Minister of National Revenue v. Members of Northwood Country Club, [1989] 1 CTC 2230

Kempo, T.C.J.:—The Minister of National Revenue (the "Minister") applied for and obtained an order pursuant to subsection 174(1) of the Income Tax Act (the "Act") requiring a determination to be made by the Court of the fair market value of each of the affected taxpayer's interests in the Northwood Country Club ("Northwood") as at December 31, 1971 ("Valuation Day"). The respondent, David Ades, was one of 271 taxpayers to be affected (the "affected taxpayers") as are named in the order, each of whom is to be bound by the determination.

As a subsidiary issue, onus of proof matters arose during the hearing. While there was a consensus that taxpayers in cases such as this should, as in the usual appeal situation, carry the evidentiary burden of establishing its case, the argument advanced here was that the respondent had done so by having demolished the factual foundations underlying the subject assessment and that alternatively, given the circumstances of this case, the onus of establishing the essential issue should be a burden of the evidence advanced in the cause.

Preliminary Matters

None of the affected taxpayers had filed any formal pleadings as none are contemplated in this type of proceeding. Of relevance to the issues raised at the trial were paragraphs 4, 18(a), 18(b), 20 and 22 extrapolated from the Minister’s application dated November 29, 1984. They read as follows:

4. There were 271 people who were senior playing members on December 31, 1971. Each of these senior playing members had obtained his or her membership by:

(a) subscribing for bonds or debentures in Northwood for $5,000.00, and

(b) paying an initiation fee of $5,500.00.

18. The Minister of National Revenue has reassessed each of the affected taxpayers in respect of taxation years 1980 and 1981, and proposes to reassess each of them with respect to taxation year 1982 on the basis that:

(a) the fair market value of each of the affected taxpayer's interests in Northwood as at December 31, 1971 was in the maximum amount of $10,500.00 (that is to say the purchase price for the bond or debenture of $5,000.00 plus the initiation fee paid of $5,500.00,

(b) the adjusted cost base of each of the interests aforementioned was in the maximum amount of $10,500.00

20. The Minister of National Revenue requests that this Honourable Court determine:

(a) the fair market value of each of the affected taxpayer's interests in Northwood as at December 31, 1971;

(b) any other question that arises in the course of proceedings which this Honourable Court considers should be resolved in order to determine the questions hereinbefore set out.

22. He further submits that the affected taxpayers realized a capital gain from the distribution of capital of Northwood of at least $4,675.00 in 1980, $45,900.00 in 1981 and $8,925.00 in 1982.

Respective counsel for all parties exchanged their valuation reports and had consultations concerning various and diverse matters of relevance to these assessments. An agreed statement of facts {infra, Exhibit A-1) was signed, dated and submitted on the concluding day of the trial. At the commencement of the trial counsel advised the Court that the parties had fully resolved an underlying issue which was that at Valuation Day the fair market value of Northwood's real property was $13 million. They could not agree, however, as to the extent that the underlying asset value could or would impact on the valuation of the interests of each of the affected taxpayers on that date.

In any event counsel for the Minister advised the Court that, in view of the agreed statement of facts, certain figures required correction in paragraphs 4 and 18 of the Minister’s Application, supra, in that the subscription or purchase price for the bond/debenture in Northwood was to be $4,300 and not $5,000 and that the initiation fee amount was to be $5,000 and not $5,500. However it was stressed that counsel's position remained unchanged as to the amount of $10,500 still being representative of the adjusted cost base of the taxpayers' interests in Northwood as per paragraph 18(b) of the application. The Minister's factual assessing position that the value was to be made up of the bond/debenture price plus the initiation fee as per paragraph 18(a) of the application was conceded to have been erroneous; however the allegation found in paragraph 18(b) still stood, namely that "the adjusted cost base of each of the interests aforementioned was in the maximum amount of $10,500.00”.

Facts

The agreed statement of facts, filed as Exhibit A-1, reads thusly:

Agreed Statement of Facts

1. Northwood Country Club (hereinafter referred to as "Northwood") was incorporated under the laws of the Province of Ontario on March 18,1958 as a corporation without share capital.

2. Prior to 1979 Northwood operated a golf course, country club and ancillary facilities for recreation on approximately 200 acres of land in Metropolitan Toronto. Northwood was a non-profit organization within the meaning of subsection 149(1)(l) of the Income Tax Act, R.S.C. 1952, c. 148, as amended ("the Act”).

3. The only members of Northwood that are affected by the reassessments which the Minister of National Revenue has issued, or the reassessments which he proposes to issue, are 271 people (or their representatives) who were classed as senior members on December 31, 1971 and also received amounts upon Northwood's dissolution (hereinafter referred to as "the affected taxpayers").

4. Each of the affected taxpayers obtained his or her membership by:

(a) subscribing for bonds or debentures in Northwood for $4,300.00, and

(b) paying an initiation fee of a prescribed amount, which amount did not exceed $5,000.00.

5. Other members who received amounts upon Northwood's dissolution obtained their membership after December 31, 1971. Cost of membership, that is the cost of the bond plus the initiation fee, for these members varied from $5,500 to $14,000.

6. On December 31,1971 the sale of Northwood's property was not contemplated.

7. On December 31, 1971 the dissolution or winding up of Northwood was not contemplated.

8. On June 5,1978 Northwood applied to the Minister of National Revenue for an Advance Ruling in respect of the proposed sale of Northwood's property and the possible dissolution of Northwood.

9. On June 13, 1978 members at a Special General Meeting authorized the Board of Directors of Northwood to consider offers from potential purchasers for all of the real and personal property of Northwood.

10. On August 9, 1978 the Minister of National Revenue issued Advance Ruling AR5-472.

11. In accordance with the policy of the Department of National Revenue, advance rulings are not issued with respect to the fair market value of property.

12. Advance Ruling AR5-472 did not address the fair market value of the affected taxpayer's interest in Northwood as at December 31, 1971, or as at any other time.

13. By Agreement of Purchase and Sale dated September 20, 1978 Northwood agreed to sell its land and premises to Commerce First Company Limited for the purchase price of $24,281,000.00 to be paid as follows:

Deposit	$ 1,000,000.00
Cash on Closing	$ 5,281,000.00
Vendor take back mortgage	$18,000,000.00 at 10% per annum. Maturing in
	5 years. Interest payable quarterly. Principal
	payable from time to time on a pro-rata basis
	without notice or bonus interest.

14. The sale closed on January 31, 1979.

15. In April, 1979 Northwood resolved to wind up, and it proposed to distribute the proceeds of the sale of its land and premises to its members who were entitled.

16. In April, 1979 Northwood became a taxable Canadian Corporation within the meaning of paragraph 89(1 )(i) of the Act.

17. Litigation arose between the various members as to their entitlement to participate in the distribution of proceeds from the sale aforementioned.

18. The litigation between the various members was resolved by judicial determination.

19. From the inception of Northwood to its dissolution a bond or debenture, or any interest, right or privilege attaching to membership in Northwood had never been sold by a senior member or by any member of any class.

20. In 1980, 1981 and 1982 Northwood paid taxable dividends and made distributions of capital to the affected taxpayers as follows:

Calendar Year	Dividends	Capital Distributed
1980	$7,000.00	$ 5,500.00
1981	$2,000.00	$54,000.00
1982		$10,500.00

21. The Board of Directors of Northwood and its auditors advised the affected taxpayers that they had realized a capital gain on their receipt of the capital distributed, and the capital gain should be reported and calculated in their individual tax returns on the basis that the adjusted cost base of each of their interests in Northwood was $50,390.00. This amount was determined, inter alia, by dividing $15,500,000.00 by 271. The amount of $15,500,000.00 was derived from an appraisal dated November 7, 1980 of the land and improvements held by Northwood as at December 31, 1971.

22. As at December 31, 1971 Northwood would have had to pay $1,397,500 to repay the holders of the bonds and debentures. At that date, Northwood had no other debts and liabilities.

23. The fair market value of Northwood's real property as at December 31, 1971 was $13,000,000.00.

24. Had Northwood been dissolved at December 31, 1971 there would have been 325 persons entitled to share in the proceeds.

25. As at December 31, 1971 Northwood had 306 Senior members. The maximum number of Senior members permitted under Article 111(6) of By-Law No. 1 was 325.

The $1,397,500 amount above mentioned in paragraph 22 was the product of multiplying $4,300 (the subscription amount for the bond/debenture) times the 325 persons (the bond/debenture holders) entitled to share in the proceeds if Northwood had dissolved on December 31, 1971.

When the real property was acquired by Northwood in 1967 the vendor retained an option to repurchase it at any time prior to December 31, 1977 at a price of $600,000 upon Northwood's decision to sell it or to use it as other than a golf course. There was a general consensus that, given the $13 million value at Valuation Day, no prospect of sale and dissolution at that time was or would have been contemplated and that any knowledgeable individual would have been aware of its value and ripeness for real estate development.

Counsel for both parties generally agreed that the underlying real property value would impact on the value of the subject interest herein to be valued; however each differed markedly in their respective methodological approaches and therefore in their ultimate conclusions.

As noted, Northwood was a non-profit golf/social country club organization. To become a member as at Valuation Day a person would have to apply for membership, be sponsored by two senior playing members, not be opposed by four or more members of the Board of twenty persons, pass the scrutiny of all senior playing members, pay such initiation fee as the Board had determined, pay membership dues and pay any balance owing on a bond/debenture. To become a senior playing member (hereafter sometimes called a "SPM") at Valuation Day, and provided there was a vacancy, a person would have to satisfy certain age requirements, be so elected by the Board and continue to be the absolute owner of or to have subscribed for a bond/ debenture in a prescribed amount. The number of senior playing members was restricted to 325 persons with a reserve of five persons to take care of any annual resignations. Upon the death of a senior playing member, an application for membership by a person of the immediate family was to be given priority over other applications.

Membership was divided into seven classifications and, excepting for honorary members, every member in each membership class was to have owned or have subscribed for a bond/debenture. The case at hand concerns valuation of the interests of only an SPM. The rights, privileges and conditions which would have distinguished an SPM from other member classes included eligibility for election to the Board of Directors and voting rights at annual or special general meetings; upon death, the deceased SPM's interest could be redeemed only at Northwood's option, the immediate family had membership priority over other applications and the bond/debenture was transferable to the immediate family member. In the event of dissolution or winding up, all moneys realized from the disposition of Northwood's real and personal property (after payment of the secured claims, other liabilities and the bond/debentures) was to have been distributed pro rata amongst only the senior playing members.

As noted earlier, an SPM was required to own a bond/debenture. At Valuation Day it was subject to the following relevant conditions: it was non- transferable (except to the immediate family on death), non-interest bearing, redeemable at par at any time at the option of the Club, and redeemable at the issued price upon death, resignation or expulsion of a member upon payment of the full purchase price by a new member accepted by the Board or when a pro rata payment had been paid by all members. In itself it did not entitle the owner to any rights or privileges, and it was alterable from time to time by the Board subject to ratification by a meeting of the members of the Club. As noted earlier only the senior playing members had voting privileges at club meetings.

It was reasonably assumed that each SPM knew they were playing golf on an extremely valuable piece of real estate in which, under the Bylaw provisions, each had an ultimate interest upon sale and dissolution, that each knew of the terms, conditions and restrictions applicable to membership (which included the requisite holding of the restrictive bond/debenture), and that any willing, knowledgeable purchaser acting at arm's length in an open and unrestricted market would also have been equally aware of these elements and factors.

There was a further consensus at trial by the business valuators called for each party as to the following basic principles. The definition and meaning of "fair market value” was described by the Minister's valuator, Mr. D. Alan Jones, at page 2 of his filed report (Exhibit R-2) thusly:

A generally accepted definition of the term “fair market value" to which I subscribe is contained in Mann Estate v. Minister of Finance of British Columbia, [1972] 5 W.W.R. 23, at page 27:

“fair market value” is the highest price available estimated in terms of money which a willing seller may obtain for the property in an open and unrestricted market from a willing knowledgeable purchaser acting at arm's length.

In performing an equity valuation on a security, valuation practice requires that a business equity valuator look to a notional transaction taking into account the rights and restrictions applicable to the security at the date of valuation. The concept of a notional market assumes that for a moment in time, restrictions on the transfer of a security are lifted to allow a knowledgeable prospective purchaser to stand in the shoes of an equally knowledgeable vendor. The notional purchaser takes the security subject to the same rights and restrictions as the vendor—no more, and no less. It is also assumed that both notional parties are acting in good faith and that there was nothing in place at the valuation date which would result in either party acting in concert in such a way as to affect the value.

Judicial authority for the concept that in the notional market the restrictions are lifted and then fall back in place again following the notional purchase is found in Salvesen's Trustees v. Commissioners of Inland Revenue, [1930] S.L.T. 387 at 391 and Commissioners of Inland Revenue v. Ethel MacLean Crossman et al., [1937] A.C. 26 (H.L.).

Also, and for the sake of simplicity, a common approach taken was to have assumed that golf/social membership rights and privileges, and the requirement to pay annual dues, had effectively cancelled each other out in that both the Club and its members had probably benefitted equally by the interest-free infusion of capital through its bond/debenture mechanism.

A general consensus also extended to, with much focus on, the "illiquidity" factor of the bond/debenture relative to the uncertainty that even at some unknown point of time after 1977 (upon lapse of the vendor's option to repurchase) there must still be a requisite majority consensus amongst the senior playing members to sell Northwood's assets followed by dissolution and distribution of the funds to themselves.

Finally, the evidentiary consensus was that a person would not have joined Northwood at Valuation Day primarily for real estate speculation or money making purposes. However, as mentioned before, the professional witnesses had assumed that as at Valuation Day a knowledgeable vendor and purchaser would have known of the valuable nature of the land, that due to its location it was then ripe for development and that real estate development was then its highest and best use.

The fundamental differences between the parties to this case was not with the numbers or arithmetic as such. Rather it was one approach and methodology.

The Evidence of the Experts

A. For the Applicant

Evidence was advanced for the applicant by Mr. David Alan Jones who was duly qualified as having had an extensive and impressive expertise in business valuations. The Minister's fair market value assessment amount of $10,500 was not the product of his advice or expertise. In point of fact his approach and opinion led to the reduced amount of $8,600.

Mr. Jones considered the aforementioned conditions, restrictions, limitations and risks associated with attaining membership in the Club and those of the bond/debenture as well as the underlying values of Northwood's realty given to him by the Minister's counsel. He took into account and applied the principles of retention value which he described on page 7 of his Report thusly:

A determination of fair market value depends on an estimate of what might happen in the future, usually based on a projected income stream arising from the asset being valued. This future orientation includes the concept of a "retention value” which suggests that a person might hold or retain an asset in the hope that foregone immediate returns will be rewarded with some degree of certainty in the future.

To Mr. Jones there were two types of conditions that would have depressed value. One dealt with membership itself and the other with the terms of the bond/debenture as a representation of that membership, and he weighed them together.

Because there was no income stream to capitalize, Mr. Jones was of the view that the value of the underlying assets and liquidation of the organiza- tion should be looked at. So the first step in his approach was to have considered three assumed ($8 million, $13 million and $15.5 million) fair market values of the realty at Valuation Day and to prorate those amounts amongst the senior playing members. That is, he employed the pro rata methodology based on liquidation value, but only as a starting point. His opinion was that at each increasing level of the assumed real estate values, an SPM at Valuation Day would have considered the risks associated with retaining his bond/debenture. Since no liquidation was contemplated, there would have been less incentive at the $8 million value to have held the bond/ debenture for at least six years and therefore the retention premium would likely have been in the area of 50 per cent over his bond/debenture cost. If the land value was $13 million or $15.5 million, then an SPM would have likely expected a retention premium of 100 per cent over his cost.

The arithmetic applicable to the $13 million underlying value was that the retention value based on a group pro rata liquidation approach would be $40,000. That the amount of $8,600 was seen by Mr. Jones to be the fair market value was premised solely on a 100 per cent premium over the cost of the bond/debenture approach when taking into account all of the risks and contingencies. He conceded that, mathematically, the effect of his 50 per cent and 100 per cent premium over-cost approach resulted in an unaccountable 70 per cent discount assuming an $8 million underlying value, an 80 per cent discount assuming a $15.5 million value and a 78.5 per cent discount assuming a $13 million value and that the $5 million incremental value increase between $8 to $13 million attracted a discount of 97 per cent. Mr. Jones stressed that he did not approach the valuation that way. As he could not find, and therefore employ, any comparable type of security or interest to that of the subject, it was his view that the approach to use was to consider what a seller would have been happy to have received to get out, and what a potential purchaser wanting to play golf would have been willing to pay to get into the Club, to assume all the risks and restrictions and "perhaps" to one day have shared in wind up and distribution. The only way, in his opinion, to determine the value of this bundle of rights, as it related to the fair market value of the underlying realty, was by way of mark up of the seller's cost to get in—in this case it would be $8,600 with the 100 per cent mark up. He said that the greater the underlying value the higher the premium, but that the increased premium amount in the final analysis would be a value judgment call with nothing more scientific than that in retention value cases.

With respect to the evidence of the respondent's professional witnesses, Mr. Jones said that he was unaware of any concept of a "reservation price” as being applicable to concepts of "retention value", that he did not believe that a sale of a senior player member's interest would have happened in the $30,000 plus range and that from the very beginning he was valuing an individual's interest and not the interests of 325 senior playing members as a group.

Finally, it was his opinion that an appraiser does not, in a notional market, have to exclude other means by which an entity or object can be obtained such as, assuming an appropriate vacancy existed, it may have been possible for an individual to have obtained membership directly from Northwood itself simply by paying amounts for an initiation fee and a bond/debenture. For convenience this situation will henceforth be referred to as an administered method, as the context requires.

B. For the Respondent

The methodology and opinions advanced by the professionals called by the respondent were substantially different from that of Mr. Jones.

1. Mr. Richard Wise was similarly qualified as having had an extensive and impressive expertise in business valuations. It was his opinion that each membership interest comprised of (a) certain membership rights and (b) a bond/debenture, and that given all of the circumstances the fair market value at Valuation Day of the membership interests held by each SPM was in the range of $36,300 to $37,300, with a mid-point amount of $36,800. Given that the bond/debenture value was agreed to have been valued at its face value of $4,300, the range for the "membership rights” would be $32,000 to $33,000 with $32,500 as the mid-point value.

His valuation approach, taken from pages 7-8 of his report filed as Exhibits A-4 and A-5, was that:

In valuing the collective and aggregate interests of members of a non-profit organization, regard must be had to the inherent value of the underlying assets. Non-profit organizations include golf clubs, gentlemen's or ladies' clubs, private sports clubs, associations, etc. Other entities such as camp grounds, trailer parks, nursing homes, etc. would be valued on the basis of their underlying assets provided that the value thereof exceeds the capitalized earnings or cash flow revenue stream.

More specifically, if the non-profit organization is a golf club, the value of the land, plus the salvage value of the improvements, represent the "en bloc” fair market value of the property. However, notwithstanding the value of the real estate, new members are not charged an entrance or initiation fee calculated by reference to such value.

Generally, in notional fair market value determinations, sale is assumed to take place. Judicial precedents have supported the proposition that any restrictions on sale are temporary [sic] lifted in order that a hypothetical transaction can be consummated. However, the potential purchaser of the asset would then be bound by any restrictive agreements in effect (to which the vendor had been subject).

In the case of a non-profit organization, the disposition of an interest therein held by a person (or persons) unable to have control over the conduct of the entity's affairs would fetch very little as such isolated member could not unilaterally control the board of directors of the entity and hence dictate policy and decision-making aspects. The member would not be in a position to liquidate the organization and therefore would not be entitled to realize his or her pro-rata share of the value of the organization's net assets. Only in the event of a dissolution of a non-profit organization would the proceeds be distributed equally amongst its members.

The definition of fair market value noted above makes specific reference to the "highest price" obtainable in an open market transaction. Only in the event of a dissolution of the net assets "en bloc" would the highest price be obtainable.

Mr. Wise was of the same view as Mr. Jones that the principles of “retention value” would be applicable here. He stated at pages 13-14 of his report:

. . . an SPM would be reluctant to divest of his interest in Northwood, knowing that the property was valuable at the valuation date and that it would likely appreciate subsequent to that date, given its prime location, the state of the economy as well as being aware that it could be sold after 1977 for a significant amount, which is more than the cost which an SPM would pay upon joining Northwood.

Furthermore, the rights of the collective SPMs at the valuation date are property rights, which if sold on the valuation date, would be included in the determination of fair market value, as a hypothetical purchaser of the collective SPM interests as of the valuation date could “wait out" the ensuing six-year period at which time he or she would be able to realize the proceeds from the hypothetical sale of the land.

For the purposes of calculating the fair market value of a Membership Interest at the valuation date, we have assumed that any likely increase in the value of property from then to December 31, 1977 would be offset by the discount applied at December 31, 1977 to present-value the property at that date back to the valuation date. We have been asked to assume that the fair market value of the property at the valuation date was $13,000,000.00, net of commissions.

Accordingly, in our view the "en bloc" fair market value to be rateably attributed to the [three] hundred and [twenty-five] [(325)] SPMs as of the valuation date is $13,000,000, segregated between (a) membership rights (i.e., retention value) and (b) the redemption price of the bonds or debentures of the SPMs.

[As amended]

Mr. Wise testified that he took into account the fact that the Club members were knowledgeable, uncompellable, sophisticated business people, that to his mind a golf course was often just an interim use of land which was likely to change, that its highest and best use would be for real estate development and that the members would have agreed to its sale sometime between 1978 and 1982. He said he was:

. . . just taking a guess at it, and it could have even been a few years after that, but I am trying to arrive at a reasonable figure for fair market value and I thought that would be a reasonable period. It did happen. [Transcript p. 62]

Due to improbability of sale of the realty prior to the lapse of the repurchase option, Mr. Wise said that this holding encompassed "illiquidity", and that the application of a discount would be the normal approach to its recognition. At page 15 of his report he said:

For valuation purposes, we have based the fair market value of the Membership Interests on the probability of an assumed sale of the entire property during the period 1978 to 1982. That is, our approach contemplated a sale of the property and the subsequent dissolution of Northwood. As noted in Section 7 hereof, the rate of growth in the value of the land was deemed by us to approximate the discount rate, so that no adjustment was made for either growth or present-value purposes. However, we have applied a discount to the Membership Interest to reflect, amongst other things, the market risk inherent in a real estate investment as compared with a “risk-free” or gilt-edge security; the relatively illiquid nature of the asset; expected return on investment; prevailing yields in the marketplace; etc. Accordingly, we applied a discount factor in the range of 8% to 10%, say 9%, in recognition thereof (which factor has not been included in the present-value discount rate), and based upon an assumed, probable sale of the real estate during the period 1978-1982.

His valuation conclusion was presented on page 16, as amended, of his report (Exhibit A-5) thusly:

Mr. Wise employed a discount rage for illiquidity of 8 per cent to 10 per cent. He said that the 9 per cent which he had used amounted to a little over 1 per cent per annum. He acknowledged that he had no evidence supporting his probability of a sale and distribution of funds happening between 1978 and 1982, that it could have been later and possibly beyond 1988, and that it was his professional "judgment call" of the whole situation. He disagreed that a real estate appraiser (which he was not) would be better qualified than a business valuator to give an opinion as to the probabilities of a real estate sale within a given period of time, if at all. Mr. Wise admitted that, like Mr. Jones, his expertise was in valuing businesses and business interests (things out there to make money) and that he could not recall ever having had any situation analogous to this one. He had considered and dismissed any possibility that the members acting in concert would have sold the realty, purchased another at a lesser price and distributed the difference to themselves as being merely factually hypothetical. Rather, he stood firmly behind the opinion that his own forward-looking events were likely and probable, given all of the circumstances.

The valuation approach taken by Mr. Wise was to arrive at an en bloc value attributable to all 325 members entitled to participate in the control group which, to him, was the normal and only way of doing it. It was his position that the assumed willing, prudent seller was one of a group who would not sell at less than $37,000 (which included the $4,300 bond/ debenture) and that this was where the retention value played such an important part. The maximization of value, in his opinion, rested on the control group concept. Acting alone would not have achieved maximization. The value was to be determined on a retention basis. It was only upon a sale of the land that value would be maximized and realized by the control group. Mr. Wise reasoned that because every senior playing member at Valuation Day ought to have had the same adjusted cost base when reporting a gain on the disposition, the retention value could only apply to the group as a whole and thence to its individual members, otherwise it would be meaningless in that each member could have taken a different adjusted cost base on a purely subjective basis. The membership interest to be valued was therefore to be part of a block and, although in the minority in and of itself, it was not to be discounted on that basis because maximum value could not and would not have then been achieved.

Mr. Wise confirmed that to him the membership “interest” which he had valued equalled the membership rights plus the bond/debenture. He said that the 9 per cent discount rate he had applied fundamentally related to the illiquidity of only that interest, that it was not used qua the real estate and that it did not mean that there was a 91 per cent certainty of a sale and distribution between 1978 and 1982. Finally, he was of the view that if the probability of a sale over any given time period could be transposed to that of only a possibility, no further discounting would be required because a longer holding period would mean a higher selling price, with a cancellingout effect.

2. Professor Lawrence B. Smith is a Professor of Economics with considerable and impressive academic and practical experience and learning in the field of real estate economics, primarily in the area of economic perfor- mance and behaviours of real estate markets. Counsel for the Minister submitted that Professor Smith's area of expertise had little if nothing at all to do with valuation of the subject membership interest in a golf club which was not an investment company. Because the valuation issue before me encompassed concepts of retention value, which appeared to have a very significant impact on the methodology employed by the two businessvaluator witnesses in arriving at their fair market value on Valuation Day, I acceded to respondent counsel's urging that this type of problem was prima facie suited to the analysis of an economist of Professor Smith’s experience and reputation. It was therefore ruled that he had been qualified to give expert opinions on economic-based methodological approaches that may be relevant and useful in the resolution of the ultimate issue.

It was Professor Smith’s opinion that because money has a time value and because the bond/debenture carried zero interest, its value would have been less than its face value, which face value in turn would have depended on how long it was to be held before redemption. However if its value should be seen to be more than its $4,300 face value, then the only possible way for that to happen would be to add other things to it, such as the value of the ability to share in the break-up value of the Club. In this situation, the bond/debenture would be essentially similar or analogous to a convertible bond/debenture enjoying a share in the equity value as well. In this case the procedure would be to inquire as to the value of the equity and then to attribute it back to the bond/debenture. Put another way, the bond/ debenture should be viewed on a converted basis, and then regard should be had to the value itself. Further, since the bond/debenture value was agreed to have been no less than its face value, any notional equity or "stock" value would not be less either, so there would be an extra hedge here with two shots at value. Accordingly, the value of the bond/debenture would be on its conversion-to-equity basis, which would then be the value of the bond/debenture itself.

He agreed with Mr. Jones' concept and definition of retention value, however he understood the concept to be in the context of a "reservation price” which is the value that an owner would place on his own holdings as an inducement to give it up. He said it was the “implicit value that would be placed on the holding by the member . . . if we are dealing with any kind of retention value. It is the reservation price, the price below which one would not give up the holding whatever that is.” [Transcript p. 254] He was also of the view that the underlying land value must have been reflected in a senior playing member's interest otherwise there was no way in which the membership interest value could have exceeded the $4,300 face value of the bond/ debenture.

Professor Smith agreed that if no buyer was willing to pay a reservation, or retention value, price there would be no market price; but that in a hypothetical market which assumes a transaction between willing and informed arm's length parties under no compulsion to act, there needs be a range of price and an ultimate point of conveyance between them and that someone would meet the reservation price. The concept of willing and informed parties encompasses their knowledge of all factors upon which the retention value was based. He was adamant that, from an economist's perspective, the value should be determined in accordance with capital markets because if one is valuing anything one must look at the values that the market would put on it. He professed that that is what was being done in this case in the “fair market value" context in that it necessarily and implicitly assumes that the bond/debenture can be traded and that it was being traded in a capital market.

He acknowledged the difficulty here in that the interest to be valued was illiquid to a holder because the senior playing members would have had to have acted in concert for a sale and distribution to have occurred. He said this was a risk that had to be priced; that it was a legitimate one that would affect value. This disadvantage would have existed even after 1977 and it called for a minority or illiquidity discount which had to be quantified by looking at other capital market instruments to see how the market prices equivalent kinds of problems of lack of liquidity. Once this illiquidity was recognized, it would not matter how long the real property was expected to be held by the Club. The longer the time the higher the discount, and it would be in that sense that the usual notion would be applicable that the longer one looks into the future the smaller the value.

However, Professor Smith noted that the market does not price long periods of holding time with a very high amount, that its range was 1 per cent to a little over 2 per cent per annum and that that would be the premium that the market would require as compensation for this illiquidity. At the material time, for example, the yield on a 5-year government bond was higher than a 1-year yield. This was the illiquidity return for being locked-in. Therefore a market pricing did exist for what a lock-in price may be which was determinable by looking at different instruments that were competitively priced in the market. Professor Smith had examined the yield of government or treasury bonds and, using a "yield curve", he said that in 1971 a little more than a 2 per cent discount was required to entice people to lock-in their funds for over 10 years, or a 1.25 per cent discount for a 2 to 7.5 year holding period. On this basis, a 6-year holding of Northwood's real property would attract a discount of 1.3 per cent and the $13 million property value with that discount would be approximately $12 million. A 10 to 14.5 year holding would attract an averaged 2.14 per cent discount and the $13 million property value would thereby be about $10.5 million. The prime focus of this discount was for time only which was predicated on the inability to have caused a sale and distribution without the full co-operation of the majority number of senior playing members.

Professor Smith gave his economic-based opinions on the following additional matters. Northwood's ability to have redeemed the bond/ debenture at its issued price without cause at any time was only a very small possibility, and it would not be a priceable market-resulted risk in any event because one would assume a member would not trigger anything that would cause such drastic action to have been taken. The want of an income return on the bond/debenture was known, it was not a risk, and it was not overly material in view of the membership and equity-conversion type benefits enjoyed.

He said, as an economist, that it was not possible to have a market price and an administered price at the same time in that the concept of fair market value assumes no special price being established by some mechanism other than that in the market. The thing of importance was the concept, the concept was an economic concept and that it goes to methodology by which fair market value is established. To him, by putting a restriction on the number of senior playing members (some of whom may have gained membership via an administered price) meant only a dilution of value to the point of full complement of membership; the effect would have been merely one of watering down. An administrative price is the very antithesis to the components and concept of fair market value and there was no reason here to assume that it would have borne any relationship to market price at all. In the notional market of two parties, there is no place for another entry point in which the vendor and the purchaser are not the players.

Having analyzed Mr. Jones' methodological approach, Professor Smith said his understanding of it was that it had attempted to establish value by reference to the member's entry price and then to have given consideration to the risks pertaining to the underlying asset which gave an adjustment factor that was applied to the member's historical cost of the bond/ debenture. The problem with this approach, in his opinion, was that it applied an inappropriate and unspecified adjustment factor to the wrong thing. It was a pulled-out-of-the-air adjustment for risks which was then applied to a historical value which in turn had little if no [sic] meaning. To him the Jones’ analysis had allocated, effectually, a 70.8 per cent discount if the asset value was $8 million and a 80.3 per cent discount if it was $15.5 million. According to the Jones' method, the land value increase from $8 to $13 million amounted to a non-proportional increase of only $350; that is from $8,250 to $8,600, for a mere 3 per cent. This has a corresponding and unaccountable discount of 97 per cent. Professor Smith said that that was not the way risks are priced in the capital market and that no real evidence was to be had, and examined, as to where the premium or any real discount had its source. Because no discount factors or adjustment rates had been employed by Mr. Jones, it led to inconsistent and non-sustainable conclusions when he tried to objectively justify a 50 per cent premium over historical cost of the bond/debenture for the retention value if the underlying land was worth $8 million and a 100 per cent premium if it was $15.5 million. As he noted earlier, the consequences were not proportional and had amounted to a 70.8 per cent discount and a 80.3 per cent discount respectively which was beyond anything that the market would have priced and which was what happens when no analytical theory was being applied as to any discount factor or adjustment rate in order to avoid inherent and unaccountable inconsistencies.

Professor Smith readily agreed that if there was no buyer willing to pay a reservation or retention value price there would be no market price, and that in this case there had been no transactions which would have impacted on the determination of market price. To him this situation was more akin to thinly-traded markets where there are ranges, but no transactions. In a hypothetical market of assumed willing and informed sellers and buyers, if there was going to be an assumed transaction there would be a range and ultimate point of convergence between them, and that someone would have met the retention or reservation price with the knowledge of the risks of no control over sale and distribution, but that they could play golf and enjoy the social amenities in the meantime. He conceded, but as being miniscule, those additional risks that could be applied which encompassed the possibility of the member having no heirs to inherit membership, and that the bond/debenture was not realistically pledgeable as a loan security, to the extent of a further discount in a range of .001 per cent to .005 per cent. This transposed to a 2.15 per cent discount rate rather than 2.14 per cent in a 10 to 14.5 year holding time.

To Professor Smith, while the professional views from a business valuation perspective and an economic perspective may be different, they should nonetheless come to the same results if they had worked on the same assumptions.

The use of Professor Smith's averaged discount for a 10 to 14.5 year holding time (due to a member's inability to cause a sale within that time) makes the land value at approximately $10.5 million which, after deducting the agreed amount of $1,397,500 for the bond/debentures, mathematically comes to about $28,000 for retention value per member.

Submissions

Counsel for the Minister. Only the situation of the individual taxpayer, David Ades, is to be looked at notwithstanding that whatever happens to him would also happen to the 270 others. The parties are probably not really at odds about what each member had. Mr. Jones said that the asset in question was the bond itself with the bond being the tangible evidence of the other rights, while Mr. Wise said the asset was the bond plus something else which was the other rights. The Wise/Smith approaches were essentially flawed because the Club was not a commercial venture, and their methodology was premised on investments, rates of return and pledgeable bonds or securities which are situations normally found in commercially orientated financial capital markets. Here the bond/debenture holders were not investors—they were, and wanted to be, golfers which is a very important distinction. Treasury bill yields (as support for Professor Smith's 2 per cent annual discount rate) enjoy a totally liquid base, and its attributes are the very antithesis to the nature of this taxpayer's bond/debenture. Mr. Jones realized that difference and, unlike Mr. Wise and Professor Smith, he had properly approached the retention value valuation matter from the bottom (historical cost of entry) and worked upward, while regarding the value of the underlying real estate as meaning something only in a general sense. A logical approach was to take the break-up approach (which is a commercial concept) only as a reference point and to try and value this as a mere expectation, if and when it may have occurred. It is unreasonable to be so categorical about unanimity of a sale, if and when it may have happened. The whole matter must be approached as a house of minorities; there was no evidence to support any inference that as of Valuation Day the members would have acted in concert about a sale, dissolution and distribution and therefore Mr. Wise's approach as to group-control signifying highest and best use was not in accord with overall reality. Events founded on hindsight are not, except in very limited situations, probative evidence of a futuristic event or happening: viz, The Queen v. National System of Baking Alberta Ltd., [1978] C.T.C. 30; 78 D.T.C. 6018 at 6024 (F.C.T.D.), affd. [1980] C.T.C. 237; 80 D.T.C. 6178 (F.C.A.).

Mr. Jones' approach was that with all of the uncertainties a taxpayer would have been happy at Valuation Day to have doubled their money and run, so to speak. The 100 per cent premium over the face value of the bond/ debenture was generous, and the assessed $10,500 amounts to a premium of over 150 per cent of the face value which the respondent has not shown to have been erroneous.

As to the latter aspect, the onus rests on the respondent to dislodge the assessed amount which is a question of fact. Any of the Minister's mistakes as to methods or theories are irrelevant provided the right figure had been arrived at. Reasons are not appealable: viz, M.N.R. v. Minden, [1962] C.T.C. 79; 62 D.T.C. 1044 at 1050 (Ex. Ct.). What is appealable is only the quantum of tax arising from the assessed adjusted cost base as pleaded in paragraph 18(b) of the application, supra.

Counsel for the Respondent. Regard is to be had to paragraph 20 of the application, supra, wherein the Minister had requested the Court to deter mine the fair market value. It is clear from the application that the assessment was made attaching $ nil to retention value. There is an unequivocal concession by the Minister's counsel that there should have been an allowance for this, and none had been given. This has defeated any initial evidentiary onus protection that the assessment might have had and therefore the Minister is without the benefit of any assumed validity of the assessment. Indeed the respondent should be entitled to succeed on this basis alone however, in any event, the matter should be resolved in accordance with the evidence advanced in the cause and not on an ultimate onus requirement.

There was no issue as to the fair market value at Valuation Day respecting the face value of the bond/debenture itself. The real problem was to assess the “added value” arising out of the rights that were encompassed in membership. Northwood's way of obtaining its capital though requiring its members, as a condition of membership, to purchase redeemable noninterest bearing bonds/debentures, has no bearing and has absolutely nothing in logic to do with, the fair market value of the bundle of rights associated with membership rights at Valuation Day. The fundamental differences between the parties was one of methodology only.

Both witnesses called for the respondent were highly qualified and recognized experts in their fields, and it is their evidence that should be preferred. All witnesses had assumed that knowledgeable parties would have known of the value of the land; that it was ripe for development which was its highest and best use. Mr. Wise had attributed a proportionate share of the break-up value to each member and applied a 9 per cent discount for time, market yields and investment return, it being derived from a range of 8 per cent to 10 per cent.

An administered price was at odds with the concept of and does not reflect fair market value; its only consequence was of mere dilution. The definition of fair market value, being the highest obtainable price available estimated in terms of money which a willing seller may obtain for the property in an open and unrestricted market applies in both directions. An administered price is not an open and unrestricted market: viz, Commissioners of Inland Revenue v. Crossman et al., [1937] A.C. 26 (H.L.) which held by majority that fair market value must have regard to the real value as opposed to a contracted value.

Professor Smith gave the correct theoretical analysis and methodological approach to be adopted regarding the minority/time aspect of the case as opposed to the controlling group/time aspect. The "cost plus” approach of Mr. Jones was not a market analysis approach, and no rational economic individual would have approached the fair market value of his or her interest that way. No inference or reason was shown here from which it could be assumed that a reasonably prudent and informed member would have been satisfied to have given up their rights for anything less than the value of the land's ripeness for real estate development as impacting on the fair market value on their interests on Valuation Day. The non-profit status of the Club per se does not prevent its members and any prospective members from having an important, but secondary, object or motive to that of golfing for acquiring the bond/debenture and membership. The subsequent events of actual sale, dissolution and distribution was relevant, was logically and rationally probative and was admissible in assessing the reasonableness of any prospect which a member as at Valuation Day might have had or perceived with respect to its future probabilities: viz, Joseph Simard & Cie v. M.N.R., [1964] C.T.C. 461; 64 D.T.C. 5289 (Ex. Ct.), W.H. Crandall v. M.N.R., [1974] C.T.C. 2289 at 2293; 74 D.T.C. 1204 and those land compensation cases of Possum v. Sudbury, 53 O.R. 988 at 999 (C.A.), Tabco Timber Ltd. v. The Queen, [1971] S.C.R. 361; 15 D.L.R. (3d) 748 (S.C.C.) at 752-3, Markpal Holdings Ltd. v. Municipality of Metro Toronto (1977), 10 L.C.R. 193 at 196 (Ont. Div. Ct.), and McNeil/ v. City of Calgary (1982), 24 L.C.R. 69 (Alta. L.C.B.) at 91-2. Subsequent events may be taken into account, which are adjustable as to time and as to weight, but they are not wholly irrelevant.

Analysis

From the expert testimony, the range of retention value in relation to that bundle of rights associated with ownership of the bond/debenture was $4,300 at the lowest (Mr. Jones’ 100 per cent premium) to $32,500 at the highest (Mr. Wise) with $28,000 being the amount derived from Professor Smith's approach.

The resolution of the issue of this case is primarily one of fact. The opinion and approach taken by Mr. Jones had a certain intuitive attractiveness to it; however it was substantively based on his best judgment call and was thus essentially subjective and not sustainable in many important aspects. No convincing foundation was laid out for a historical cost-plus approach as being the better one and/or the only one to follow. In the case of The Queen v. Hugh Waddell Ltd., [1983] C.T.C. 270; 83 D.T.C. 5309 (F.C.A.), the premium for the retention value of the voting trust certificates was founded on a formula price which was reached by an averaging [of] the stock market prices for the CTC shares over a period of a year. The value was not premised on the holder's historical cost; but rather it was valued on a formula price. No sales of voting trust certificates had occurred, and it was shown that for an approximate ten-year period dealers purchasing these certificates had paid a premium and were prepared to have done so to get them.

Counsel for the Minister urged that valuation of the subject interests encompassed many aspects found in a never-never land of uncertainties, the bond/debentures were non-commercial in nature and that each affected taxpayer was in a house of minorities. In my view, in the absence of anything more, those kinds of circumstances may well have justified a historical cost plus approach because nothing else would have logically and rationally fit for valuation purposes. However this case, factually, does have considerably more to it than that. In particular, the fact that Northwood's underlying real estate was so situated as to be so valuable and prime or ripe for development, and that the assumed knowledgeable seller and buyer would have known that, effectually removes this case from an otherwise purely personal/pleasure interest into one that does encompass and include significant commercially-oriented aspects into valuation of the senior playing membership rights.

I accept the submission of counsel for the respondent that the subsequent events of sale, dissolution and dispersal of funds was admissible only to give some credence to the probability of such an even occurring within a 14 to 15 year period following Valuation Day, that it showed that the theory or hypothesis was not unreasonable and that it tended to lend some weight to the argument as to what a reasonable investor at Valuation Day would have believed would have happened. However, it is to be remembered that the assumed knowledgeable purchaser would have been only secondarily interested in acquiring membership for the sale of the value of the underlying asset. This is an important factor which must be considered.

I am impressed by Professor Smith's opinion that this case may be likened to that of a thinly-traded market in which there are no transactions, only ranges, and that the parties can be assumed to have arrived at a fair market value price within that range. As noted earlier, a range of three values had arisen from the evidence of the three very eminent experts heard in the case, each employing differing methodological approaches. The approach of Mr. Jones was ultimately intuitive and highly subjective; the historical cost of the bond/debenture bore no relationship to Northwood's underlying land value. Mr. Wise's maximization of value was premised on group control to the exclusion of the fact that single interests were to be valued and it therefore was overly categorical.

Professor Smith's opinions, being economically based, were thought provoking and carried with them more moderate and flexible approaches to the matter. However it is difficult to see a compelling analogous link between a treasury bill holding on the one hand and the Club membership rights holding on the other. The very nature of the latter is essentially so much more nebulous than the former. But his evidence was material and ultimately convincing in that, methodologically, the fair market value concept does envisage market concepts of a capital nature, and that its behaviour as to the pricing of time was material to arrive at a notional or hypothetical fair market price.

Remembering that Valuation Day value in this case encompassed minority holdings with futuristic components arising from the highest and best use principles with all of its attendant uncertainties, Professor Smith's 10 to 14.5 year holding discount, averaged at 2.14 per cent per annum, may not be unreasonable as to a discount for illiquidity based on time only. Nonetheless the matter is still one of uncertainties in that such a sale in 10 to 14.5 years was only a foreseeable probability which is so essentially different from the probabilities of the cashing in of a treasury bill within that time frame. Implicit in the above comment is a rejection of Mr. Wise’s 9 per cent discount over a 10-year period as being sufficient or realistic.

Counsel for the Minister noted that, in the case of Board of Education for the Township of North York v. Village Developments Ltd., [1956] S.C.R. 539, a 15 per cent discount was seen not to have been unreasonable for post facto actualities of a rezoning which occurred only two months after expropriation. The facts of that case, however, were markedly different from those at hand. There the parties had agreed to the acquisition value of the property, however the transaction was not concluded because of a dispute over one of its conditions.

In the present circumstances I have serious reservations of being able to rely wholly on any one of the methodological approaches advanced in the case. The Jones' approach had severely, and unduly in my view, down-played the economic capital land value aspects of the matter and the Wise/Smith approaches had, similarly, down-played the very unique minority, golf/ personal aspects of the matter and a probability (which must be considered) that a sale followed by actual dissolution of the Club may not have occurred for a very long time, if at all. The only common thread amongst the three professionals was the recognition, in some fashion or another, of the en block, pro rata distribution amounts premised on a sale of the land at Valuation Day.

Some comfort may be had in following the comments of Walsh, J. in Bibby Estate v. The Queen, [1983] C.T.C. 121; 83 D.T.C. 5148 (F.C.T.D.) at page 131 (D.T.C. 5148):

While it has frequently been held that a Court should not, after considering all the expert and other evidence merely adopt a figure somewhere between the figure sought by the contending parties, it has also been held that the Court may, when it does not find the evidence of any expert completely satisfying or conclusive, not any comparable especially apt, form its own opinion of valuation, provided this is always based on the careful consideration of all the conflicting evidence. The figure so arrived at need not be that suggested by any expert or contended for by the parties.

Taking all of the aforementioned matters into consideration, and based on all factors presented, I find that the retention value of $4,300 for the Minister was too low and the $28,000 for each member was too high and that significant adjustments upward and downward, respectively, are called for in view of the aforesaid shortcomings. The Court concludes that the retention value associated with the membership rights in Northwood at Valuation Day was $15,700 per member. To that amount is to be added the agreed $4,300 value attributable to the bond/debenture itself in order to arrive at the fair market value of $20,000 for each member's entire interest.

As to the question raised about the onus or evidentiary burden of proof, it is my opinion that even if the burden had remained on the respondent throughout this case, the evidence adduced had fully and effectually discharged that onus on the balance of probabilities. Not only has methodological error on the part of the Minister been shown, partially through admission and essentially through the evidence, but also the extent of the error as exceeding the assessed $10,500 adjusted cost base has also been shown. I see no need for any further comment in this respect.

Determination

The questions to be determined pursuant to the Order dated May 22, 1986 are answered as follows:

(1) the fair market value of each of the affected taxpayer's interests in Northwood as at December 31,1971 was $20,000.00; and

(2) no other question arose in the course of the proceedings which should be resolved in order to determine the aforementioned question.