1988] 2 C.T.C. 2156, 88 D.T.C. 1474 (T.C.C.);

58. M.N.R. v. Freud, [1968] C.T.C. 438, 68 D.T.C. 5279;

59. lan R. Campbell, The Principles and Practice of Business Valuation, Richard DeBoo Ltd., 1975, Chapter 10,"Difficulties most frequently encountered in business valuation”, pages 141-159;

60. Rodgers v. M.N.R., [1989] 1 C.T.C. 2181, 88 D.T.C. 78 (T.C.C.);

61. Union Carbide Canada Ltd. v. M.N.R., [1989] 1 C.T.C. 2356, 89 D.T.C. 236 (T.C.C.).

4.03 Analysis

4.03.1 Submission of the appellant: alternative facts

In commencing his submissions, counsel for the appellant pointed out to the Court that, in his reply to the notice of appeal of May 17, 1985, the respondent had not alleged the facts relating to the alternative argument: that Marine conferred a benefit with a value of $603,081 on Robitaille (1978). These facts are described in paragraphs 6 to 15 of the amended reply to the notice of appeal of January 27, 1988 (2.02).

According to counsel for the appellant, only on receipt of the answer to this reply to the notice of appeal on November 16, 1987 did the respondent put forward the alternative facts.

According to the appellant, these alternative facts in no way support the basis of the present assessment, which is the refusal of the $603,081 expenditure. The effect of this argument is to create a reassessment: to add $603,081 to the income of Robitaille (1978) because that company received property from an affiliated company and paid nothing in return, thereby receiving a benefit within the meaning of subsection 245(2) of the Income Tax Act.

According to counsel for the appellant, since this is an alternative argument, the Crown has the burden of proof; he referred the court to the decisions in Brewster (4.02(1)), Tobias (4.02(2)), Johnston, (4.02(3)) and Pills- bury Holdings Ltd, (4.02(51)).

The argument is essentially as follows: the burden on the taxpayer is to demolish the fundamental facts on which the notice of assessment was based at the time it was issued. The taxpayer accordingly does not have the burden of destroying facts which were not considered at the time of the assessment. It is therefore for the respondent to prove the alternative facts which he puts forward.

4.03.2 Value of the shares

4.03.2(1) Counsel for the appellant submitted two propositions concerning the value of the preferred shares issued by Robitaille (1978) which are the primary subject matter of these proceedings. They read as follows:

[Translation]

First proposition

. . . we submit that the cost to the appellant of the preferred shares issued is equal to the par value of the shares, and that in determining this cost, no consideration should be given to the fair market value of the said shares. [4.03.2 et seq.]

Second proposition

If the Court finds that the fair market value of the shares must be considered, then we submit that the fair market value is equal to the par value of one dollar ($1) per share. [4.03.3]

4.03.2(2) According to counsel for the appellant, the first proposition is purely and simply a question of law, which derives from Osborne v. Steel Barrel Co. Ltd. (4.02(4)), Craddock v. Zevo Finance Co, Ltd. (4.02(5)), Tuxedo Holding Co. Ltd. (4.02(6)) and Stanton v. Drayton Commercial Investment Co. (4.02(20)). The Tuxedo Holding Co. Ltd. case is Canadian, while the other three are British.

4.03.2(3) The decision in Tuxedo Holding Co. Ltd. is based, inter alia, on the decisions in Osborne v. Steel Barrel Co. Ltd. and Craddock v. Zevo Finance Co. Ltd.

Tuxedo Holding Co. Ltd., which was first heard in 1951 by Chairman Snyder of the Tax Appeal Board, and was then affirmed by Cameron, J. of the Exchequer Court in 1959, may be summarized as follows:

In 1910, a group of landowners (individuals and companies in Manitoba) who together owned 278.53 acres of land, entered into an agreement to give 160 acres of land to establish a site for the University of Manitoba. They anticipated that if their donation was accepted and the University was actually built, the surrounding land would acquire greater value. After several interim steps, the final transaction took place in August 1914, with the formation of the appellant company, Tuxedo Holding Co. Ltd., having authorized capital of 2,000 common shares with a par value of $100 each. One of the objects of the company was to buy and sell land in Manitoba.

It was agreed that the 160 acres of land forming the site of the University would be transferred to the new company. This land was valued at $355,000, and was paid for by issuing 1,000 shares having a nominal value of $100, or $100,000. The balance of the lots which were not given to the University, 118.53 acres comprising 905 lots also valued at $355,000, were also transferred to Tuxedo Holding Co. Ltd. in consideration for the 1,000 other shares of the company.

In 1919, Tuxedo Holding Co. Ltd., with the consent of the University, transferred part of the 160 acres to the government of Manitoba to be used for educational purposes. The balance remained the property of the University. In 1930, when the University was not going to be built on that site, an agreement was entered into between Tuxedo Holding Co. Ltd., the government of Manitoba and the University to give the University land back to the company. The government paid $65,000 to Tuxedo Holding Co. Ltd. for the land that had been transferred to in 1919.

In 1948, 676 lots valued at a total of $200,000 were transferred to the municipality to secure payment of unpaid municipal taxes. In 1951, Tuxedo Holding Co. Ltd. sold a parcel of land for $1,875.

The Department's position was that the cost of all of the land in 1914 was $200,000. The appellant argued that the value was $710,000.

The appellant relied primarily on the decision in Murphy v. Australian Machinery and Investment Co. Ltd., [1948] 30 T.C. 244 (4.02(7)), which held that in computing taxable profit, the amount to be deducted as the cost of the shares of the companies in western Australia was the real value of the mining interests at the time they were sold to the companies. The value of the shares issued by the Australian companies was in fact far higher than the real value of the property acquired.

However, relying on the decision in Craddock v. Zevo Finance Co. Ltd. (4.02(5)), Chairman Snyder concluded that the amount to be deducted in computing income was the $200,000 cost paid in 1914 and not the fair market value of the land, which was $710,000. His decision was subsequently affirmed by Cameron, J. of the Exchequer Court (4.02(6)).

4.03.2(4) Craddock v. Zevo Finance Co. Ltd. (4.02(5)) may be summarized as follows:

In 1932, as a result of the death of Otto Bert, the principal shareholder of the Zevo Syndicate Ltd., and the problems that arose therefrom, it was decided that two new companies would be formed. Thus Zevo Trust Ltd., with nominal capital of £980,000, would take charge of the safer investments, while Zevo Finance Ltd. (Z.F.), with capital stock on the order of £620,030, would deal with the more speculative investments. Those investments were purchased in June 1932 by Zevo Finance Ltd. at the price that appeared on the books of the former company Zevo Syndicate Ltd., that is, the price paid for the investments in 1927: £620,030.

The capital of Zevo Finance Ltd. was composed of the following:

All these shares of Zevo Finance Ltd. were distributed to the shareholders of Zevo Syndicate Ltd. (the heirs of Otto Bert) in exchange for the speculative investments. These shares were issued as fully paid.

In computing its profit for 1933-34, Zevo Finance Ltd. deducted, as the cost of purchasing these investments, the real amount paid through the shares, and arrived at a loss. However, an assessment issued under British tax legislation allowed the deduction not of the value of the investments at the time of acquisition by Zevo Syndicate Ltd. in 1927, but rather the fair market value of the investments at the time of the transaction in 1932, and arrived at a profit resulting from the acquisition of the investments. The fair market value of the investments on the Stock Exchange in 1932 was one third the cost paid by Zevo Finance Ltd. to the shareholders in 1927.

The appellant, Zevo Finance Ltd., argued first that the price paid in 1932 was the price agreed upon between the parties involved in the business reorganization. It also argued that the price paid in shares had to be calculated according to the par value of the shares and that the Stock Exchange prices did not represent the fair market value of the investments since there was no evidence of their true market value. The Special Commissioners and Mac- naghten, J. of the High Court of Justice found for the appellant, Zevo Finance Ltd.

Lord Greene, of the Court of Appeal, to which the inspector of taxes appealed the decision of Macnaghten, J., affirmed that decision in May 1944.

The Crown's argument was that the shares had been unlawfully sold at a discount, that is, at a lower price than the true value of the investments for which the share issue was the consideration (at page 277).

But the argument of the Solicitor-General is open to a fatal criticism of a different character altogether. It is founded on, or necessarily leads to, the proposition that the shares were issued at a discount. This seems to me an impossible contention. First of all, upon the facts as found by the Commissioners, it is impossible even to say that the consideration for which the respondents acquired the investments—namely, £409,928 in respect of the debentures and the allotment of shares amounting to £620,630—exceeded in nominal amount the real value of the investments. But what is even more conclusive is that on no possible view can the shares be regarded as having been issued otherwise than as fully paid. The agreement of 15th June, 1932, in terms provides that the shares should be allotted to the shareholders of the Syndicate as fully paid. It was on these terms, and these terms alone, that they were accepted by the shareholders: they clearly could not have been accepted and the reconstruction scheme could never have been carried through; if the shares had been allotted as partly paid. The terms on which the Syndicate and its liquidator agreed to part with these investments were (1) that the respondents should take over the liability on the debentures; (2) that the respondents should issue fully paid shares to the shareholders of the Syndicate. It was with these terms and none other that the respondents had to comply in order to acquire the investments. By no possible means can this arrangement be varied so as to leave the shareholders with shares on which only part of the nominal amount (or indeed nothing) is to be treated as having been paid.

The fallacy, if I may respectfully so call it, which underlies the argument is to be found in the assertion that where a company issues its own shares as consideration for the acquisition of property, these shares are to be treated as money's worth as though they were shares in another company altogether, transferred by way of consideration for the acquisition. This proposition amounts to saying that consideration in the form of fully paid shares allotted by a company must be treated as being of the value of the shares, no more and no less. Such a contention will not bear a moment's examination where the transaction is a straightforward one and not a mere device for issuing shares at a discount. /n the everyday case of reconstruction, the shares in the new company allotted to the shareholders of the old company as fully paid will often, if not in most cases, fetch substantially less than their nominal value if sold in the market. But this does not mean that they are to be treated as having been issued at a discount, or that the price paid by the new company for the assets which it acquires from the old company ought to be treated as something less than the nominal value of the fully paid shares. The Crown in this case is in fact attempting to depart from the rule (the correctness of which it itself admits) that the figure at which stock-in-trade is to be brought in is its cost to the trader and substitute the alleged market value of the stock for its cost. Of course, in a case where stock which a company proposes to acquire for shares is deliberately overvalued for the purpose of issuing an inflated amount of share capital, very different considerations apply. But nothing of the kind is present in this case which, as I have already pointed out, is a perfectly proper and normal reconstruction. The propriety of the course adopted is manifest when the uncertainty as to the value of the investments, which is pointed out by the Commissioners, is borne in mind. It is, I think, true as a general proposition that where a company acquires property for fully paid shares of its own, the price paid by the company is, prima facie, the nominal value of the shares. It is for those who assert the contrary to establish it, as could be done, for example, in the suggested case of a deliberately inflated valuation. In the present case the Crown has failed to establish the contrary on the facts as found, and there is no justification for the proposition that, on these facts, the Commissioners were bound in law to decide the appeal in favour of the Crown.

[Italics indicates the points emphasized by counsel for the appellant.]

Luxmoore, L.J., of the Court of Appeal, dissented. Viscount Simon of the House of Lords approved the reasons of Greene, M.R. in a judgment delivered in March 1946, in which he stated (at page 287):

Notwithstanding the dissenting judgment of Luxmoore, L.J., and the arguments addressed to us on behalf of the appellant, I find myself unable to resist the conclusion reached by Lord Greene, M.R., with whose judgment I entirely concur. The crucial transaction, albeit in a reconstruction, is a transaction of sale and purchase, and the proper figure to be debited in respect of the purchased investments is the cost thereof to the respondent.

That cost is set out in the agreement between the Zevo Syndicate and its liquidator of the one part and the respondent of the other part dated 15th June, 1932, and the shares allotted as part of the purchase price are allotted "credited as fully paid up”. "On no possible view”, says the Master of the Rolls, can the shares be regarded as having been issued otherwise than as fully paid . . . The terms on which the Syndicate and its liquidator agreed to part with these investments were (1) that the respondents should take over the liability on the debentures; (2) that the respondents should issue fully paid shares to the shareholders of the Syndicate.” The contrary proposition amounts to saying that consideration in the form of its fully paid shares allotted by a company must be treated as being the value of the shares, no more and no less. I agree with the Master of the Rolls that such a contention will not bear a moment's examination when the transaction is a straightforward one and not a mere device for issuing shares at a discount.

To put the matter in its simplest form, the profit or loss to a trader in dealing with his stock-in-trade is arrived at for Income Tax purposes by comparing what his stock in fact cost him with what he in fact realised on resale. It is unsound to substitute alleged market values for what it in fact cost him.

4.03.2(5) In the British case Osborne v. Steel Barrel Co. Ltd. (4.02(4)), a decision of the Court of Appeal, assets (land, buildings, material and equipment, goodwill, inventory, and so on) of a company that manufactured steel barrels were sold on September 11,1932 to an individual, Mr. Barrs, at a cost of £10,500. On August 29, 1932, a new company having been incorporated, it bought back the assets from Mr. Barrs in consideration for £10,500 and 29,997 common shares having a nominal value of £1, issued as fully paid. These shares were intended to be the compensation paid to Mr. Barrs for services rendered to the company. The capital stock of the new company was 30,000 shares.

In the books of the new company, the £10,500 was broken down as follows:

In the books of the new company for the period from August 29,1932 to December 31, 1933, the opening inventory was set out as follows:

A valuation of the market value of the inventory was made in July 1932 by 12 to 15 persons from the staff of the former company, under the supervision of Mr. Barrs. The stock was valued at £21,868. The evidence was not unanimous as to the results of this valuation, since other witnesses who were called to appraise the same inventory property put forward figures of £3,750, £3,871, £3,500 and £8,390.

In reassessing the years from 1933 to 1939, the inspector of taxes considered that the cost paid by Steel Barrel to acquire the inventory was £2,493, that is, the value actually attributed to that inventory in transferring the assets to the new company. It was also considered for purposes of this reassessment that the shares issued as fully paid in consideration for the assets acquired had no value and that the valuation of the inventory by the appellant's staff was obviously inflated.

In July 1940, the Special Revenue Commissioners fixed the value of the inventory at £10,000. Considering the fact that the value of the inventory had been established at £2,493, part of the shares issued, given the verdict of the Commissioners, had necessarily contributed to payment for the inventory.

In July 1941, Macnaghten, J. of the High Court of Justice decided that the cost of the inventory in trade was £2,493, thereby reversing the position of the Special Commissioners.

The new company appealed the judgment of Macnaghten, J. to the Court of Appeal. The respondents position, argued by the inspector of taxes, was that while part of the inventory may be paid for by the share issue, those shares cannot be considered in computing the company's income. Since the shares issued as fully paid had cost the company nothing, their "nil" cost could accordingly not decrease the amount of the sales, to give the profit. In conclusion, the profit was equal to the sales. The appellant argues, on the contrary, that the value of the shares issued must be £29,997, and that that cost must be used in computing the profit.

On the argument that the shares had cost the company nothing and had added nothing to the price paid, Lord Greene of the Court of Appeal stated, at page 306:

The argument really rests on a misconception as to what happens when a company issues shares credited as fully paid for a consideration other than cash. The primary liability of an allottee of shares is to pay for them in cash; but when shares are allotted credited as fully paid, this primary liability is satisfied by a consideration other than cash passing from the allottee. A company, therefore, when in pursuance of such a transaction it agrees to credit the shares as fully paid, is giving up what it would otherwise have had, namely, the right to call on the allottee for payment of the par value in cash. A company cannot issue £1,000 nominal worth of shares for stock of the market value of £500, since shares cannot be issued at a discount. Accordingly, when fully paid shares are properly issued for a consideration other than cash, the consideration moving from the company must be at least equal in value to the par value of the shares and must be based on an honest estimate by the directors of the value of the assets acquired.

To summarize, when the property transferred has a value at least equal to the par value of the shares issued, it must be considered that payment was actually made.

Thus, in April 1942, Lord Greene affirmed the decision of the Special Commissioners by determining the cost of the inventory to be £10,000.

In the appeal before us, counsel for the appellant noted, there is no doubt that the value of the assets transferred to Robitaille (1978) was at least equal to that of the preferred shares issued: $600,000. The respondent even argued that those assets were worth $1,400,000.

4.03.3 Second proposition

4.03.3(1) It is necessary to determine the fair market value of the shares in issue, given how important this may be in relation to the application of the alternative argument presented by the respondent (4.05.10(3)).

First, we should note that the fair market value of property is defined as follows:

[Translation]

Fair market value is generally defined as the highest price expressed in cash or the equivalent, resulting from negotiations between an informed purchaser who wishes to buy and an informed vendor who wishes to sell, being under no compulsion and dealing at arm's length.

The procedure followed by the appellant consisted in considering

(A) whether the issuing company had the financial ability to pay the dividends in order to redeem the shares in question, and

(B) whether the same person or group of persons control both the issuing company and the company which holds the preferred shares.

4.03.3(2) Does the issuing company, Robitaille (1978), have the financial ability to pay the dividends and redeem the shares?

To answer this question, counsel for the appellant referred to page 6 of the report of the valuator, Mr. Wise (Exhibit A-8) and to his testimony (3.35.1). He stated positively that at January 31, 1979, the payment of dividends on the order of $30,145 (5 per cent of $602,901) and redemption of the preferred shares amounting to $764,152 were both possible. However, these operations were possible as a result of a long-term loan of $500,000.

Counsel for the appellant recalled, on this point, that the Martel report, filed by the respondent (Exhibit I-8, pages 4-5), pointed out that the company was in a good financial position and presented very attractive prospects for growth. While Marine's total sales at December 31, 1977 were $1,815,000, the figure for Robitaille (1978) at December 31, 1979 was $2,420,000.

4.03.3(3) Mr. Wise, the appellant's appraiser, answered the second question, whether the fact that the two companies, Marine and Robitaille (1978), are controlled by the same persons must be taken into account, in the affirmative, at page 7 of his report (Exhibit A-8), as follows:

. . . Accordingly, while the Company was financially capable of redeeming the Shares, there would have been no compulsion on its part to redeem. However, the holder of the Shares, namely Marine, was controlled by the same group that controls the Company, i.e., Marine is part of a related group controlled by the same persons. In this connection, we note that the members of the group which exercises such control are family members and have been acting, and have continued to act, in concert vis-a-vis their shareholdings and the direction of Marine and the Company. On this basis, the Shares held by Marine, have a fair market value equal to their redemption price of $1 per Share.

4.03.3(4)(a) In the same vein, counsel for the appellant quoted other appraisers: Messrs Kingston and McQuillan of the firm Ernst & Whinney (4.02(9)), who said:

If the special shares are redeemable only at the directors' option but these shares are held by the persons who control the company, a valuator will ordinarily treat them as the equivalent of demand notes and value them at their redemption price.

If the special shares are retractable at the option of the holder, they should be valued at their redemption price. This can be inferred from Income Tax Ruling TR-50 dated March 7, 1977 and issued by Revenue Canada.

(b) Counsel for the appellant also referred to Mr. Anson-Cartwright, a valuator with Price Waterhouse, who testified in West Hill Redevelopment Company Ltd. (4.02(12)).

In that case, however, the valuation of the shares was secondary. The main point was whether the pension plan established by the appellant for its managers was a true pension plan. Moneys paid to the managers for past services were used to purchase shares of the company which could then redeem them. The Exchequer Court decided that this was not a true pension plan.

Nonetheless, the Court referred to Mr. Anson-Cartwright's comments as an expert concerning the value of the shares. At pages 591-92 (D.T.C. 5391), the following appears:

Mr. R. M. Anson-Cartwright, a chartered accountant and partner in Price Waterhouse & Co., was called as an expert witness by the respondent. He expressed his opinion that the appellant’s preference shares "had, marketwise, only a nuisance value”. He agreed, however, that the value of the shares to the holder is not necessarily the same as the fair market value and that the Lebovic brothers, by virtue of their control of the company, could have been in a position to cause the company to redeem the shares and, in that event the company would, if solvent, pay out $11 per share in redemption of the shares held by the Deferred Profit Sharing Plan.

(c) Wolfe D. Goodman, a lawyer with the firm Goodman and Carr, referred to West Hill Redevelopment Ltd. (4.02(12)) in a letter to the editor of The Journal of Business Valuation (4.02(H)) relating to an article written by W. Yvan Linton, director of technical interpretations at Revenue Canada, on various subjects including the valuation of preferred shares. Mr. Goodman had the following reservation:

Finally, a word about the departmental view that non-interest-bearing demand notes and preferred shares which are redeemable at the holder’s will“ have a value substantially below par, how much depending on the circumstances". In West Hill Redevelopment Co. Ltd. v. M.N.R., (1969) C.T.C. 581, the expert witness for the Minister of National Revenue attempted to establish the position that non-voting preferred shares which were redeemable at the corporation’s option had only a nominal value, even where the preferred shareholder also controlled the corporation through his other shareholdings. On cross-examination by counsel for the taxpayer, the witness was compelled to admit that, in the hands of a controlling shareholder, the preferred shares were the equivalent of a demand note and that, in the case of a solvent corporation, they were worth their redemption price.

[Emphasis added.]

(d) Counsel for the appellant also cited lan Campbell in the looseleaf publication Canada Valuation Service. He made the following comment at paragraph 4-14 (October 1987) under the heading Value to the Owner:

Value to the owner is frequently confused with fair market value, although there is at least one instance where it is likely the value to the owner concept should play a role in fair market value determination (in respect of redeemable preference shares where the holder of the shares also owns a controlling block of the common shares in the same corporation).

In the case at bar, as noted by counsel for the appellant, the holders of the preferred shares of Robitaille (1978) are also, although indirectly, holders of common shares of Robitaille (1978).

(e) Finally, counsel for the appellant quoted the director of the valuation section of the Department of Revenue at the Winnipeg office, Mr. M. A. Cudjoe, who, at a seminar entitled Revenue Canada Update (4.02(13)) demonstrated the following facts and the various ways of allocating the capitalized earnings of a typical private corporation, as follows:

6. Differences of opinion in the allocation of the product of capitalized earnings

The shareholders collectively are the owners of their company, and it is generally agreed that a reference to maintainable earnings implies earnings attributable to all outstanding shares of the company.

Assume that the issued capital stock of a private corporation includes 300,000 preferred shares with the following characteristics:

Dividend rights	— non-cumulative
Stated capital; $1 per share	$300,000
Fixed Dividend yield	= 6 per cent
Participating rights	— none
Redemption values	$1 per share
Redemption provisions	— redeemable at face value at the option of the
	company with 30 day notification to the pre
	ferred shareholders.

Assume also that you are valuing the common shares of the same corporation and the following variables are given:

Indicated Estimated After-tax maintainable earnings = $200,000

Indicated multiplier = 8 times

Which of the following approaches would you use?

A. Capitalize the maintainable earnings without providing for the preferred dividends and deduct the preferred shares at their stated value.

Example
Indicated Maintainable Earnings		$200,000
Multiplier [cap rate	12.5%]	x	8
En block value—all shares		$1,600,000
Deduct
Preferred share capital		300,000
En bloc value of the common stock		$1,300,000

Mr. Cudjoe gave three other examples, noting, however, that Example A cited above is most frequently used. He then noted that the possible variations on the various rights, restrictions, conditions and so on attaching to the preferred shares make it preferable, in applying Example A, for the preferred shares to be redeemable at the option of the shareholder.

Further on, he made a comment concerning the situation where the preferred shares and common shares are held by the same person and the preferred share is redeemable at the option of the issuing company. This comment, at pages 25 and 26, reads as follows:

The validity of any of the approaches discussed depends on the circumstances of each case. Consideration must be given to the rights, privileges, restrictions and redemption provisions. Consideration should also be given to whether the common shares and the preferred shares are owned by the same persons. Assume for example that certain preferred shares are non-cumulative, non-participating and redeemable at the option of the corporation (believe it or not, I have seen many of these). In such cases the preferred shareholders are at the mercy of the controlling shareholder(s).

If such preferred shares are owned by the controlling shareholders, then to these shareholders the preferred shares have some value as they can cause the corporation to pay dividends and/or redeem the preferred shares as they wish. If they tried to sell such preferred shares in the open market it is unlikely that they will receive much for them.

[Emphasis added.]

Mr. Cudjoe also makes the following comment:

In such a case it would also obviously be pragmatic if the shareholders attempted to sell both the common and preferred shares at the same time and to the same person (s). (s).

[Emphasis added.]

Finally, counsel for the appellant quoted Mr. Cudjoe on the question of family control of the shares of a company. Mr. Cudjoe noted that the shares of a minority shareholder are normally considered to have less value. They must therefore be sold at a discount. However, when a minority interest exists within a family which controls the business, there is little or no discount. Mr. Cudjoe had the following to say on this point:

The family control concept is based on the following presumptions:

(i) Family members will act in concert to protect each others liquidity.

(ii) A ready market exists among the family members.

(iii) Relationships are amicable among family members.

The consequence of the family control concept is that minority holdings in a family group setting would be valued at:

(i) Either rateable value or

(ii) A smaller than normal minority discount.

He based his opinion on the three judgments in Littler (4.02(48)), Blank Estate (4.02(49)) and Taylor Estate (4.02(50)).

Counsel noted that the fundamental presumption is that all shares in such situations are sold together.

(f) This was also the conclusion reached by the Privy Council in London, in Ceylon v. Mackie (4.04(42)). In that case, involving an estate in which the voting shares of the company were composed of two classes of common shares, the valuation of the shares was based on a presumption that the two classes would be sold together, while the vendors wanted to have the higher value suggested by the definition of fair market value.

Counsel for the appellant also cited Ahmanson Foundation (4.02(16)), in which the United States Court of Appeal reached the same conclusion. The price must be set as if the transaction had taken place between a willing vendor and purchaser, thus resulting, by the bulk sale of the shares of the company, in the maximum price that might be obtained on the market for such shares.

In another American case, Curry Estate (4.02(17)), the Court of Appeal reversed a decision of the circuit court which had given instructions to value the voting and non-voting shares in an estate separately. The Court of Appeal stated that one had to be logical with the “ willing buyer-willing seller rule”, at pages 1428-29:

. . .. And it does comport with common sense [sic] that a willing buyer would be likely to purchase non-voting shares in a small, family-held business, without concomitantly purchasing a controlling voting interest.

. . . In applying the willing buyer-willing seller rule, courts may not permit the positing of transactions which are unlikely and plainly contrary to the economic interest of a hypothetical buyer as a basis for the valuation. Thus, even apart from considerations of estate tax policy, there is logical reason to reject the estate's proposed separate fair market valuation of voting and non-voting stock.

[Italics indicates the points emphasized by counsel for the appellant.]

Accordingly, counsel for the respondent argues, the preferred shares of Robitaille (1978) held by Marina Québec cannot be valued separately. It must therefore be considered that they would be sold at the same time as the common shares of Robitaille (1978) held by Mr. and Mrs. Robitaille.

4.03.4 Counsel for the appellant questioned the objectivity of the respondent's valuator as an expert witness.

Counsel recalled that the report filed as Exhibit 1-8 was signed on March 21, 1986, while Mr. Martel said he had been on the case since 1983. Apparently, Mr. Martel also met with the appellant's accountant and lawyer before preparing his report.

Moreover, as noted by counsel for the appellant, Mr. Martel stated at page 11 of his report that the circumstances in which the preferred shares were issued must be taken into account. On this point, he mentioned that Marine had defrauded the Department of Revenue, Customs and Excise Division, of the sum of $449,216. The fraud charges (Exhibit A-18) were withdrawn in 1981 for lack of evidence (3.05) The valuation report was prepared in 1986 and so it should have mentioned this fact.

Moreover, Mr. Martel used this fact as the basis for his report, although it was of no relevance in valuing the preferred shares. His use of it is particularly questionable in that the evidence showed that there was no debt owing to Customs and Excise. The appellant's offence was in taking an administrative shortcut, not paying rather than paying and then seeking a refund, arguing exemption from customs.

Moreover, at page 12 of his report, Mr. Martel stated the following:

[Translation]

Thus, because Robitaille (1978) was part of a controlling group, the value (to it) of the preferred shares might perhaps have been closer to the par value. However, the concept of special value to the owner is formally excluded in determining fair market value since an approach must be considered in the context of a hypothetical market.

Counsel for the appellant noted that, on cross-examination by him, Mr. Martel admitted that he had quoted Campbell only for the definition of fair market value while the quotation from Campbell indicates that in the case of preferred shares held by a controlling person or group the value to the owner may be the same as the fair market value.

However, at page 9 of his report, Mr. Martel clearly expressed Mr. Campbell's opinion on preferred shares, without, however, referring to the case where the same group of persons has visible control.

According to counsel for the appellant, Mr. Martel wanted to support the assessment: [Translation] He acted more as a tax collector than as an objective witness".

4.03.5 Marc Dorion, co-counsel for the appellant, explained to the Court that under paragraph 48(1)(d) of the former Quebec Companies Act, preferred shares could not be redeemable at the option of the holder of the shares.

The basic principle was that the purchase by a company of its own shares was an exceptional measure. Accordingly, the general scheme of the act was that a company had to preserve its capital and not traffic in its own shares.

The amendments to the act on January 30, 1980 and in 1981 seem to have changed this philosophy, so that such redemptions are now possible at the option of the holder of the preferred shares.

4.04 Submissions of the respondent

Counsel for the respondent divided his submissions into four points, as follows:

1. The Department did not issue inconsistent assessments, as argued by the principal witness, Mr. Vézina (4.04.1).

2. The fair market value and the value to the owner of the preferred shares (4.04.2).

3. The cost of the inventory to the appellant (4.04.3).

4. The alternative argument under section 245(2) (4.04.4).

4.04.1 Were the assessments inconsistent or not?

Referring to Mr. Vézina's testimony (S.N., page 116, paragraph 3.21), Mr. Laperriere argues that there was no inconsistency.

With respect to the first assessment, counsel for the respondent stated that the vendor transferred property having a value of $675,000, while the purchaser paid nothing in return. It was not the property transferred which had a nil value, but rather what was given in return: the preferred shares redeemable only at the option of the issuer.

With respect to the assessment issued on January 31, 1984, against Les Placements A. & N. Robitaille Inc. (formerly Marine Robitaille Inc.) (Exhibits 1-12 and 1-13), $800,000 in goodwill was added to the value of the property transferred in 1978 for a total of $625,000. “ [Translation] ‘In other words', counsel concluded, ‘the shares given by the purchaser were worth nothing, and the purchaser received a benefit because it received everything and gave nothing'."

In conclusion, there is no inconsistency between the notice of assessment issued on December 23, 1983 to Marina Québec Inc. and the notice of January 24, 1984 issued to Les Placements A. & N. Robitaille Inc.

4.04.2 Fair market value and value to the owner of the preferred shares

While admitting that Richard Wise is [Translation] "highly qualified”, counsel for the respondent had reservations "as to the factual and theoretical foundation of his valuation”.

He summarized each of Mr. Wise's arguments as to the fair market value and the value to the owner of the preferred shares, and then put forward his reservations (S.N., pages 146 et seq.).

4.04.2(a) Mr. Wise's first argument was that Marina Québec Inc. had the financial ability to redeem the preferred shares at March 1, 1978 and at January 31, 1979.

The first general reservation expressed by counsel for the respondent on this point was that the valuation was made ten years after the transfer which formed the basis of the dispute. Moreover, Mr. Wise had discussed the circumstances of the case only with Mr. Gauthier, counsel for the appellant. He did not meet with Mr. Robitaille, with Mr. Vézina, or with the bankers. He put 8 to 12 hours into completing the report. Mr. Wise was not there at the time the inventory transfer took place.

Mr. Wise's submission was simply [Translation] a mathematical computation, an accounting computation” (S.N., pages 148 et seq.). According to him, Mr. Wise relied only on Exhibits A-10 (table RW-1) in respect of redemption on March 1, 1978 and A-11 (table RW-2) in respect of redemption on January 31,1979 (3.35.1) These documents were prepared by Mr. Wise.

Exhibit A-10 presumes the redemption of the shares on March 1, 1978 with an adjustment ($515,055).

4.04.2(b) The second reservation concerning Mr. Wise's computation is that on March 1, 1978, Mr. Robitaille personally held 161,251 preferred shares of Marine Robitaille (1978) Inc. (Exhibit A-8: respondent's valuation report, schedule 5) while Robitaille Marine Inc. held 646,486 shares.

Finally, his third reservation, taken from Mr. Vézina's testimony, was that there was still considerable work to be done on the inventory in order for it to be made saleable:

[Translation]

A. Which had six hundred seventy five thousand dollars ($675,000) in inventory, on the condition that someone apply themselves, put some work into it to repair them and sell them. But the value of the saleable items was not more than one hundred thousand ($100,000) bucks. That was one hundred thousand ($100,000) for the creditors. (S.N., page 103.)

Thus, according to counsel for the respondent, the only assets which were available for purposes of redeeming the preferred shares did not have a value of $515,055, as Exhibit A-10 would lead us to believe. In reality, the value of those assets does not exceed $100,000.

Basing his argument on Mr. Vézina's testimony, counsel for the respondent stated that the new company had no money to pay for the inventory property. [Translation] It even took 4 to 5 years to rebuild the company." (S.N., page 95.)

Thus, according to counsel for the respondent, at the beginning of March 1978 the company had no money, although it had to incur a lot of expenses to complete the work on the inventory. There was therefore no cash available which would have enabled it to redeem the preferred shares, although the data in Exhibit A-10 might have led us to believe otherwise.

4.04.2(c) Exhibit A-11 (3.35.1) assumes the redemption of the preferred shares on January 31, 1979 using a long-term loan of $500,000 and $264,152 taken from the company's working capital.

Counsel for the respondent argues that the figures in Exhibit A-11 are not realistic (see 3.35.1), given the fact, according to Mr. Vézina, that it took four to five years to build up the new company.

Counsel for the respondent argues that it is not realistic to believe that a bank would have lent $500,000 when $350,000 had already been borrowed and the only guarantee that could be offered was the inventory property had been released on payment of $100,000 (S.N., pages 84 and 88). The only conceivable alternative, as suggested by Mr. Wise (Exhibit A-8, page 6) was that Mr. and Mrs. Robitaille would personally pay out this money. Counsel for the respondent submits that the evidence does not support this suggestion.

According to counsel for the respondent, the company did not have the financial ability to redeem the preferred shares on March 1, 1978 or on January 31, 1979.

4.04.2(d) Counsel for the respondent then noted the other salient point in Mr. Wise's report: that Robitaille Marine Inc. and Marina Québec Inc. were controlled by the same group of persons. According to Mr. Wise, since it was financially possible to redeem the shares, they were worth $1 each.

Counsel for the respondent admits that the same group of persons controlled both companies but argues that it is of fundamental importance to recall that Robitaille Marine Inc. held only preferred shares in Marina Québec Inc., and not common shares:

[Translation]

This factor seems to us to be a fundamental distinction; it is a factor which appears to us to be extremely important. Suppose for a moment that Robitaille Marine Incorporated, which held a majority of the common shares, held not only the preferred shares, but also a majority of the common shares of Marina Quebec, in that case, then, in fact, it would be easy to force redemption! There is control of the second corporation. And I assure you that to a creditor, this makes all the difference in the world. If Robitaille Marine Incorporated held both common shares and preferred shares of the second corporation, Marina Quebec, then in that case, in fact, the creditors have something to enforce their claims! You have a debtor, Robitaille Marine, which controls the second corporation and can force redemption.

Let us come back to our situation. Robitaille Marine Incorporated holds only preferred shares. This is unfortunate; Robitaille Marine cannot force anything at all, it cannot force redemption. And this is also the reason why, in this case, the creditors have failed during all the time we are talking about here. Because, fundamentally, Robitaille Marine Incorporated does not hold the common shares. That is the reality of the market. And fair market value, that is the reality of the market. The creditors have failed during all this time for one reason: Robitaille Marine Incorporated had only preferred shares redeemable at the option of the issuer. It did not have common shares.

Taking into account this fact and this difference which, in our view, is extremely important, I have no difficulty in distinguishing the authorities cited by the appellant, all of them, without exception.

4.04.2(d)(1) The article by Mr. W.D. Goodman 4.02(43), to which Mr. Wise referred in his expert opinion report (Exhibit A-8, page 7), is entitled “Some current valuation problems raised by recent cases". At page 96 of this article there is a reference to Curry Estate (4.02(17)) under the heading "Valuation of non-voting shares held by a shareholder who also controls corporation through other shareholdings”.

In Curry Estate, the deceased owned 800 of the 1,500 Common voting shares and 1,300 of the 4,500 class A common, non-voting shares. The decision of the court was that the non-voting shares had the same value as the voting shares, given that the deceased had control of the company.

In the case at bar, according to counsel for the respondent, Robitaille Marine (the vendor of the property) held only preferred shares of Marine Robitaille (1978) Inc. (the purchaser of the property), but did not control it “through [its] shareholdings".

In this case, Mr. Robitaille and his wife alone control Robitaille (1978): [Translation]. . . What do you want a creditor to do when its debtor has only preferred shares redeemable at the option of the issuer, while Robitaille Marine Incorporated holds no common shares?"

And so the title, on its face, may be distinguished since Robitaille Marine Inc. does not control the second corporation'^through other shareholdings".

Mr. Wise also referred to another article by Mr. Goodman (4.03.3(4)(c)), relating to West Hill Redevelopment Company Ltd, (4.02(12)). Counsel for the respondent noted that Mr. Goodman again used the expression “ controlled the corporation through his shareholdings".

Since that condition is not fulfilled in this case, we cannot consider the preferred shares to be demand notes, as suggested in the text referred to earlier (4.03.3(4)(c)). Counsel for the respondent commented: “ Translation] . . . This is far from being the equivalent of a demand note! In fact, it is exactly the contrary, it is notes that you will be paid for if someone feels like paying.” (S.N., page 179.)

4.04.2(d)(2) According to counsel for the respondent, it appears that in Ceylon v. Mackie (4.02(42)) the deceased, Mackie, held at his death all of the common shares of the corporation in question, and 9,201 preferred shares. It was quite obvious that he controlled the Company. That is not the case with Robitaille Marine Inc. vis-a-vis Marine Robitaille (1978) Inc.

4.04.2(d)(3) According to counsel for the respondent, the same reasoning applies to the American case Curry Estate (4.02(17)), cited above in paragraph 4.04.2(d)(1), and to Ahmanson Foundation (4.02(16)), which was considered and cited in Curry Estate.

In Canada Valuation Service, lan R. Campbell commented to the same effect at page 4-14: "... (in respect of redeemable preference shares where the holder of the shares also owns a controlling block of the common shares in the same corporation)."

In Valuation of Businesses: A Practical Guide (4.02(9)) Messrs. Kingston and McQuillan note, at paragraph 820:

If the special shares are redeemable only at the directors' option but these shares are held by persons who control the company, a valuator will ordinarily treat them as the equivalent of demand notes and value them at their redemption price.

If, however, the redeemable special shares are redeemable at the directors’ option only and the holders do not control the company, then it will be necessary to consider all the relevant factors in valuing the special shares, eg:

(v) likelihood of redemption at the valuation date;

Counsel for the respondent stated that he agreed with the statement that it is necessary to consider the probabilities and likelihood of redemption at the valuation date.

In this case, according to counsel, there is little likelihood of redemption, given the lack of financial ability. Moreover, interest in redeeming the preferred shares was nonexistent. In fact, redemption would have resulted in the profits of Robitaille (1978) being used to pay past debts. The reorganization of the business using the scheme of Robitaille (1978) Inc. was designed precisely to avoid payment of past debts, as counsel for the respondent stated, referring to Mr. Vézina's testimony:

[Translation]

Q. Precisely the way it was done, you were starting over, you avoided paying the debts?

A. Absolutely. We were starting over, you are absolutely right. We were starting over and saying: “if it is ever worth something, it will be worth something for Robitaille, for André Robitaille.” That is true.

Q. You avoided paying past debts?

And this answer is important:

No! We were avoiding having the future used to pay past debts. Yes, that is true, sir! That is true. But at the time it was done—this is his theory—nothing was being taken from the company, because if it were not done, Marine’s creditors, the first company's creditors, had nothing.

But a little earlier, he said:

We were avoiding having the future used to pay past debts. Yes, that is true, sir! That is true. (S.N., page 92.)

4.04.2(e) Referring to the article by the appellant's valuator, Richard Wise, "The Valuation of Preferred Shares Issued on a Section 85 Rollover" (4.02(10)), counsel for the respondent quoted this passage from page 258:

REVENUE CANADA'S POSITION

Before paragraph 85(1 )(e.2)

Prior to the introduction and widespread use of the retraction” feature attaching to preferred shares, the major issue concerning the valuation of preferred shares for income tax and estate planning purposes (in the late 1960s and early 1970s) was basically twofold:

1) If the shares were nonvoting and had a noncumulative (often very low) dividend, they might have been valued by the Department at a nominal amount. (91)

However, he stated the following condition: Provided that the holder thereof did not have control of the company through his holding of voting common shares.” [Emphasisadded.]

Since Robitaille Marine did not control the company Robitaille (1978) Inc. “through [its] holding of voting common shares”, counsel for the respondent argues that the preferred shares must be valued "at a nominal amount”.

4.04.2(f) Counsel for the respondent also argues that even if the Robitaille group had been able and had wanted to have the preferred shares redeemed, [Translation] "that has nothing to do with fair market value”.

In support of this submission, counsel for the respondent referred to the decisions in National System of Baking of Alberta Ltd. (4.02(36)) and Levitt (4.02(39)).

In those two cases, the issue was whether the particular circumstances, such as knowing that a takeover bid was about to be made (National System of Baking of Alberta Ltd.) or having control of the company (Levitt) could change the fair market value of the shares held by the taxpayer.

The Tax Review Board (Levitt) and the Federal Court of Appeal (National System of Baking of Alberta Ltd.) both replied in the negative. The general principles of valuation apply and there is no specific rule that can counter the application of these general principles.

In National System of Baking of Alberta Ltd., the Court of Appeal quoted the Trial Division at page 240 (D.T.C. 6181), as follows: ” Be it market value or fair market value, it is the value in the marketplace, not the value to a particularly situated or motivated investor, that is to be determined.”

And the Court of Appeal added: “I agree with those words."

In conclusion, counsel for the respondent reiterated that even if the Robitaille group had been willing and financially able to redeem the preferred shares, this was not relevant in determining the fair market value of these shares.

The argument submitted by counsel for the appellant that we must not be concerned with the fair market value of the shares, but with their par value, given that the issuing company was controlled by the holder of the preferred shares, cannot stand since Robitaille Marine did not control Robitaille (1978) by holding the preferred shares alone.

4.04.2(g) Counsel for the respondent then referred to the proposition put forward in Mr. Wise's testimony: we must assume a sale at the highest possible price in valuing the shares.

According to counsel for the respondent, Mr. Wise [Translation] went on to say: Well, we have to assume the sale of the preferred and common shares".

The evidence does not support this hypothesis, because Robitaille Marine held only the preferred shares of Marine Robitaille (1978) Inc. (which became Marina Québec, the appellant).

For this to have taken place, the Robitaille group would have had to sell the common shares and the 161,251 preferred shares they held in the appellant company to a third party. Moreover, Robitaille Marine would have had to sell the 646,486 preferred shares that it held in Robitaille (1978) to the same buyer.

The Robitaille group in fact had no interest in having the preferred shares redeemed. Moreover, since the very cornerstone of the reorganization was the goal of evading the payment owing to the Customs and Excise Section, redemption of the shares would ultimately have served to pay the debts of the past.

Apart from the fact that the sale was not highly plausible, there is one fundamental point: Marine Robitaille held only the preferred shares, and so they must be valued separately. They are therefore of no value.

In support of this argument, the respondent referred to the decision in Terry (4.02(40)), which was delivered in 1985 by the Federal Court-Trial Division.

This case involved a taxpayer who owned most of the shares of company H, the principal asset of which was the shares of company P, a distillery. The taxpayer gave his two sons the class A preferred, participating, non-voting shares of company H, keeping the class B, voting, non-participating shares. The Department of Revenue taxed the donor on the basis of a deemed sale of the non-voting shares. Given the possibility of future earnings, the fair market value of these shares was established at $785. The Court allowed the appeal, holding that the class A non-voting shares were of little value only. First, Colliers, J. found that company P, which was just starting up, had no valuable base to support the projected earnings. Second, since the class A shares were non-voting they held very little attraction for an outside purchaser. At page 139 (D.T.C. 5179), Colliers, J. stated:

Normally voting shares (here, the B shares) have some premium. Votes control management and operations. Here, the hypothetical purchaser in the market place is only looking at the A shares. If he bought at all, he would not be buying control. I agree with Beach: The Class A and Class B, as a package, might have had some value to a hypothetical purchaser. But the Class A shares alone held, in my opinion, no interest to an outsider, and had no value in a potential purchaser's eyes.

As noted by counsel for the respondent, this case is similar to the case at bar, in which the shareholder has only preferred, non-voting shares.

4.04.2(h) With respect to Mr. Wise's statement that we should not consider the circumstances surrounding the share issue, counsel for the respondent noted that, on the contrary, a prudent purchaser should consider them. He referred to the decision in Lynall (4.02(37)), a decision of the House of Lords, in which Lord Morris referred to the willing purchaser, and to two decisions of Lord Fleming, as follows at page 698:

. . . In Salvesen's Trustees v. Inland Revenue Commissioners, [1930] S.L.T. 387 Lord Fleming pointed out the difficulty of estimating the value of shares in a company whose shares could not be bought and sold in the open market and with regard to which there had not been any sales on ordinary terms and said, at page 392:

The problem can only be dealt with by considering all the relevant facts so far as known at the date of the testator's death, and by determining what a prudent investor, who knew these facts, might be expected to be willing to pay for the shares.

Lord Fleming proceeded to indicate what in that case were "the relevant facts”.

In Findlay's Trustees v. Inland Revenue Commissioners (1938), 22 A.T.C. 437 Lord Fleming spoke of the willing purchaser as being "a person of reasonable prudence" who would inform himself of all relevant facts such as the history of the business being carried on and its present position and future prospects and who would have access to the accounts of the business for a number of years.

In Beament Estate (4.02(38)) the Supreme Court of Canada took into account the fact that at the time the shares in question were issued, the taxpayer had undertaken that the company would be wound up at the time of death. As well, the $2,000 as capital paid plus declared but unpaid dividends of $8,725.98 had to be considered in valuing the shares.

In the present appeal, counsel for the respondent argues that one of the goals of the reorganization and of issuing the preferred shares was to avoid having the future be used to pay the debts of the past. This fact should therefore be taken into consideration.

In support of this submission, counsel for the appellant referred to the report prepared by John McAreavey in October 1972, entitled Proceedings of the First Bi-Annual Conference of the Canadian Association of Business Valuators (4.02(14)). Part of this report was filed as Exhibit A-17. The following passage appears at pages A-13 and A-14 of the report:

. . .The Lands Tribunal in Mountview Estate v. London Borough of Enfield (1969) EG 165 put the point even more forcibly. Neither are we concerned with the personal characteristics of the parties even if we could ascertain what they were. Whether

(he) was rich or poor, wise or foolish, easygoing or obstinate—these personal characteristics are as irrelevant as whether he is black or white. For the purpose of the hypothetical exercise the parties are to be conceived as two persons on the Clapham omnibus, devoid of prejudice or eccentricity, who in any given circumstances might have been expected to behave reasonably.”

Counsel for the respondent noted that we must also read the following paragraph:

In this connection too I would refer you to my earlier comments in the Hinchcliffe v. Crabtree case in which I emphasized the point made in the Court of Appeal that when the open market is being discussed the personal position of the owner of the shares cannot be taken into account.

And counsel for the respondent added:

[Translation]

This passage is in fact a clear statement of the willing buyer, willing seller" theory. In other words, it is correct to say that we must assume a prudent seller and buyer who want to buy and sell. Where we disagree, however, is that we argue that it is not correct to say that we must ignore all the circumstances of the case, the fact that only preferred shares are held, the characteristics of the shares in question, the circumstances in which they were issued, the financial ability to redeem, the probability of redemption, whether there are creditors and the fact that if the money goes into the first company the creditors are very probably going to enforce their claim and demand their due.

Referring to an article by Mr. M.A. Cudjoe entitled Revenue Canada Update (4.02(13)) counsel for the respondent referred the Court to the definition of "fair market value” at page 25: The definition of fair market value presumes rational vendors and purchasers who will conduct themselves in a manner most beneficial to themselves.”

In conclusion, counsel for the respondent stated that a prudent buyer [Translation] will not put money in a first corporation when it will be used to pay creditors and for that reason as well a sale of the common and preferred shares will be avoided, because that will serve precisely to pay debts".

4.04(2)(i) Counsel then referred to the three examples discussed by Mr. Cudjoe at pages 21 and 24 of the article cited above. Counsel for the appellant cited these examples (4.03(1)(e)) in arguing that it was preferable for the preferred shares to be redeemable at the option of the company which issued the share. He specifically referred to Example A.

Counsel for the respondent paid particular attention to the possible variations on the example cited: “This approach seems to be generally acceptable when the preferred shares are redeemable at the option of the preferred shareholder.”

Mr. Cudjoe added, at page 25 of his article, that in the same circumstances: "Consideration should be given to whether the common shares and the preferred shares are owned by the same persons.”

Counsel for the respondent submits that the comments made in Mr. Cud- joe's article confirm the argument on which the Department of National Revenue relied.

4.04.2(j) With respect to the applicability of a Paulian action, counsel for the respondent referred to the decision in D./M.R. Quebec v. 122392 Canada Inc. et Systèmes de menuiseries J.S.C. Canada Ltée, mise en cause (4.02(41)).

At the beginning of that judgment, Judge A. Brossard of the Superior Court set out the nub of the problem, as follows:

[Translation]

This is a Pauli an action by the plaintiff seeking to have avoided, for its benefit and up to the value of its claim, a bulk sale between the plaintiff and the mis-en- cause (Exhibit D-4); under that contract, all the assets of the defendant, including its business name, were transferred to the mis-en-cause in consideration for "class 2" shares of the company in question.

The plaintiff essentially alleged that at the time of that sale the defendant owed it arrears of income tax and interest totalizing $158,943, for the 1980, 1981 and 1982 taxation years. The plaintiff is nowhere mentioned as a creditor in the affidavit signed at the time of the bulk sale (Exhibit D-4). It argues that the effect of this transaction was to make the defendant insolvent, as the mis-en-cause was aware, since the officers of the mis-en-cause were, according to the plaintiff, the same as the officers of the defendant and this transaction was therefore carried out with intent to defraud, within the meaning of Articles 1032 et seq. of the Civil Code. Whence this action.

However, the plaintiff's action was dismissed, since it was brought more than one year after the plaintiff became aware of the impeached transaction.

Nonetheless, Brossard, J. ruled on the merits in respect of the alleged fraud. At page 2250, he stated:

[Translation]

1— Was the transaction carried out with intent to defraud, within the meaning of Articles 1034 or 1035 of the Civil Code?

The Court has no hesitation in finding that it was.

First, not only was it more than doubtful that the defendant was solvent, in the words of its chairman, Marc De Roche, himself, but the indisputable effect of the transaction, insofar as the validity of the plaintiff's claim, was indisputably to make it plainly insolvent for the future. It is obvious, on reading the mis-en-cause company's founding charter and the admissions of its chairman, Marc De Roche, that the shares of the mis-en-cause company held by the defendant company can in no way be considered to be liquid assets out of which the defendant company can meet its obligations, when their value is purely theoretical and open to being completely diluted at any time.

Nor is there any doubt that the witness, Marc De Roche, in his capacity as chairman and majority shareholder in the mis-en-cause company, was fully aware of this fact.

These two facts, taken together, are sufficient to bring into operation the presumption of intent to defraud, whether within the meaning of Article 1035 or Article 1034 of the Civil Code, without the necessity of further considering whether this was a gratuitous contract or an onerous contract.

From the moment that the presumption of intention to defraud arises, the burden then rests on the defendant and mis-en-cause to rebut it and to establish that this transaction, the effect of which was to deprive the plaintiff of any opportunity to recover its debt, was legitimate.

4.04.2(k) Counsel for the respondent also addressed the concept of the value to the owner. On this point, he referred to the decisions in Gagetown Lumber Co. Ltd. (4.02(46)) and National Capital Commission v. Hobbs (4.02(47)).

In summary, the value to the owner is what a prudent owner would pay rather than be ejected from his or her property.

In the case at bar, counsel argues that the value to the owner is also nil. Robitaille Marine held only the preferred shares of Robitaille (1978), and could not force redemption of those shares.

4.04.3 Cost of inventory to the appellant

The question is what the cost of the inventory acquired as consideration for fully paid-up nominal value shares is.

4.04.3.1 Counsel for the respondent does not question the principle that the cost of assets acquired is the price paid for them, as explained in Osborne v. Steel Barrel Co. Ltd. (4.02(4)) and Tuxedo Holding Company Ltd. (4.02(6)) and (4.03.2(3)).

He also does not question the fact that since this principle applies to inventory transferred in consideration for nominal value shares, the price paid corresponds to the nominal value of the shares issued. The decision in Craddock v. Zevo Finance Co. Ltd. (4.02(5)) is clear on this point (4.03.2(4)).

However, he argues that there are exceptions to this principle.

4.04.3.1(a) The first exception arises when the consideration for the inventory is comprised of shares issued at a discount, that is, when the inventory has a lower value than the par value of the shares issued. This exception, which was stated at page 307 of the decision in Osborne v. Steel Barrel Co. Ltd. (4.02(4)), was presented as follows: "It would have been illegal for the appellant company to issue the shares at a discount and there is no ground for suggesting that this was done.”

However, the respondent does not argue before this Court that the shares were issued at a discount. Mr. Vézina testified that if the inventory had been liquidated it was worth only $100,000. However, the respondent would not abandon this argument before a higher court if there were new factors present.

4.04.3.1(b) The second exception is a fraudulent transaction as discussed in Craddock v. Zevo Finance Co. Ltd. (4.02(5)). Lord Greene stated, at page 276: ". . . there is no question of any impropriety from any point of view; nor is it suggested that it was in any way colourable or a device to circumvent the Revenue, or anybody else.”

Also in that case, the judgment of Viscount Simon stated at page 288 of his decision in the judgment of the House of Lords: “ Leaving aside cases where the scheme is what the Master of the Rolls calls a'mere device'. . .”.

Lord Wright stated the following, at page 289 of the same judgment:

. . . the construction of this contract does not seem capable of doubt. The contract is unimpeachable.

It is admitted, and is found by the commissioners, that there was a genuine bargain, neither colourable nor fraudulent, as between the two companies concerned, which were separate entities. No question could be raised to impeach the efficacy of the agreement.

Finally, at pages 292 and 293, Lord Porter expressed the following more explicit opinion:

Later, when setting out the respondents' arguments, the Commissioners say that it was not suggested that the transaction was colourable or fraudulent. Fraudulent it obviously was not: the arrangement as to the capital to be issued was made so as to keep the shareholding as it had been previously, and consequently treats the shares as of the value at which they were bought. It was not found to have been done to cheat the Revenue, the creditors or the shareholders.

The word "colourable" is a little more difficult to construe. It might mean only that the bargain appearing in the contract between the old and new companies was the real bargain. In a formal sense this is true, since the same persons were concerned both as buyers and sellers, and therefore it did not matter what figure they put as the price of the investments. They therefore chose £1,029,958 15s. 4d. because that represented the purchase price and because its adoption would enable the share capital of the two new companies to be equal to that of the old. If this had been the sense in which the commissioners used the word, I should myself call the price put upon the shares a colourable figure, but I do not think that this is the meaning of the Commissioners. In Re Wragg. Ltd., [1897] 1 Ch. 796, was quoted to them, and in that case the word "colourable" is used both in the headnote and in the judgments to mean a fancy price having no relationship to the real value.

The same meaning is applied to it by Lord Watson in Ooregum Gold Mining Company of India v. Roper, [1892] A.C. 125, at page 137. In Chapman's case, [1895] 1 Ch. 771, at page 775, Vaughan Williams, J. (as he then was), uses the expression “illusory”; and in the argument before your Lordships “ fictitious” and "conventional" were added as epithets of the transaction.

It is, I think, necessary to find the cost to the purchaser, but it must be the real cost, not a figure formally arranged when assets are transferred from one company to another, both being under the complete control of the same parties.

. . . but if the consideration given by way of payment is a mere blind or clearly colourable or illusory—see per A. L. Smith, L.J., in In re Wragg. Ltd. (4)—the so- called payment up is ineffectual for the purpose. The question whether the consideration is colourable is one of fact in each case: see per Vaughan Williams, L.J., in In re Innes & Co. Ltd. (5).

I would only add that, in deciding whether a bargain is colourable or not, its whole genesis as well as the purported price may have to be taken into consideration when the time arrives for deciding this question.

Following upon Lord Porter's comments, counsel for the respondent made the following two propositions:

[Translation]

First proposition:

This passage from the judgment of Lord Porter appears to us to be extremely important, first because, and it is perhaps in this respect that it will answer the parties on one of the points raised by my colleague yesterday: why did not you challenge the transaction by bringing a Paulian action? Well, here we have the answer. Because in order for the Crown to succeed in its presumptions today the transaction need not have been so challenged . . .

Second proposition:

As our second proposition, we contend that here the price stated in the contract is "colourable", and "colourable" must be taken to mean illusory, fictitious, conventional, a figure formally arranged between two (2) companies which are controlled by the same parties, a smokescreen. In other words, this is perhaps a somewhat liberal translation of the expression used in Lord Porter's reasons. Because, in fact, if we turn to the contract filed as Exhibit A-3, at page 4 you have a stipulated price of six hundred ninety five thousand and eleven dollars ($695,011). Out of that we have five hundred fifteen thousand two hundred and thirty-five dollars ($515,235) in shares, and so, we submit, it is worth zero (0), it is worth nothing. Accounts payable worth one hundred seventy nine thousand nine hundred fifty-six dollars and thirty cents ($179,956.30) were assumed. The real cost, in this case, we submit, is one hundred seventy nine thousand nine hundred fifty-six dollars and thirty cents ($179,956.30), the accounts to be assumed, that is the real cost. All the rest is mere illusion (S.N. of submissions, vol. 2, page 23.)

4.04.3.1(c) Finally, to provide a solid foundation for the principle of the" colourable" transaction, counsel for the respondent cited Stanton v. Drayton Commercial Investment Co. (4.02(20)), a 1983 decision of the House of Lords. In that case, Lord Fraser of Tullybelton commented on Osborne v. Steel Barrel Co. Ltd. (4.02(4)) and Craddock v. Zevo Finance Co. Ltd. (4.02(5)). The following comments are found at page 511 of his judgment:

From these judgments I extract the following propositions relevant to the present appeal. (1) A company can issue their own shares "as consideration for the acquisition of property"—as Lord Greene M.R. said. (2) The value of consideration given in the form of fully paid shares allotted by the company is not the value of the shares allotted but, in the case of an honest and straightforward transaction, is the price upon which the parties agreed—as Lord Simonds said.

At pages 512-13, he stated:

Secondly, Osborne v. Steel Barrel Co. Ltd., [1942] 1 All E.R. 634 and Craddock v. Zevo Finance Co. Ltd., 27 T.C. 267 are ample authority for saying, in the words of Lord Wright in the latter case, that the Revenue are not entitled to go behind the agreed consideration in a case where, as in the present case, the transaction is not alleged to be dishonest or otherwise not straightforward.

If I am right in thinking that the agreed value of the newly allotted shares, in a bargain at arm's length, is conclusive, no question arises about the date at which the value of the shares should be ascertained.

. . .. But, provided the agreed value has been honestly reached by a bargain at arm's length, it must, in my opinion, be final and it is not open to attack by the Inland Revenue. Not only is that right in principle, but it is very much in accordance with practical convenience, once it is accepted, as it was, rightly in my opinion, by counsel appearing for the Crown, that market value could not necessarily be ascertained almost instantly by reference to the Stock Exchange price list, but might have to be proved by the evidence of accountants and other financial experts, the practical inconvenience of leaving agreements liable to be reopened to such inquiry becomes clear. I do not believe that Parliament can have intended to permit that inconvenience in cases where bargains have been made at arm's length.

The respondent submitted that as in the present appeal, the price set out in the contract of sale of the inventory was "colourable", that is, “illusory, fictitious, conventional, ‘a smokescreen'" (S.N. of the submissions, vol. 2, page 16), a figure formally arranged between two companies controlled by the same parties.

At this stage of the analysis, counsel for the respondent submitted that there was one question which was still relevant: [Translation] “With whom are we dealing?"

Here we have a company which, having forged documents, had all its inventory, worth more than $600,000, seized in April 1977. In June 1977, the seized property was released upon payment of $100,000.

At the beginning of December 1977, a customs and excise tax account of $482,000 was issued by the Department of National Revenue (Exhibit I-5, page 28).

On December 16, 1977, the company informed Customs of its intention to contest the seizure (Exhibit I-4, page 9). In December 1977, criminal charges were laid against the company and the principal shareholders. The charges were withdrawn three years later.

Counsel for the respondent also referred to the testimony of Mr. Vézina, who stated that the bank said [Translation] start over, or you won't get any money".

A second company was formed in February 1978. On March 1, 1978, the second company in fact acquired the assets of the first company and took possession.

Counsel for the respondent also noted certain of Mr. Vézina's comments, to the effect:

— that the past belonged to the creditors, who have got $100,000, and the future to us;

— that there was no question of transferring the common shares to the previous company, because they did not want to transfer the plus value" of future years to it (3.17(h), (i) (j), 3.19 and 3.20).

Counsel for the respondent stated that by pursuing the above course of action Marine unilaterally discharged itself, without the consent of its cred- itors. Mr. Archambault of Customs never authorized the transfer to a second corporation. Moreover, the bank had taken a commercial pledge by trust deed on the transferred inventory, to secure its $350,000 loan to Robitaille (1978), so there was no security left to pay the outstanding customs taxes.

The official contract of June 26, 1978 confirmed the transfer of the inventory to Robitaille (1978) (Exhibit A-3). Clause 6-B of that contract confirmed that the potential liability of $500,000 (the debt owed to Customs) was not assumed by the purchaser, Marine Robitaille (1978) Inc.

What were the proceeds of the transaction? The 515,235 non-cumulative dividend preferred shares, redeemable at the option of the issuer. What assets did Marine have? Accounts receivable of $15,924 (Exhibit I-5, page 43).

Robitaille (1978), however, undertook to pay the $179,000 to suppliers, omitting to arrange payment of the debt owing to Customs.

In short, the transaction between Marine and Robitaille (1978) was definitely "colourable".

This is confirmed by the fact that the same scheme of transferring preferred shares was used in forming the third company, the numbered company 2173-4157 Québec Inc. This numbered company received the assets, while Marina Québec was paid in preferred shares redeemable at the option of the issuer, in order to evade payment of a debt of some $800,000 owing to both Revenu Québec and Revenue Canada (3.61 to 3.64).

To summarize, the value of the preferred shares must not be taken into account when the transaction is colourable. Counsel quoted Lord Porter in Craddock v. Zevo Finance Co. Ltd. (4.02(5)) and Lord Fraser in Stanton v. Drayton Commercial Investment Co. (4.02(20)).

He also referred to the decision of Jacket J. of the former Exchequer Court in D'Auteuil Lumber Co. Ltd. (4.02(23)) at page 128 (D.T.C. 6099), under the heading "Proper determination of capital cost”:

As it seems to me, if A conveys Blackacre to B in exchange for a conveyance by B to A of Whiteacre, the cost of Whiteacre to A is the value of Blackacre (being what he gave up to get Whiteacre) and the cost of Blackacre to B is the value of Whiteacre (being what he gave up in order to get Blackacre).

Counsel then referred to the article by D. Keith McNair entitled "The meaning of cost in Canadian Income Tax" (4.02(22)), in which the decision in D'Auteuil Lumber Co. Ltd. was examined, inter alia.

4.04.4 The alternative argument under subsection 245(2)

4.04.4(1) Here we should quote subsections 245(2) and 245(3) of the Act, which are involved in this appeal. They read as follows:

245. (2) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be

(a) included in computing the taxpayer's income for the purpose of Part I,

(b) deemed to be payment to a non-resident person to which Part XIII applies, or

(c) deemed to be a disposition by way of gift.

245. (3) Where it is established that a sale, exchange or other transaction was entered into by persons dealing at arm's length, bona fide and not pursuant to, or as part of, any other transaction and not to effect payment, in whole or in part, of an existing or future obligation, no party thereto shall be regarded, for the purpose of this section, as having conferred a benefit on a party with whom he was so dealing.

Counsel for the respondent noted that the appellant admitted that the respondent could argue subsection 245(2) subject to the respondent then having to assume the burden of proof. That is admitted, since this is an alternative argument. Moreover, the appellant has not to this day raised any argument as to the exception of subsection 245(3) which applies when the parties are dealing at arm's length. However, it is acknowledged that the parties involved in the inventory transfer are related. "[Translation] This is precisely why I did not raise it”, counsel for the appellant then noted.

4.04.4(2) Subsection 245(2), quoted above, states: bona fide ”. . . where a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred. . .”. The respondent's alternative facts are described in paragraphs 6 to 15 of the amended reply to the notice of appeal, quoted in paragraph 2.02 of this judgment.

Paragraphs 20 to 22 of the amended reply to the notice of appeal also summarize the respondent's legal argument, as follows:

[Translation]

20. In the alternative, Robitaille Marine Inc. conferred a benefit of $603,081 on Robitaille Marine (1978) Inc. by transferring property to it in consideration for preferred shares having no market value;

21. In the circumstances, Robitaille Marine Inc. is deemed to have made a payment to Robitaille Marine (1978) Inc. equal to this benefit of $603,081;

22. In accordance with section 245(2) of the Income Tax Act, this deemed payment of $603,081 must be included in computing the income of Robitaille Marine (1978) Inc. for its 1979 taxation year, for the purposes of Part I of the Income Tax Act;

4.04.4(3) Counsel for the respondent referred first to the appellant's argument that no benefit was received by Robitaille (1978) as a result of the inventory transfer. He then dealt with the fact that there was no intention on the part of Robitaille (1978) to obtain a tax benefit.

On the latter point, counsel for the respondent referred to subsection 245(2): ” . . . whether or not there was an intention to avoid or evade taxes under this act, . . .”.

On the appellant's first point, that there was no benefit conferred on the appellant, counsel for the respondent contended that this provision does not deal solely with tax benefits. In support of this argument, he referred to Blais (4.02(28)) in which the payment for the shares was more than the fair market value, to Boardman (4.02(31)) in which a company transferred assets to the former spouse of the taxpayer to comply with a support order, and to Laxton (4.02(32)) in which the value of the interest-free loan to the taxpayer by a joint venture in which he was a partner was included in his income for 1981 ($34,000) and 1982 ($37,000). In the latter two cases, the decisions were appealed to the Federal Court of Appeal.

The Federal Court of Appeal recently allowed the appeal in Laxton in part ([1989] 2 C.T.C. 85, 89 D.T.C. 5327). It held that a joint venture is not a separate entity from its members, for tax purposes. The appellant could therefore not lend himself money without a benefit being deemed to be transferred. Thus in computing his income the appellant was able to deduct from the cost of the loan an amount equal to the product of the value of the loan and the appellant's share in the joint venture.

Counsel contended that a tax impact may be found in Blais, Boardman and Laxton, just as in the case at bar. Inventory having a value of $675,000 was transferred in consideration for shares which were worth nothing and a balance owing of $179,000, thereby conferring a benefit on the recipient of the assets transferred.

4.04.4(4) Counsel for the respondent contended that in order to reduce the impact of the potential benefit resulting from the inventory transfer, the appellant relied on what it called a rule of law taken from the decisions in Osborne v. Steel Barrel Co. Ltd. (4.02(4)), quoted in paragraph 4.03.2(5), and Craddock v. Zevo Finance Co. Ltd. (4.02(5)), quoted in paragraph 4.03.2(4). ” [Translation] The problem we have is that subsection 245(2) looks at the reality of the situation rather than holding to the formal structure of the transaction."

Counsel for the respondent went on to note" [Translation] the legal form or effect of transactions, the formal legal structure of the transaction, is secondary and we must rather consider the reality of the situation". Shares having a market value of nil cannot therefore counterbalance inventory with real value.

Moreover, as counsel for the respondent pointed out, the appellants argument is that in valuing the shares we must consider their value to the owner and not the market value. The value to the owner of the shares issued is therefore $1.

Counsel for the respondent did not admit that the value to the owner of the shares issued was $1, when those shares were of no value to Marine, the Company which received them.

4.04.4(5) He did not admit the appellants position that a special value must be attributed to the shares for a person who no longer holds them. He referred to Fraser (4.02(15)), in which two partners purchased a 32 acre lot for $97,800. Shortly after the acquisition, they sold 4 acres for $50,000. Several months later, they sold the other 28 acres to a newly formed company in which they were the shareholders. The company assumed the $41,550 mortgage and gave 16,345 preferred shares having a par value of $10. The Department of Revenue calculated the sale price to be $205,000 ($41,550 + $163,450 (16,345 x $10)).

Ritchie, J. of the Exchequer Court rejected the Department's argument and held that the value of the preferred shares received by the partners was no more nor less than the market value of the 28 acres at the date of the sale. In view of the expert opinions, the value of the 28 acres was established at $59,163. Taking into account the $41,550 mortgage, the value of the preferred shares came to $17,613.

In order to determine the value of the shares, we must consider the value of the assets sold.

Counsel referred to D. Keith McNair's article "The meaning of cost in Canadian Income Tax" (4.02(22)), which quotes the following at page 121:

Exchanging property for shares may present some problems for tax purposes. The recipient of the shares appears to be required to account for these shares on the basis of their fair market value rather than on the basis of par value or stated value. This proposition is derived from the decision of the House of Lords in Gold Coast Selection Trust. In this case, the taxpayer received par value shares in exchange for mining claims and Viscount Simon stated at page 240 the principles to be followed in these words:

In my view the principle to be applied is the following. In cases such as this, when a trader in the course of his trade receives a new and valuable asset, not being money, as the result of sale or exchange, that asset, for the purpose of computing the annual profits or gains arising or accruing to him from his trade, should be valued as at the end of the accounting period in which it was received, even though it is neither realised nor realisable till later. The fact that it cannot be realised at once may reduce its present value, but that is no reason for treating it, for the purposes of Income Tax, as though it had no value until it could be realised. If the asset takes the form of fully paid shares, the valuation will take into account not only the terms of the agreement but a number of other factors, such as prospective yield, marketability, the general outlook for the type of business of the company which has allotted the shares, the result of a contemporary prospectus offering similar shares for subscription, the capital position of the company, and so forth.

As a result, the trust was required to include in its income the fair market value of the shares received as consideration for the sale of the gold mining concession, rather than the par value of those shares.

Counsel for the respondent therefore concluded that in this case we must consider not the value of the shares to the owner but the fair market value of the inventory.

4.04.4(6) Citing Fraser (4.02(15)), the appellant contended that since the value of the inventory was $600,000, the preferred shares were therefore also worth $600,000.

Counsel for the respondent noted the fact that the partners in Fraser were also holders of common shares. Since there were no debts or other assets, it was easy to understand why the fair value of the land sold was used to determine the fair value of the shares. It is different when there are other shareholders and debts.

Counsel also referred to Cattermole Timber Ltd. (4.02(21)), concluding that the preferred shares must be considered on their own merits when the owners of the preferred shares are not owners of the common shares.

4.04.4(7) Finally, in respect of subsection 245(2) of the Act, counsel for the respondent cited Guthrie (4.02(33)). The facts are summarized as follows:

The appellant was the controlling shareholder in L corporation. In 1966, $185,000 in funds of L corporation were transferred to the Bahamas and used to purchase preferred shares of S corporation, a non-resident corporation beneficially owned by trusts for the children of the appellant. The Minister added this $185,000 to the income of the appellant as a benefit conferred on her directly or indirectly by L corporation. The Minister argued that the alleged investment was not a genuine business transaction in that it was motivated by a desire to remove the assets of L corporation from Canada at a time when it owed substantial amounts in taxes, and that there was no evidence to show that the preferred shares of 5 corporation had any value whatever. The appellant argued that the investment was a legitimate one and that no one in the appellant's family received the $185,000.

Held: The appeal was dismissed. The funds transferred to S corporation constituted a taxable benefit conferred on the appellant. The onus was on the appellant to show that the purchase of preferred shares was a bona fide transaction, and this she failed to do. There was no evidence that the preferred shares of S corporation had any value. In the circumstances, the transfer of funds by a corporation in which the appellant was a shareholder to the trusts for the children constituted a transfer for the advantage of the appellant shareholder and the amount of the transfer was taxable to her.

Counsel noted that while the judgment was decided under former section 8 (now section 15) the concept of benefit which is developed in that judgment in a context similar to the present appeal is of some interest in the case before us. In Guthrie, the assets ($185,000) were transferred to another company in return for the preferred shares being issued. This transfer was made for the benefit of the appellant's children, at a time when the company which transferred its assets owed $61,000 in income tax. The Court decided that the preferred shares received in return had no value.

4.05 Reply by counsel for the appellant

4.05.1 Counsel for the appellant submitted that the emphasis placed by counsel for the respondent on the ownership of the common and preferred shares distorted the discussion, and that the determining factor in terms of valuing the shares is the concept of control. The fact that there is such control will make it possible to redeem the preferred shares.

He argues that the respondent had made the same error as the error corrected by the Supreme Court of Canada in Army and Navy Department Store Ltd. and Army and Navy Department Store (Western) Ltd. (4.02(53)) and in Vineland Quarries and Crushed Stone Ltd. (4.02(54)). In both cases, the issue was whether the companies were associated.

According to counsel for the appellant, the Court held that a shareholder cannot own the assets of his or her company indirectly. However, a person may control a corporation indirectly. Counsel for the appellant then made the following argument:

[Translation]

So in our case, the same distinction must be made, and this is the basis of Mr. Wise's testimony and, I respectfully submit, I will return to this, it was also this concept of control about which Mr. Goodman and the others say that shares have their full value, everybody. It is not on the fact that [SIC] co-ownership, it is on the issue of control, because it is control which makes it possible to redeem the shares and which therefore makes these shares the equivalent of demand notes. (S.N. vol. 2, page 110.)

[Translation]

"The entire reasoning”, he went on, “is based on the ability of the shareholder to have the shares redeemed, whether through direct control or through indirect control. This is what gives them their value”. (S.N. vol. 2, page 111.)

Counsel for the appellant continued as follows:

In our case here, Mr. Robitaille controls Marine and controls the other company, (1978). He controls them both.

So he is still able because Mr. Robitaille’s will is the will of Marine and of (1978). It is the same thing, it is a company controlled by one person. And so, essentially, a corporation, the will of a corporation, is the will of the people who control it.

He is still able, and thus Marine is still able, to have (1978) redeem the shares. Whether or not it does so, that is another matter. Is it. . . does it have the power to do so? And where that power exists, we say: preferred shares, in circumstances like these, are the equivalent of a demand note. (S.N. vol. 2, pages 112-13.)

Counsel for the appellant then referred to a passage from Richard Wise's article, “The Valuation of Preferred Shares Issued on a Section 85 Rollover”, cited above in paragraph 4.04.2(e), which it would be instructive to repeat. This passage reads as follows:

REVENUE CANADA'S POSITION

Before Paragraph 85(1)(e.2)

Prior to the introduction and widespread use of the“ retraction" feature attaching to preferred shares, the major issue concerning the valuation of preferred shares for income tax and estate planning purposes (in the late 1960s and early 1970s) was basically twofold:

1) If the shares were nonvoting and had a noncumulative (often very low) dividend, they might have been valued by the Department at a nominal amount. (91)

Provided that the holder thereof did not have control of the company through his holding of voting common shares.

[Emphasis added.]

In response to the argument that counsel for the respondent based on the condition "Provided . . . through his holding of voting common shares" which is found in this article, allowing him to state that preferred shares could not be valued "at a nominal amount”, counsel for the appellant added:

[Translation]

What I am saying is this: Provided that the holder thereof did not have control of the company through his holding of voting common shares.” OK. The important point in the sentence in question is the issue of control.

. . . Whether it is, whether this control arises from the fact that the person holds both classes of shares . . .

. . . or this control arises from the fact that both classes of shares are held by different persons but controlled by a single person, indirect control, we arrive at the same result, because the reasoning is: the possibility of having the shares redeemed through control and not through joint ownership.

It is true that in a majority of cases, and that is why we mention it here, in a majority of cases control arises from that fact that a single person is the owner of both classes of shares. That is true. In many cases.

But control can also exist without there being any ownership in a single corporation or person. And when control exists directly or indirectly, the principle applies. This is the entire basis of the reasoning. (S.N. vol. 2, pages 115-17.)

Counsel for the appellant again quoted the letter that Wolfe D. Goodman, the lawyer with the firm Goodman and Carr, sent to the editor of The Journal of Business Valuation (cited above in paragraph 4.03.3(4)(c). Counsel made the following comment:

[Translation]

Here again, the concept of control still comes up. This is what makes the difference. Whether it is, whether the shares are held by a single corporation, directly or indirectly, it is the question of ability to compel redemption which makes these shares similar to a demand note.

The Court:

But, you say, whether that control is exercised by the person who holds the preferred shares or by Robitaille, it is the same thing?

André Gauthier, for the appellant:

Whether it is exercised by either one or the other, whether it is direct or indirect control, it amounts to the same thing, because it is the result of this that is important, the possibility of having the shares redeemed through control.

The same thing, the same principle comes up in. . .let's say the report, the testimony of Anson Cartwright in the case West Hill Redevelopment Co. Ltd., page 5391. (S.N. vol. 2, pages 117-118.)

He also quoted it earlier, in paragraph 4.03.3(4)(b). He continued with the following comment:

[Translation]

What is he saying? Because there is control, we were in a position to have the company redeem the shares. That is the important point. If we are in a position, whether directly or indirectly, to have the issuer redeem the shares, at that point the shares are worth their nominal value. And that is the equivalent of a demand note.

The Court:

Par value.

André Gauthier, for the appellant:

Par value.

It is the ability to have it redeemed.

The Court:

By the issuer.

By André Gauthier, for the appellant:

It is I, as a shareholder, directly or indirectly, Mr. Robitaille as a shareholder, directly or indirectly, had the ability, the possibility, as in the case mentioned here, to have the company (1978) redeem the shares.

This may not be true for a creditor, but we are not talking about the value to a creditor here. We are talking about fair market value and as the courts have said, when there are preferred shares of the type we have here and common shares, they are valued together.

It is quite certain that for a creditor who had only preferred shares it is not worth the same thing. That is true. But the basis for the assessment is not the value to a creditor, it is the fair market value.

4.05.2 Counsel for the appellant suggested that counsel for the respondent questioned Mr. Wise's testimony as to the financial ability of Robitaille (1978) to redeem the shares.

According to counsel for the respondent, the inventory was worth only $100,000 and not $675,000 (4.04.2(b)).

Counsel for the respondent explained that the value was only $100,000 to someone who seized the inventory and was going to try to resell it piece by piece. However, for someone who bought the inventory in the context of a going concern and who had the necessary experience to carry on the work that had been started, the inventory had a value of $675,000. Nor was this cost questioned by the Crown.

4.05.3 Counsel for the appellant recalled the respondent's argument that Robitaille (1978) was not able to redeem the preferred shares in 1979 (4.04.2(c)).

Counsel for the appellant referred to the testimony given by the respondent's witness Mr. Martel, who said that in 1979 Robitaille (1978) was in excellent financial condition, thereby confirming the testimony given by Mr. Wise to the effect that the financial position was sufficiently healthy to redeem all the preferred shares. It could therefore have taken out new loans.

Moreover, in the reply to the notice of appeal by Les Placements A. & N. Robitaille Inc. (84-2256 (IT)) (Exhibit 1-13), the respondent asserted that the value of the assets transferred is $1,515,011 (tangible assets of $695,011, composed of inventory of $675,000 + intangible assets (goodwill) of $820,000).

The assessment established in respect of Les Placements A. & N. Robitaille Inc. is based on section 69 of the Act, which provides that a transfer or gift of property to a person who is not at arm's length at a price less than the fair market value is deemed to have been acquired at fair market value. Accordingly, the respondent acknowledges that the assets were worth $1,515,011 since the appellant is being taxed for that amount. The Minister cannot say on the one hand "it is worth $1" and on the other hand “it is worth nothing”.

4.05.4 Counsel for the appellant noted the emphasis placed by counsel for the respondent on the debt owing to Customs. First, this debt is not owed under the Income Tax Act. Counsel asked:

[Translation]

. . . is the Income Tax Act a substitute for collection proceedings under another totally different statute? It isn't even income tax. And strictly speaking this has been muddled: what is the creditor going to do to get paid?

Would the same thing have been said if it had been the banker? Would they have said: the transfer is not valid because the banker won't get paid? But it is the same thing.

Customs and income tax are two totally different statutes, two totally different debts.

When we say to the Crown, OK, listen, under the Customs Act, the customs debt, if you wererï't happy, you could bring a Paulian action to set aside the transaction. But what is the answer? We are told, OK, you know, the government is a big machine, . . . and there will be a one-year delay; we don't have time to change directions. (S.N. vol. 2, pages 141-42.)

4.05.5 Counsel for the appellant noted that Mr. Wise's valuation report was no less credible because he completed it some ten years after the transfer of the inventory to Robitaille (1978). Mr. Gauthier recalled that Mr. Martel, the respondent's valuator, prepared his report eight years after the transfer.

Counsel for the appellant also added that the two valuators met with the same people in order to prepare their respective reports. Moreover, the fact that Mr. Wise prepared his report in 12 hours in no way alters its reliability. Mr. Wise's skill meant that once he had the relevant data this sort of report was normally completed quickly.

4.05.6 Referring to the position of counsel for the respondent with respect to the value to the owner, counsel for the appellant said the opinion of the respondent's counsel differed from that of his valuator, Mr. Martel.

Mr. Laperrière said:

[Translation]

. . . Well, whether it is fair market value or value to the owner, in any event it is zero. That is what he is telling us. Look at what Mr. Martel says at page 12 of his report. He says: “thus, because Robitaille Marine Inc. was part of a controlling group, the value to it of a controlling group, the value to it of the preferred shares might have been close to nominal value". (S.N. vol. 2, page 148.)

After noting that valeur nominal (nominal value) means valeur au pari (par value), counsel for the appellant made the following submissions:

[Translation]

I respectfully submit that on this question Mr. Martel is correct. I respectfully submit that the Crown's problem is that they are saying: fair market value. . . they are talking about fair market value, they are talking about value to the owner, but in reality what they mean is the value to the creditors. They always come back with: OK, but what about the creditor? If this was the basis of the assessment, they should have argued: value to the creditors. But unfortunately, that doesn't work under the Income Tax Act, value to the creditors. They have to use a concept. . . they have a technical concept that means something in the Income Tax Act. But that is the basis, it is this obsession with the creditor. I wonder whether the obsession would have been the same if it had been the Bank of Montreal. (S.N. vol. 2, page 149.)

4.05.7 Counsel for the appellant referred to the decision in Levitt (4.02(39)), cited above by counsel for the respondent in paragraph 4.04.2(f)).

In that case, Mr. Prociuk of the Tax Review Board rejected the Crown's argument which was essentially the same as the appellant's argument. Mr. Prociuk noted, however, that the Crown had not produced any witness or cited any authority. This appeal is completely different, given that expert witnesses were heard.

This is the kind of decision referred to as per incuriam, in which the applicable precedents are not taken into consideration. Citing the late Mr. Justice Pigeon of the Supreme Court of Canada in his booklet Drafting and Interpreting Legislation, counsel for the appellant submitted that this kind of decision cannot make law.

Counsel also referred to National System of Baking of Alberta Ltd. (4.02(36)), cited earlier by counsel for the respondent, at paragraph 4.04.2(f) of this judgment.

According to counsel for the appellant, this case, which related to determination of the value of shares listed on the stock exchange, bears no relation to the case before us or even to the Levitt case.

Counsel for the appellant also dismissed the decision in Beament Estate (4.02(38)) in which the existence of a contract, creating a direct relationship with the shares involved, affected the value of those shares. Counsel for the appellant argues that the debt that Robitaille Marine might owe to Customs can in no way affect the fair market value of the preferred shares of Robitaille (1978).

4.05.8 Referring to the respondent's argument as to the cost of the inventory (4.04.3), which was based on Tuxedo Holding Company Ltd. (4.02(6)) and Craddock v. Zevo Finance Co. Ltd. (4.02(5)) counsel for the appellant reread the quotations from Viscount Simon (page 288) Lord Wright (page 289) and Lord Porter (pages 292-93) quoted by the respondent above at paragraph 4.04.3.1(b). Counsel for the appellant emphasized the fact that anything there may be in the way of“ mere device", colourable”, discounted shares, sham", and so on, must be such in respect of the two companies concerned and not a third party such as Customs (passage from Lord Wright, page 289).

Counsel for the appellant then cited Brewster (4.02(1)) which was in some ways similar to the case at bar. Judgment was rendered by Gibson, J. of the Federal Court-Trial Division. The facts are summarized at page 6047:

The plaintiff taxpayer held a 10 per cent interest in a partnership, carrying on the business of a stockbroker and investment dealer. In February 1969 the taxpayer transferred 9 per cent interest in the partnership to company B which he controlled. In the taxation years 1969, 1970 and 1971 company B received income of $180,620, $91,282 and $54,870, respectively, representing 9 per cent of the partnership's profits. The Minister treated these sums as income of the taxpayer in the respective taxation years contending, among other things, that (a) the taxpayer was at all material times the beneficial owner of the 10 per cent interest in the partnership; (b) the transfer of the 9 per cent interest to company B was invalid and unenforceable; alternatively, (c) company B was a personal corporation and

(d) company B was a sham. The taxpayer appealed. (The facts and contentions in five other actions dealt with in this appeal were similar, but subject to the appropriate changes for each.)

Held: The appeal was allowed. There was nothing in the evidence from which it could possibly be inferred that company B was a sham or puppet of the taxpayer. Company B was a genuine corporation and, therefore, its income was improperly taxed in the hands of the taxpayer.

At pages 125-26 (D.T.C. 6058), Gibson, J. stated:

There is nothing in the evidence from which it could possibly be inferred that either Jalab Securities Ltd. or Brewster Securities Ltd. were "shams", "simulacrums" (or any other pejorative characterization for tax purposes or otherwise); nor were they "puppets" of Labbett or Brewster, in the sense alleged by counsel for the defendant, or in any other sense relevant to the result found in this action. Specifically, it is found as a fact that Brewster Securities Ltd. and Jalab Securities Ltd. were “genuine” corporations (using the word employed by Harris, solicitor for the plaintiff, Brewster) and the respective transactions between them and Brewster and Labbett were also "genuine" in the dictionary meaning.

With respect to the word “sham”, he referred to a New Zealand case, as follows at page 125:

For a view of the misuse of the word sham” see Paintin and Nottingham Ltd. v. Miller Gale and Winter [1971] N.Z.L.R. 164 at page 175:

. . . What is at present being discussed is whether it was a“ sham” or a genuine effective transaction.

Wilson J. held that the transaction was a "sham". There was in my respectful opinion nothing of the nature of a" sham" about it. The word "sham" is well on the

way to becoming a legal shibboleth: on its mere utterance it seems to be expected that contracts will wither like one who encounters the gaze of a basilisk. But by a "sham" is meant in my opinion, no more and no less than an appearance lent by documents or other evidentiary material, concealing the true nature of a transaction and making it seem something other than what it really is. The word "sham" has no applicability to transactions which are intended to take effect and do take effect, between the parties thereto according to their tenor, even though those transactions may have the effect of fraudulently preferring one creditor to others and notwithstanding that they are deliberately planned with this in view. If such is their effect, there are statutes and rules of law designed to thwart the intentions of those who enter into them; but the fact that the law discountenances such transactions as these does not render them "shams".

After quoting this passage, counsel for the appellant made the following comments:

[Translation]

. . . And so, he says: when a transaction is real between two parties, effect must be given to it. He says: even if this transaction was carried out with the fraudulent intention of preferring one creditor to another—he says—even if this is the case, effect must be given to the transaction. He says: if it is alleged that there was an intention to favour one creditor over another, fine, there are statutes, there are laws for that.

So this is what I am submitting to you. If it is alleged that a creditor has been defrauded, fine there is a law for that, the Civil Code. . . 1138 [SIC] of the Civil Code; a Paulian action. That is the solution.

From the moment a transaction is not set aside by the court if it has not been set aside, it is valid, and it has effect between the parties. It was for the Superior Court to set the transaction aside if there were grounds to do so, through a Paulian action.

But from the moment that the Superior Court has not done so, the transaction is valid, it has effect between the parties and the Department of Revenue, which establishes income tax based on the position of the parties, this is what it does, it looks at the transactions as they affect the parties in order to establish the assessment. This is the very essence, the basis of the assessment.

So the Minister cannot come along and say: now I am going to do an assessment on the basis that the contract does not exist. It exists. It is valid between the parties. It has not been set aside by the court. And unless we are in a situation of, for example, a“ sham" or where there has been an attempt to evade payment of income tax or in cases where an attempt has been made to evade payment of income tax and the courts have adopted anti-evasion rules to deal with such situations. But these are the only cases where, in tax matters, the courts can set aside transactions.

But in a case where the transaction was not entered into in any way to save income tax and is valid between the parties, the Department of Revenue, and accordingly the court, must give effect to it. Regardless of the reason why the transaction was entered into. And then Mr. Vézina was very clear on that, his testimony was not contradicted, he said: in order to continue the business, at the request of the bank itself, we had to reorganize.

And then it is clear that they had to reorganize because there was a customs claim of five hundred eighty two thousand bucks ($582,000). There is no point in denying it, it is reality. And then if Customs were not satisfied, as it says here in Brewster, the solution was not the Income Tax Act, it was the Civil Code.

The Crown is basing its argument on a technical point, fair market value, and also on a technical point to say that the rule established in Tuxedo Holdings does not apply but the Crown, in reality is complaining that a creditor has had problems. And so I won't say: the birds have flown the coop. I would say, at some point, that the cat is out of the bag.

When my colleague said: that transaction was far from good for the Government of Canada, it was far from good for the Government of Canada. Well, he is mixing customs and tax. That is what I mean when I say that the cat is out of the bag, that is the real reason. It was far from good for the Government of Canada— Customs.

So I submit to you that this factor should not even enter into consideration when the taxes payable by a taxpayer are being established. It has nothing to do with it. (S.N. vol. 2, pages 177-80).

4.05.9 Counsel for the appellant submits that the transaction is not colourable. Moreover, the precedents cited on this point did not set out the consequences of a transaction being found to be “colourable”. Is the transaction then set aside? Is the value of the shares nil?

In D'Auteuil Lumber Co. Ltd. (4.02(23)), the court tells us that the cost is what is given in return. In the case before us, the cost, as established in Craddock v. Zevo Finance Co. Ltd., (4.02(5)) and Tuxedo Holding Co. Ltd. (4.02(6)), is the right to demand payment. Thus the decision in D'Auteuil Lumber Co. Ltd. supports our position.

The appellant also argues that in its amended reply to the notice of appeal the Crown [Translation] came here, not with an alternative argument, but in reality with an alternative assessment".

Counsel for the respondent tells us that two decisions currently on appeal, in particular, apply: Boardman (4.02(31)) and Laxton (4.02(32)). These cases are quite different from the case before us. The Federal Court of Appeal has rendered its decision in Laxton (see 4.04.4(3)).

The issue in Boardman was the use of funds to pay a personal debt: support payments to the spouse. In Laxton, the issue was an interest-free loan from a joint venture to a partner. It is a partner benefit. Section 15 and subsection 245(2) were argued. Section 245 was also argued in Smythe. The issue was dividend stripping. Tax avoidance was involved, which is not the case here.

4.05.10 As a result of the submissions on the alternative argument and the discussions which followed between the Court and counsel, the situations in which subsection 245(2) may be applied, or on the other hand should not be applied, may be summarized as follows.

4.05.10(1) If the Court concludes that the principle to be taken from Tuxedo Holding and Steel Barrel and Zevo Finance does not apply, and that the fair market value of the shares is nil, the appeal must then be dismissed. The value of the shares issued may be less than the inventory property purchased, which would rebut the appellants argument. The alternative argument cannot be accepted, because the Court would be increasing the taxpayer's taxes, which is contrary to section 171 of the Act.

4.05.10(2) If the Court concludes that the principle to be taken from Tuxedo Holding and the British cases applies and that the fair market value of each share amounts to $1, the appeal will then be allowed and the alternative argument should not be taken into consideration. There has then been no benefit conferred under subsection 245(2) of the Act.

4.05.10(3) If the Court concludes that the principle in Tuxedo Holding and the English cases does not apply but that the fair market value of each preferred share is $1, the appeal must then be allowed and the alternative argument should not be considered because no benefit was conferred. The question of whether a benefit was conferred under subsection 245(2) of the Act is raised by the issue of whether or not there was a fair market value.

4.05.10(4) If the Court concludes that the principle in Tuxedo Holding and the British cases applies but that the fair market value of each share is nil, the appeal should be allowed insofar as the alternative argument does not apply. The burden of proof of this alternative argument rests on the shoulders of the respondent for the reasons given in Grohne in 1989 (4.02(55)), inter alia.

4.05.11 Still on the question of subsection 245(2) counsel for the appellant stated:

[Translation]

And, supposing that that is your reason for judgment, at that point you must look at the alternative argument on 245(2) and this also requires that you, first, determine whether 245(2) can apply in the circumstances and, second, determine whether it is market value or value to the owner and whether there is a benefit. . . (S.N. vol. 2, page 198.)

4.05.11(1) Counsel for the appellant also argues that subsection 245(2) allows a transaction to be“ "set aside”, that is, to be treated as if there had been no sale.

One cannot both base an assessment on a transaction entered into and in the alternative argue subsection 245(2) in order to set aside the transaction. On this point, counsel for the appellant stated:

[Translation]

. . . what Parliament is saying is that if there is a tax evasion situation, whether or not there was mens rea, there is tax evasion, and so 245(2) may apply.

And I say to you: in the case before us, there is no tax evasion situation, there is no scheme to save tax. I would even say: in the spirit of the Act, the result of this assessment, is artificially to pay the tax payable because, at bottom, they are disallowing a deduction for an amount that was really paid: six hundred seventy five thousand bucks ($675,000). There is no scheme to evade tax in this, and accordingly there is no tax evasion. And that is what there has to be for 245(2) to apply, for there to be evasion, regardless of whether or not I have the mens rea.

And so I submit that in the circumstances, 245(2) does not apply at all, and that if you conclude that 245(2) may apply, well, I submit that there was no benefit conferred. And finally, the application of 245(2) is based on the concept of fair market value. If you conclude that the preferred shares were worth $1 per share, as Mr. Wise told us, well then I submit that the alternative argument also falls. (S.N. vol. 2, pages 201-202.)

4.06 Final reply by counsel for the respondent

4.06.1 In response to the statement by counsel for the appellant to the effect that there was no benefit conferred, counsel for the respondent alleged that the transfer of the assets from the first company to the second for no consideration was" [Translation] a very serious indication of a benefit" of a tax nature. “Briefly, it is a deduction for a purchase that was paid for. First, it is submitted that it was not paid for, but if it was paid for, it was with money on paper only." In the words of counsel for the respondent, the new company, Robitaille (1978), which became the appellant, was therefore not entitled to claim the deduction for the purchase price of $603,000 in computing its income. (S.N. vol. 2, pages 203-204.)

4.07 Supplementary argument

Following the argument submitted by counsel on October 27 and 28, 988, the Court became aware of two decisions rendered by this Court in early 1989: Barbara Rodgers and 493800 Ontario Ltd. v. M.N.R. [1989] 1 C.T.C. 2181, 89 D.T.C. 78 and Union Carbide Canada Ltd. v. M.N.R. [1989] 1 C.T.C. 2356, 89 D.T.C. 236. These decisions were sent to counsel to obtain their comments. These two cases may be summarized as follows:

4.07.1 Rodgers and the numbered company 493800 Ontario Ltd.

On November 19, 1982, Arthur Rodgers deposited a sum of $195,000 in the bank account of his wife Barbara. The following November 22, Arthur Rodgers used these funds to acquire 1,950 preferred shares of the appellant company for himself. These non-voting and non-redeemable shares had a par value of $100 each. Mrs. Rodgers owned all the common shares of the appellant corporation. The Minister assessed both Mrs. Rodgers and the company as transferees under section 160(2) of the Act, making them liable for arrears of more than $400,000 in tax owed by Arthur Rodgers to the Department. The Department asserted that the preferred shares received in return had no market value. The case was appealed to this Court.

Barbara Rodgers argued that she had no favourable interest in the funds and that during the relevant period the favourable interest was in the hands of the appellant company. The company argued that at the time of the transaction the market value of the preferred shares was equal to the amount paid, $195,000. Moreover, the Minister admitted that the two appellants could not both be liable for the tax since both assessments were effectively based on the same amount.

The Court dismissed the appeal by the appellant company. The company had not established that it had the necessary assets to support the fair market value of the shares. Moreover, the fact that the shares were non-redeemable seriously affected their marketability.

Finally, as a result of Arthur Rodgers's bankruptcy, both he and the trustee in bankruptcy considered the said shares as having no market value. The appeal by the company was dismissed and, accordingly, Mrs. Rodgers' appeal was allowed.

4.07.2 Union Carbide of Canada Ltd.

In 1974, the appellant, together with Polysar Ltd. and Dupont of Canada Ltd., formed a joint venture to construct, own and operate a petrochemical products plant near Sarnia, Ontario. For this purpose, Pétrosar was incorporated, and $50 million in shares were issued. Union Carbide held 20 per cent of the capital stock. While the original construction estimate was for 371 million, costs in 1977 amounted to 700 million. It became necessary to refinance.

On December 31, 1977, before the refinancing, the appellant held 20 per cent of Pétrosar's bonds and 20 per cent of its common shares. In January 1978, following a series of refinancing agreements, the appellant exchanged its Pétrosar bonds for a group of Class C preferred shares (non-voting and non- redeemable before 1990) with a fair market value fixed by resolution of its directors at an amount equal to the amount of the bonds exchanged, with the addition of accrued interest amounting to $3,090,900. This amount was included in the appellant's 1978 income by the respondent.

The appellant argued before the Court that no interest should be included in income for the 1978 fiscal year because the preferred shares received from Pétrosar for the interest had no value. According to the appellant, it was unlikely that those shares could be redeemed or would generate dividends in the foreseeable future.

Moreover, according to an investment expert, Pétrosar's problems (such as ever-mounting costs and the difficult market for selling the products) meant that these shares were virtually worthless to third parties.

However, the Court dismissed the appeal, holding that the appellant had been unable to prove that the preferred shares had no value. A significant portion of the evidence in fact tended to prove the opposite. The directors of Pétrosar had passed a special resolution fixing the value of the shares in accordance with section 44 of the Ontario Business Corporations Act. This section prohibited the issuance of shares except for valuable consideration. Moreover, a legal opinion given during that period and confirmed by Pétrosar's financial statements showed that the class C preferred shares had a value equivalent to the bonds exchanged and the accrued interest of $3,090,900.

4.07.3 In valuing the preferred shares at the time of their purchase in November 1982 in Rodgers, Taylor, J. relied on an approach that was” retrospective” to the date of Mr. Rodgers's bankruptcy in October 1984. The appellant company did not have enough assets in 1982 to support the value of the shares. Moreover, following Mr. Rodgers's bankruptcy, the trustee could only notice that the shares in question could not be resaleable on the open market. These non- redeemable shares therefore could not interest any serious purchaser.

In the case at bar, counsel for the respondent argues that the "retrospective" approach taken by Taylor, J. in Rodgers may be applied in Marina Québec.

Counsel for the appellant added, inter alia, that in the case at bar the preferred shares have been determined to have been redeemable at the time they were issued in March 1978. Moreover, both experts were of the same opinion; that the financial situation of Robitaille (1978) was even better in January 1979.

4.07.4 In Union Carbide, because of the particular circumstances of the case, the Department took a position opposite to what it is arguing in Marina Québec. Nonetheless, there are certain similarities with this case: the nonvoting preferred shares were redeemable at the option of the issuer, Pétrosar. Pétrosar would not redeem the C shares unless the B shares had been redeemed, working capital was maintained at $10,000,000 plus an equal amount to redeem the A shares within 12 months and financial criteria were met.

Moreover, Union Carbide had only 20 per cent of the voting shares of Pétrosar. This led counsel for the appellant in the present case to make the following observations, at paragraph 23 of his comments:

[Translation]

23. We respectfully submit to this Court that given that the Court reached such a conclusion in Union Carbide Canada Ltd., a fortiori, this Court should therefore conclude that the shares have their full value in the case before us, considering:

(a) that the issuing company and the holder of the shares are controlled by the same person or group of persons;

(b) that the issuing company is in a position to pay dividends and redeem the preferred shares.

Considering that the respondent has essentially taxed the same amount twice, in the hands of both Robitaille Marine Inc. and Robitaille Marine (78) Inc., and considering the decision of this Court in Union Carbide Canada Ltd., we submit that the following comments by Mr. Justice Pigeon of the Supreme Court of Canada in Freud v. M.N.R., [1968] C.T.C. 438, 22 D.T.C. 5279 should be considered at page 440-41:

They are not subjected to discriminatory fiscal treatment by being taxed if successful but denied deduction if unsuccessful.

Such being the principles to be applied in cases when a profit is obtained, the same rules must be followed when a loss is suffered. Fairness to the taxpayers requires us to be very careful to avoid allowing profits to be taxed as income but losses to be treated as on account of capital and therefore not deductible from income when the situation is essentially the same.

4.08 Decision

4.08.1 The fundamental point is the determination of the value of the preferred shares issued by the appellant in consideration for the inventory transferred to Robitaille (1978).

Considering that the parties have on numerous occasions raised several points which are not directly related to the solution in issue; considering as well that they influenced the actions of the parties both before and during the trial; it seems to me to be necessary to deal with them briefly.

(1) Were there inconsistent assessments and as a result double taxation?

(2) Was it necessary to bring a Paulian action?

(3) Is there a debt owing to Customs?

(4) What is the value of the inventory property transferred on March 1, 1978 to Robitaille (1978)?

4.08.1(1) Were there inconsistent assessments? Double taxation?

During both testimony and argument, the appellant argued that the notices of reassessment issued to both the appellant on December 23, 1983 and Les Placements A. & N. Robitaille Inc. on January 31, 1984 were inconsistent and amounted to double taxation.

In the case of the appellant, the problem amounts to whether the inventory property acquired from Marine Robitaille Inc. on June 26, 1978, effective retroactively to March 1, 1978, was really paid for. The provisions of the Act involved here are sections 9 and 245(2). The appellant argues that the preferred shares paid for had a value equal to the inventory property transferred. The respondent then argues that the shares were worth zero. The amount in issue is $603,081.

In the case of Les Placements A. 8: N. Robitaille Inc., the issue is whether there was goodwill of $820,000 when the property of Marine Robitaille (which became Les Placements A. 8: N. Robitaille Inc.) was transferred to Robitaille (1978). The provisions of the Act involved here are 14(1), 14(2), 14(5) and 69(1)(b) and transitional rule 21(1)(a).

The circumstances which would have motivated this reassessment were explained by Mr. Vézina. Compensation of two to three million dollars had been granted by the ministère des Transports du Québec in 1982 when the land belonging to Robitaille (1978) at the mouth of the Beauport River was expropriated for the construction of the Boulevard des Grevs (highway 40) (3.21, 3.28 and 3.29). Thus this new injection of funds was, in the eyes of the directors of Robitaille (1978), only a pretext for an attempt by the Department of National Revenue to recover the Customs and Excise taxes which it had never abandoned.

The consequence of applying the provisions cited above was that the respondent included $287,000 in the income of Les Placements A. 8: N. Robitaille Inc., creating an income tax claim of $118,000. According to Mr. Vézina, that resulted in the bankruptcy of Les Placements A. 8: N. Robitaille Inc., which has since become the numbered company 1204-8567 Québec. Revenue Canada, Customs and Excise submitted no account in the bankruptcy (3.22, 3.41 and 3.44).

From all appearances, the appellant took a somewhat aggressive posture because of this notice of reassessment for 1978. An appeal bearing No. 84-2256(IT) was filed with this Court (Exhibits 1-12 (notice of appeal) and 1-13 (reply to notice of appeal)).

In any event, whether or not the notice of reassessment issued to Les Placements A. & N. Robitaille Inc. was based on the existence of this goodwill, the Court concludes that this reassessment cannot be considered to be inconsistent with the earlier notice issued to the appellant, and accordingly that there is no double taxation. This income was of a different nature from the income relating to the inventory, which is taxed under different provisions of the Act.

4.08.1(2) Should the respondent have brought a Paulian action?

In response to the criticism of the respondent that the assets of Marine Robitaille Inc. were transferred to Robitaille (1978) fraudulently, the appellant replied that the respondent only had to bring a Paulian action.

A Paulian action or action to revoke as provided in Article 1032 of the Civil Code of the Province of Quebec is a personal remedy provided by law to set aside a Contract which has been fraudulently made by a debtor to the prejudice of its creditors, such prejudice consisting in the insolvency of the debtor. The limitation period for this remedy is one year (Art. 1040 C.C.) from the date of the allegedly fraudulent contract. The appellant's argument is that no fraud can be shown: the continuation of the business following the seizure carried out in April 1977, the release of the assets seized after the payment of $100,000 in June of the same year and the decision to form the new company Robitaille (1978) and to transfer its assets to it took place in full sight and with full knowledge of everyone. This decision was made at the beginning of 1978 after charges were laid against Mr. and Mrs. Robitaille in December 1977 and the Bank of Montreal decided to terminate all credit unless the business started over under a new company name.

Moreover, according to Mr. Vézina, the good faith of the appellant and its directors was never questioned. Only after the land was expropriated, providing the appellant with a payment of two to three million dollars, was a reassessment issued to the appellant on December 23, 1983 (3.26).

Moreover, the government's administrative delay was the obstacle to bringing a Paulian action within the limitation period provided by the Civil Code. Thus, while no one can be compelled to bring judicial proceedings, this Court nonetheless considers that a Paulian action was undeniably the most effective remedy for covering the respondent's arguments. However, the respondent's negligence meant that the limitation period for that remedy passed.

4.08.1(3) Is there a debt to Customs and Excise?

4.08.1(3)(a) Everything started with the seizure of the inventory of Robitaille Marine Inc. by Customs and Excise. A presumed debt of some $475,000 was apparently the cause of the seizure. In April 1978, this debt amounted to $582,470, including interest and penalties. The existence of this debt (3.03 and 3.04) was the motivation for the criminal charges laid in December 1977 against Mr. and Mrs. Robitaille as principal shareholders of the appellant. This seizure is the main cause of the business's financial difficulties: following the seizure, suppliers demanded that they be paid cash and the bank refused any more credit unless a new company was formed (3.07, 3.10 and 3.20).

The formation of Robitaille (1978) and the transfer of the appellant's assets to the new company prompted the issuance of the notice of reassessment which is the subject matter of this case.

4.08.1 (3) (b) What is the basis of the argument by the shareholders of Robitaille Marine and its counsel that there is no basis for the assessment?

According to these shareholders, Robitaille Marine was exempt from paying customs duties, given the nature of the merchandise purchased in the United States. However, the administrative procedure then in effect meant that Robitaille Marine had to pay the duty and claim a refund afterward. It seems that this is what was determined at the preliminary inquiry which was held into the three criminal charges laid in December 1977 against Mr. and Mrs. Robitaille, including, inter alia, the charge of defrauding the government of Canada of $425,000. In 1981, at the end of the preliminary inquiry, the Crown attorney withdrew the charge concerning the $425,000 fraud and falsifying documents. The accused pleaded guilty to the third charge, forging forms. This was the scheme used by Robitaille Marine. It is also significant that the penalties, which amounted to $133,043.75 in 1981, have been abandoned (3.05, 3.58 and 3.59).

4.08.1 (3) (c) What evidence is there that the debt actually existed?

Despite the fact that this Court does not have jurisdiction over the issue of the existence of the debt, because of its importance to the manner in which the case proceeded we shall rule on this issue on the evidence before us.

Exhibit 1-4 (3.15), which is composed of, inter alia, seven pages of documents issued by Customs and Excise, gives an overall description of the boats and other parts seized, their value (real, declared, and so on) and the duty and taxes underpaid:

The comments by the Crown's three witnesses, Jean-Guy Archambault, who presided over the investigation which led to the seizure of April 5,1977 (3.54 and 3.55), Jean Bérubé, section chief at Customs and Excise (3.56 to 3.61), and André Tremblay, senior collections officer at Revenue Canada (3.62 to 3.65), did not, in the opinion of this Court, provide any basis for rejecting Mr. Vézina's testimony as to the appellant's exemption from duty and taxes for its purchases of materials in the United States. The balance of evidence seems therefore to favour the appellant's position.

4.08.1(4) The value of the assets transferred in March 1978

The problem, as stated by counsel for the respondent during the hearing, may be stated as follows. The appellant argues, first, that the inventory was not worth more than $100,000 when that amount was paid to Customs for its release. However, the appellant then transferred that same inventory to Robitaille (1978) for $675,000.

I believe that Mr. Vézina explained this point very well during his testimony (S.N. of 11/10/88 pm, pages 103-108). The value of $675,000 is the cost of the assets, which could retain this value only in the context of a going concern. However, when the inventory was seized and the business's activities ceased, its forced liquidation value did not exceed $100,000. The Customs representatives understood this and agreed to this amount. But once the seized inventory had been released and the new company, Robitaille (1978), was formed, this inventory transferred to the new company was worth $675,000, in my view.

4.08.2(1) Can we consider that the value of the preferred shares issued is equal to their nominal value?

The first segment of our analysis will consist in showing that the valuation principle set out in Steel Barrel Co. Ltd., Zevo Finance and Tuxedo Holding should be applied. A thorough examination of the circumstances surrounding the transfer of Marine's inventory property does not, in the opinion of this Court, lead us to characterize the transaction as either "colourable" or fraudulent. Accordingly, the cost of the inventory acquired in consideration for the preferred shares issued as fully paid must be equal to or greater than the par value of those shares.

4.08.2(1)(a) Should the valuation principle set out in Steel Barrel Co. Ltd., Zevo Finance and Tuxedo Holding be applied?

First, this Court takes into consideration the respondent's admission that the general principle set out in the British cases cited above should be applied (4.04.3.1). Moreover, although this question was not discussed, this Court does not hesitate to state that the nature of the shares, whether they be common or preferred shares, in no way affects the application of the valuation principle which derives from these decisions. The approach taken by Lord Greene in Steel Barrel Co. Ltd., on the basis of which he formulated the principle which was then followed in Zevo Finance and Tuxedo Holding, is in no way based on the nature of the shares to be valued (at pages 306-307):

The primary liability of an allottee of shares is to pay for them in cash: but when shares are allotted credited as fully paid, this primary liability is satisfied by a consideration other than cash passing from the allottee. A company, therefore, when in pursuance of such a transaction it agrees to credit the shares as fully paid, is giving up what it would otherwise have had, namely, the right to call on the allottee for payment of the par value in cash. A company cannot issue £1,000 nominal worth of shares for stock of the market value of £500, since shares cannot be issued at a discount. Accordingly, when fully paid shares are properly issued for a consideration other than cash, the consideration moving from the company must be at the least equal in value to the par value of the shares and must be based on an honest estimate by the directors of the value of the assets acquired.

[Emphasis added.]

In fact, the cornerstone of Lord Greene's reasoning is the relationship between payment for the shares and the issuance of these shares. In short, the full value (nominal value) of any share, of whatever nature, must be paid in order for it to be considered to have been lawfully issued. Violation of this principle would amount to issuing shares at a discount. This position is expressly rejected in the case law. A passage from Lord Greene's reasons at page 277 of Zevo Finance confirms this:

But the argument of the Solicitor General is open to a fatal criticism of a different character altogether. /t is founded on, or necessarily leads to the proposition that the shares were issued at a discount. This seems to me an impossible contention.

[Emphasis added.]

Thus the nature of the shares in no way changes the fact that they have a nominal value and that the consideration given for these shares must be at least equal to the price of the shares.

Since the facts of this case are similar to those in the three decisions cited above, the value of the preferred shares issued during the 1979 taxation year of Robitaille (1978) will be equal to the real value of the inventory property acquired The value of that inventory property is not disputed, and was established at $603,081 (2.02k). However, this Court cannot apply this principle if the analysis of the facts which led to the reorganization of the business results in a determination that the transaction was colourable or fraudulent.

4.08.2(1)(b) Was the transfer of the inventory in consideration for the preferred shares issued as fully paid a colourable or fraudulent transaction?

In Craddock v. Zevo Finance the issue of an exception to the principle derived from Steel Barrel Co. Ltd. arose: in determining the price paid by the recipient of the inventory transferred, an exception may be made to the general principle when the transaction is considered to be fraudulent or colourable given the circumstances in which the transfer took place.

A careful reading of the comments of the judges involved in that case provides us with three tests to be used in determining the validity of the transaction, and accordingly in determining whether the principle taken from Steel Barrel Co. Ltd. applies.

Before undertaking this analysis, it is necessary to establish that the assessment of the transaction as colourable or fraudulent, as stated by Lord Porter at page 293 of Zevo Finance, is solely a question of fact. Moreover, the facts which led to the transaction will have particular weight.

1. Is the transaction which we are examining here common or at least used on occasion in the context of business financing and capitalization procedures?

The first test is taken from the comments of Lord Greene at pages 275 and 276 of Zevo Finance, where he stated:

It is to be observed at the outset that there is nothing whatever unusual about the scheme of reconstruction thus carried into effect. It was the obvious way of bringing about the desired result of segregating the sounder investments from those which were more speculative and placing the former in the hands of a holding company and the latter in the hands of a trading company, which could sell and buy when favourable opportunities offered. There is no question of any impropriety from any point of view; nor is it suggested that it was in any way colourable or a device to circumvent the Revenue, or anybody else.

This Court is of the opinion that issuing preferred shares in consideration for the acquisition of assets is a method of financing which is not at all unusual in the context of associated private corporations. It is entirely relevant to observe that the privileges which normally attach to common shares lose some of their meaning in cases where two companies are associated by virtue of there being a joint control over them. The fact that Mr. Robitaille controlled Marine and Robitaille (1978) made the question of whether Marine would receive dividends of little importance, since Mr. Robitaille's position as sole shareholder meant that any unpaid money still ultimately stayed in his hands. Moreover, while Marine could not force redemption of the shares, Mr. Robitaille could at any time, through his control over Robitaille (1978), arrange for the preferred shares previously issued to be redeemed. Finally, the fact that the preferred shares are non-voting will again have little impact, given that Mr. Robitaille has a majority of the voting snares of Robitaille (1978). In short, this Court accepts the position of Mr. Wise, that given the control exercised by Mr. Robitaille over both corporations (Marine and Robitaille (1978)), the issuance of the preferred shares in this case was an entirely normal form of capitalization which provided a degree of flexibility in terms of the business's operations.

2. Can it be argued that the transaction was clearly intended to evade payment of tax?

This second test is clearly set out in this passage from Lord Porter's reasons, found at page 292 of Zevo Finance:

Later, when setting out the respondents’ arguments, the Commissioners say that it was not suggested that the transaction was colourable or fraudulent. Fraudulent it obviously was not: the arrangement as to the capital to be issued was made so as to keep the shareholding as it had been previously, and consequently treats the shares as of the value at which they were bought. /t was not found to have been done to cheat the Revenue, the creditors or the shareholders.

[Emphasis added.]

Considering the facts which made necessary the creation of Robitaille (1978), this Court can only answer this question in the negative. We must recall that a charge of tax fraud against Mr. and Mrs. Robitaille, which was determined some years later to be unfounded (3.05), was at the source of the transfer of the inventory property from Marine to Robitaille (1978) In short, the $425,000 customs and excise tax assessment issued to Marine (3.03), which led to the general seizure of its assets, was the source of the case before us. Relying, inter alia, on the examination and cross-examination of Paul Vézina (3.10, 3.18 and 3.21) this Court considers that the creation of Robitaille (1978) and the transfer of inventory to that company is a much better reflection of a need to meet practical requirements than of an obvious intent on the part of Marine to defraud the Department of National Revenue. The transfer of the inventory to Robitaille (1978) was the only solution to ensure that the business would continue. In fact, failure to perform these operations would inevitably have led to the bankruptcy of Marine. This Court is therefore of the opinion that the formation of a new company and the subsequent transfer of the inventory property to the new company was a "business decision”.

Moreover, while the respondent's argument that such a transaction makes it possible to drain the business of all of its assets, to the detriment of its creditors, appears seductive at first glance, this Court, however, considers that this proposition in fact rests on fragile footing: who were Marine's creditors at the time the inventory was transferred to Robitaille (1978)? It seems to be acknowledged that Customs and Excise was Marine's sole potential creditor on March 1, 1978. The new company, Robitaille (1978), assumed all Marine's operating debts under the contract of sale of the assets dated June 26, 1978 (3.07). Considering that the tax fraud charges laid against Mr. Robitaille and Marine in 1977 were withdrawn in 1981 after a long preliminary inquiry (3.05); considering that on the balance of evidence there was no debt owing to Customs and Excise (4.08.1(3)); finally, considering that the notice of assessment underlying these proceedings was issued on December 23, 1983, two years after the tax fraud charges were withdrawn, can we give the argument referred to above all the weight which counsel for the respondent would want us to give it? Who were the creditors who were "breaking their teeth” on "the empty shell" that Marine had become as a result of transferring its inventory? This flaw in the heart of the respondent's argument leads this Court to believe overwhelmingly in the good faith of the appellant at the time the transaction of March 1, 1978 took place.

3. Can it be argued that the real value of the preferred shares is in no way comparable to the value of the inventory transferred?

This third test is closely related to the concept of the colourable transaction, and once again is set out in the comments of Lord Porter at page 292 of Zevo Finance:

In the Wragg Ltd., [1897] 1 Ch. 796, the word "colourable" is used both in the headnote and in the judgments to mean a fancy price having no relationship to the real value.

The same meaning is applied to it by Lord Watson in Ooreaum Gold Mining Company of India v. Roger, [1892] A.C. 125, at page 137. In Chapman's case, [1895] 1 Ch. 771, at page 775, Vaughan Williams, J. (as he then was), uses the expression “illusory”; and in the argument before your Lordships “ fictitious” and "conventional" were added as epithets of the transaction.

[Emphasis added.]

This Court is also of the opinion that we must reject such an assertion. While this position is elaborated later, the fact that Mr. Robitaille controlled Marine and Robitaille (1978) would, in view of the solid financial situation of Robitaille (1978) during its 1979 fiscal year, ultimately have made it possible to redeem the preferred shares at their nominal value. By valuing the preferred shares in this way, we reach a fair market value of $1 per share, and accordingly we reject the argument that the real value of these shares is in no way comparable to their issue value, that is, their par value.

Accordingly, the approach which this Court has taken, in determining the validity of the transaction as well as the applicability of the valuation principle set out in the British cases cited above, does not lead us to consider the inventory transfer carried out in 1978 as a fraudulent or colourable transaction.

This Court also believes that the testimony of André Tremblay, senior collections officer with Revenue Canada (S.N. of 13/10/88, pages 18-22) had only slight impact on the assessment of the transaction of March 1, 1978. The facts which must be considered for the purposes of our analysis are those which preceded the occurrence of the impugned transaction (3.03, 3.05, 3.06, 3.07 and 3.10). In fact, while the second inventory transfer carried out in 1985 in consideration for preferred shares (3.13 and 3.14) as well as Mr. Robitaille's manoeuvring, presumably designed to prevent any possibility of the Department of National Revenue realizing on the security offered earlier (S.N. of 13/10/88, pages 37-40 and 42-44), may prompt to make certain analogies which would enable us to determine the nature of the impugned transaction with greater certainty, this Court nonetheless believes that the probative value of such inductive processes is hardly more meaningful than a simple presumption in support of the respondent's position.

In short, while far from absolving Mr. Robitaille of all blame, this Court nonetheless believes that these events which occurred after March 1, 1978 cannot be used to determine the nature of the transfer which occurred on that date. Moreover, the second inventory transfer, in 1985, as well as the schemes described in Mr. Tremblay's testimony, appear to this Court to be a simple reaction to the fiscal harassment to which Mr. Robitaille said he had been subjected for more than seven years, even when more than 90 per cent of Revenue Canada's supposed claim was disputed.

4.08.2(2) Is the fair market value of each share nil or equal to $1?

First, drawing upon the work of lan R. Campbell, I am going to set out the basic principle which is recognized in valuing preferred shares. This principle establishes, first, that if the company is capable of redeeming the shares, their value is equal to the par value, and second, that the value to the owner is at least equal to the fair market value (4.08.2(2)(a)). Second, I shall set out my understanding of control as it applies to preferred shares (4.08.2(2)(b)). Finally, I shall examine the financial ability of Robitaille (1978) to redeem the preferred shares (4.08.2(2)(c)).

4.08.2(2)(a) The basis of the valuation of the shares in question cannot be what is used on the open market: non-cumulative dividend preferred shares redeemable at the option of the issuer cannot find a taker on that market. They are of no interest to an investor unless they are issued in the context of a business reorganization in which a holder of the various classes of shares may be seen to have direct or indirect control. Moreover, the appellant does not dispute this fact (3.41).

The fair market value of the shares must be determined by using the concept of the value to the owner and by applying the principle that that value is at least equal to the fair market value.

After noting certain difficulties that arise in valuing minority shares of a subsidiary company held by the principal shareholder of the parent company, lan R. Campbell (4.02(59)) states, at pages 152-53:

A similar problem arises when one must determine the fair market value of redeemable shares owned by the person who can dictate their redemption by virtue of his ownership of shares of a different class. It has been argued that to consider such shares to have a fair market value equal to their redemption price is to apply a value to owner concept which has little, if anything, to do with fair market value. /f the company is able to redeem the shares or purchase them for cancellation without prejudicing its financial position, the person in a position to dictate redemption would not be a willing vendor of those shares at anything less than their redemption price. It might be argued that if the shares were sold at less than their redemption price, the fair market value of the other outstanding shares would be enhanced by the exact amount of the discount on redemption. Even if this were true, where one individual did not own all the outstanding shares of each other class, the value of his aggregate holdings would be diluted if he chose to sell the preferred shares at less than their redemption price. Accordingly, as an informed, prudent vendor he would not pursue this course and, it therefore seems reasonable to conclude that where a person can dictate the redemption of preferred shares the notional fair market value of those shares is equal to their redemption price, even where the ability to dictate redemption arises by virtue of ownership of a different class of shares. To reach this conclusion one must agree that the concepts of "value to the owner" and “fair market value” in such cases mean the same thing (22) since, unless an adequate dividend is paid, it is most unlikely that redeemable shares which did not by themselves enable the holder to dictate redemption could be sold in the open market at their par value.

[Emphasis added.]

In support of the last opinion stated, the author cites the following authorities, at footnote 22:

See, for example, A. V. Adamson, The Valuation of Company Shares and Business (Law Book Co. of Australasia Pty. Ltd., 3rd Edition, 1961; at page 29 where Abrahams v. Federal Commissioner of Taxation (1945), 70 C.L.R. 23 and Kent and Martin v. Federal Commissioner of Taxation (not reported) are cited as adopting the principle of "value to the owner". See also D. A. Ward, Fair Market Value and the Income Tax Act”, The Journal of Valuation, The Canadian Association of Business Valuators, November 1974, at page 19. See in particular the reference therein (at page 25) to Cattanach v. Water Conservation and Irrigation Commission (1963), N.S. W.R. 304, where it was suggested that"fair market value” does not mean anything different from "value to the owner".

4.08.2(2)(b) The respondent raised the point that Marine owned only preferred shares of Robitaille (1978) and not common shares as well, and that accordingly the position taken by the appellant and summarized by lan R. Campbell does not apply to this case (4.04.2(d)(1)). The appellant does not control it, according to the respondent, "through [its] shareholdings", to use Mr. Goodman's expression (4.02(43)).

Mr. Wise himself, in his article published in the Canadian Tax Journal (3.35.3), referred to control" th rough his holding of voting shares". In fact, Mr. Wise clearly explained his position, in paragraphs 3.35.2, 3.35.3 and 3.35.4. In support of his client's position with respect to control, counsel for the appellant spoke at length in his oral argument (4.03.3(3), 4.03.3(4)(a), (b), (c), (d), (e) and (f), 4.03.4), citing Canadian and American authors and case law.

Counsel for the respondent replied (4.04(2)(d), 4.04(2)(d)(1), 4.04(2)(d)(2), 4.04.2(d)(3), 4.04.2(e), 4.04.2(f), 4.04.2(g), 4.04.2(h) and 4.04.2(i)). Counsel for the appellant pursued this in his response (4.05.1).

Considering the principle that control which makes it possible ultimately to redeem the preferred shares is the primary element in valuing such shares. I believe that the value of these preferred shares is equal to their redemption value, where the person who may decide, directly or indirectly, to redeem the preferred shares is the same person who controls the common shares. It is clear that this approach cannot apply unless the company is solvent.

I could not find the above principle in the Canadian cases, or in the American cases Ahmanson Foundation v. U.S. (4.02(16)) and Curry Estate v. U.S. (4.02(17)) or the English case Ceylon v. Mackie (4.02(42)). In those cases, the deceased owned both the preferred shares and the common shares (American cases) or both of two distinct classes of voting shares (English case). However, I am of the view that in these cases, as in the case at bar, the fundamental issue is still control such as to permit the shares in issue to be redeemed. Whether such control is direct, that is, it arises from the fact that the owner of one class of shares is also the owner of the second class of shares, or is indirect, that is, it arises from the fact that another person who owns a class or classes of shares other than those in issue can decide to redeem, the basic principle is the same: control makes it possible to redeem the shares.

4.08.2(2)(c) It must be recalled that the existence of non-voting preferred shares, with non-cumulative dividends, redeemable at the option of the issuer, can only be imagined in the context of a business reorganization or refinancing.

According to Mr. Wise, when a business is capitalized by issuing preferred shares with non-cumulative dividends, [Translation] ”. . .it is not the intention shares to provide flexibility. It is not the intention to pay dividends. It is a normal instruction” (i.e., a normal policy). (S.N. of 12/10/88 pm, page 30)

The former chief valuator at Revenue Canada, D. Allan Jones, quoted earlier by counsel for the respondent (4.04(2)(k)), stated: “The uses of preference shares as financing vehicles in the Estate Freezes, in Section 85 rollovers, and so forth, are well established.”

Using the pro forma balance sheets, Exhibits A-10 and A-11 (3.36.1), Mr. Wise attempted to demonstrate that Robitaille (1978) had the ability to redeem the shares, according to the principles set out above (4.08.2(2)(a)) by lan R. Campbell.

However, it seems that when we talk about redeeming shares we must make an important distinction between the opening balance sheet of March 1, 1978 and the balance sheet of January 31, 1979.

Referring to the opening balance sheet of March 1, 1978, Mr. Wise stated that there is no“ "deficit" (3.36.1), that is, in my view, that there must still be net assets on the balance sheet, after deducting the value of the preferred shares. This test seems to be met, since the opening balance sheet shows that there was still a sum of $180,956 in assets after deducting from those assets the value of the shares issued, amounting to $515,055. We can therefore say that the assets support the cost of the preferred shares.

In Rodgers (4.02(60)), in which this principle seems to have been applied, the Court concluded that the appellant company did not have enough assets to support the preferred shares, having a value of $446,400 at December 31, 1982. A mortgage receivable” of $230,500 was not considered as an asset because of the absence of evidence on that point (4.07.1 and 4.07.3).

In the case at bar, the preferred shares used as a financing method were supported on the date the shares were issued by the assets of the new company.

Moreover, on March 1, 1978, there were factors to enable us to predict that the business could continue to operate: Mr. Robitaille's experience as a manager, Marine's sales of $1,700,000 at December 31, 1977, despite the seizure and its damaging effects. Moreover, there was nothing to indicate that the market for pleasure craft was falling.

During the fiscal year, on January 31, 1979, it was possible to redeem the shares for $764,152 and to pay dividends of $30,145, as explained by Mr. Wise. Sales after 9 months of operation amounted to $2,422,000 (3.35(1)).

I therefore find that it was possible to redeem the shares, and so that the value to the owner (in the broad sense, that is, the person who ultimately controls redemption) is equal to the redemption value. The fair market value is equal to that value (4.08.2(2)(a)).

4.08.2(3) Can the decisions in Lewitt, Rodgers and Terry alter the conclusion of the Court that the fair market value of the preferred shares issued should be established at $1?

An analysis of Steel Barrel, Zevo Finance and Tuxedo Holding and of the valuation principles set out in the comments of valuators such as Goodman (4.03.3(4)(c), 4.04.2(d)), Campbell (4.03.3(4)(d), 4.08.2(2)(a)), Cudjoe (4.03.4(4)(e)) and Wise (4.04.2(e)) leads this Court to state that in light of the facts of the present case, the fair market value of the preferred shares issued must be $1. The fact that there was indirect control which would ultimately permit redemption of the preferred shares, through Robitaille (1978), enables us to attribute their full value to these shares.

However, using three precedents, the respondent tried to question the appellant's argument, which this Court overwhelmingly accepts. The three cases are Terry (4.04.2(g)), Rodgers (4.07.1) and Lewitt (4.04.2(f)). This Court is of the opinion, however, that these decisions cannot provide a basis for ignoring the basic principles which have provided the foundation for this decision.

4.08.2(3)(a) What is the impact of Terry and Rodgers on this decision?

Rodgers

We would briefly recall the facts of that case, which may be summarized as follows: in November 1982, Arthur Rodgers, who was then a director of the company 493800 Ontario Ltd. together with his wife, invested a sum of $595,000 in a number of preferred shares of that company. His wife then had control of 493800 Ontario Ltd. In October 1984, Rodgers declared bankruptcy, leaving to his trustees the block of preferred shares (non-cumulative dividend shares, redeemable at the option of the issuer) that had been acquired earlier. Rodgers's refusal, as director of 493800 Ontario Ltd., to redeem the preferred shares that had been issued to him raised the delicate problem of valuing those shares.

The relevant passages of the decision by Taylor, J. appear, in the opinion of this Court, to be the following (at page 2193):

Both the “risk on a share purchase", and the “possibility of undisclosed liabilities" were very high in the transaction made by Arthur Rodgers. and there was no evidence that he protected himself, ”. . . by obtaining an appropriate covenant from the vendor", or certainly if he did so, none was provided in turn to the Trustee.

[Emphasis added.]

at page 2194:

It was inherent in the shares themselves when issued, that any transfer would require the initial agreement, of Arthur Rodgers at least as a director, and probably in his role as chief advisor to Barbara Rodgers. . . . In my view the facts of this case demonstrate that the restriction was a formidable obstacle at all times, and one that no knowledgeable investor would have willingly taken on, without serious reservation and compensation, or redress in some attainable form.

at page 2195:

I am satisfied that the salient fact regarding the transfer restrictions on the shares was known to all relevant parties at the date of issue, and would have been "considered by a reasonable and objective observer". The appellants’ valuation report does not take into account this very critical factor common to both the years 1982 and 1984—the prospect of Arthur Rodgers withholding his approval for transfer of the shares, . . .

[Emphasis added.]

In short, Mr. Rodgers's potential refusal to redeem the shares, combined with the lack of any real assets in the company 493800 Ontario Ltd., demanded a valuation lower than the fair market value of the preferred shares issued by the company.

However, this Court believes that two distinctions must result in a decision not to apply Rodgers to the present case. First, it has been shown, using the opening balance sheet of Robitaille (1978), that that company had the necessary assets to support the shares acquired when the inventory was transferred (4.08.2(2)(c)). Moreover, the main reason for the decision of Taylor, J., the possibility that Rodgers would refuse to redeem the preferred shares that had been issued, does not seem to recognize a fundamental principle of the valuation approach that this Court has taken in the case before us: whatever reasons there may be for potential investors to lose interest in the preferred shares issued, we must keep in mind that those shares can be sold on the market only together with the shares which give control of the issuing company. There is no market on which the preferred shares alone could be sold (3.41, 4.08.2(2)(a)).

Finally, it is obvious that Rodgers, who held the preferred shares, in no way controlled 493800 Ontario Ltd. in such a way as to permit him thus to force redemption of those shares. Moreover, the argument that there was indirect control of 493800 Ontario Ltd. through Barbara Rodgers, Mr. Rodgers's wife, is not highly probable, given the fact that, unlike the situation in the present case, Mrs. Rodgers had no beneficial interest in the transaction by virtue of which the preferred shares were issued for consideration of $195,000.

Terry

This case related to a project involving, at the outset, two companies: Potter Distilleries Ltd. (Potter) and Melchers Distilleries Ltd. (Melchers), to create a whiskey distilling business. The new company, Mar-Ter Holdings Ltd., was /3 owned by Potter, through a management company named Potter Holdings Ltd. The balance of the shares were held by Melchers. However, a conflict arose between Potter and Melchers and led to the sale of Melchers's interest in Mar- Ter Holdings Ltd. to Potter Holdings Ltd. The latter company, which was then the sole owner of the interests of Mar-Ter Holdings Ltd., had capital stock composed of Class B shares conferring voting rights on the holder, but no right to receive dividends. The capital stock of the company was also composed of class A shares which were non-voting but did confer the right to receive dividends. Upon Terry transferring to his two sons all the class A shares he held, those shares were the subject of valuation in the courts.

The relevant passage of the decision of Colliers, J. is as follows at pages 139-40:

Normally voting shares (here, the B shares) have some premium. Votes control management and operations. Here, the hypothetical purchaser in the market place is only looking at the A shares. If he bought at all, he would not be buying control. I agree with Beach: the Class A and Class B, as a package, might have had some value to a hypothetical purchaser. But the Class A shares alone held, in my opinion, no interest to an outsider, and had no value in a potential purchaser's eyes.

In fact, contrary to what the respondent seems to be proposing, I consider that this passage only reaffirms the principle on which the reasoning of this Court is based: such shares have a meaning only in a context of business financing or capitalization between associated companies. The only foreseeable redemption would be if common and preferred shares formed an indivisible block on the market.

In short, Terry in no way disturbs the conviction of this Court in respect of the principles of valuation which must be applied in the present case.

4.08.2(3) (b) What is the impact of Lewitt?

The decision in Lewitt, which is short and was delivered orally by Board Member Prociuk in 1973, seems to go directly contrary to the principles which this Court has adopted in reaching its decision. This passage from Lewitt is particularly eloquent:

The respondent called no evidence. Learned counsel for the respondent urged me to find that in view of the fact that the appellant controlled the corporation, these shares represented a greater value to her than to anyone else and since she is in a position to direct redemption at par, I should find that the fair market value of the said shares was, at the material time, the par value thereof, namely, $100 per share at which price these shares were originally sold.

I am not prepared to go along with this contention for the following reasons. Firstly, the fair market value has been defined by our Courts on numerous occasions more or less in these general terms—"It is, generally speaking, the highest price available in an open and unrestricted market between a willing buyer and a willing seller dealing at arm's length, both of whom are fully informed as to the qualities of the property concerned, neither of whom is under any compulsion or haste to transact". While there may be minor variations from time to time in the terminology used, the crux or the pit [sic] and substance thereof have remained unchanged.

Secondly, Parliament has not seen fit to set up varying criteria contingent on the various circumstances in each case.

It is essential to note the fact that in that case, the holder of the preferred shares also owned the common shares, whereby she had control of the issuing company. This decision therefore seems to have failed to consider the principle set out in the English case Ceylon v. Mackie, decided in 1952 (4.02(42)). The judgment of Board Member Prociuk is also contrary to the principles of valuation which seem to be recognized today in the doctrine (4.03.3(4)(c), (d) and (e), 4.04.2(d) and (e), 4.08.2(2)(b)) and in the case law (4.08.2(2)(a)). Accordingly, this Court does not feel bound by that decision. Lewitt can no longer serve as a precedent.

4.09 Alternative argument

The alternative argument does not need to be considered, since no benefit can have been conferred on the appellant (4.05.10(2)). The Court has reached the conclusion that the fair market value of each share in question was $1. Accordingly, the value of the shares is equal to the value of the inventory transferred. Subsection 245(2) of the Act therefore has no application.

5. Conclusion

The appeal is allowed, with costs, and the matter is referred back to the respondent for reconsideration and reassessment.

Appeal allowed.