Carmen Franklin, Madeleine Munn, Agnes A. Plaunt, and Wye Investments Limited v. Minister of National Revenue, [1988] 2 CTC 2156, 88 DTC 1474

Rip, T.C.J.:—Carmen Franklin, Madeleine Munn, Agnes A. Plaunt and Wye Investments Limited ("Wye") appeal income tax assessments in which the respondent, the Minister of National Revenue, reassessed them for 1980 on the basis that a share in the capital stock of Cambrian Broadcasting Limited ("Cambrian") owned by them on December 31, 1971, (“Valuation Day”) had a fair market value of $94.25, and not $156, as stated by them in their returns of income. On or about March 31, 1980, the appellants sold their shares in Cambrian for $144.52 per share. In the appellants’ view they suffered a capital loss on the dispositions; the assessments for 1980 reflect a gain on the dispositions and the Minister disallowed capital losses carried forward to 1981 and 1982 by Mrs. Franklin and Mrs. Munn. [1]

The purchase price was paid as to approximately 75 per cent in 1980 and the balance during the period 1981 to 1982 inclusive. The appellants submit that in the event the Court finds the dispositions of their shares resulted in capital gains the respondent should have allowed a reserve in respect of the portions of the selling price which were not due until after each of the taxation years in issue. The Minister says the appellants Franklin, Munn and Plaunt are estopped from seeking a reserve pursuant to subparagraph 40(1)(a)(iii) of the Income Tax Act ("Act") for 1980 because the amount of any such reserve cannot be brought into income for 1981 because more than four years have passed since 1981 was originally assessed. The respondent did not reply to Wye's claim to a reserve.

I shall deal firstly with the valuation of the Cambrian shares.

Valuation of Shares

Cambrian had issued an outstanding 39,000 Class "A" preference shares and 1,000 common shares as at December 31, 1971. The parties agree that each Class "A" preference share and common share had the same fair market value at the end of 1971.

Cambrian commenced broadcasting operations with radio station CKSO- AM, in Sudbury, in 1953. On December 31, 1971, Cambrian owned and operated both an AM and FM radio station in Sudbury and a Canadian Television Network ("CTV") affiliated television station in Sudbury, CKSO- TV, with satellite stations in Elliott Lake, Timmins and Kearns. It had disposed of a radio station in Saskatchewan. Its wholly owned subsidiary, Tel Ad Co. Ltd. (“Tel Ad"), operated a CTV affiliated television station in North Bay. Prior to November 1, 1971, the Sudbury television station and its satellite stations in Timmins and Kearns were affiliated with the Canadian Broadcasting Corporation (“CBC”). Tel Ad was purchased by Cambrian on October 1, 1971. The change in network affiliation from CBC to CTV on October 1, 1971, was made in conjunction with the introduction of a second television station in Sudbury which was affiliated with the CBC.

Mr. William Plaunt, president of Cambrian from 1963 to 1980 and a member of one of the three family groups who owned the shares of Cambrian on Valuation Day, testified that prior to Valuation Day the shareholders of Cambrian had received two offers for purchase of their shares.

With a view to complementing its own television service Baton Broadcasting Limited ("Baton"), the owner at the time of CFTO, a television station in Toronto affiliated with CTV, made an offer in 1969 to acquire Cambrian's shares. Mr. John W. Bassett, chairman of the executive committee of Baton, testified that he offered the shareholders of Cambrian $7 million if prior to sale the television station disaffiliated itself from the CBC and $5 million if it remained a CBC affiliate. [2] It was worth $2 million to Baton to have Cambrian make the application for change of affiliation to the CRTC; also Baton preferred acquiring a CTV affiliated station because it did not want to compete against itself for programs after the purchase, for example, which would be the case if CKSO-TV remained a CBC affiliate. Mr. Bassett preferred a co-ordination of programs between the Toronto and Sudbury stations from the outset.

Mr. Bassett also indicated that if Baton was to own a CTV station in Northern Ontario, he preferred the station to be an established station rather than “starting from scratch” since it would have an existing audience. He recalled that private stations in Calgary, Edmonton, and Saskatoon disaffiliated from the CBC and joined CTV. "We got established stations for CTV . . . CBC had to start from scratch, not us,” He said CTV's only hope of getting into Northern Ontario was with an existing station.

An additional CTV affiliated station would also be advantageous to Baton. While CTV stations shared "revenue over expenses" based on the size of the stations, each station, regardless of size, had the right to name one director to the board of directors of CTV. A corporation had the right to name one director to the CTV board of directors for each station it owned.

Baton's offering price was calculated by Mr. Bassett after having the “financial people” at Baton review Cambrian's financial statements and recommending an amount. However he said he determined the offer of $5 million and $7 million for the shares. Mr. Bassett could not remember the price recommended by his "financial people”, although he believed it was in the “neighbourhood” of what he offered. Mr. Plaunt recalled he asked for $8 million. In any event the offer was rejected.

A second offer for Cambrian was made in May 1969 by Bushnell Communications Ltd. ("Bushnell") of Ottawa for $8 million. At the time of the offer, according to Mr. Plaunt, Bushnell was expansion oriented: it had agreed to purchase the North Bay television station and had offered to purchase the CTV affiliated station in Montreal.

The Bushnell offer was rejected although Mr. Plaunt was of the view the "price was right”. Mr. Plaunt thought that with competition from only the CBC Cambrian ought to do even better in the future as a CTV station. The majority of the ownership groups in Cambrian was prepared to sell; the group consisting of a family named Miller wished to sell its interest since the principal of the group was in his eighties, but finally agreed not to sell; a group including members of the Cooper family, led by Judge James Cooper, the senior Provincial Court judge for Sudbury, also wanted to sell but did not push its wish. But neither group felt any urgency to sell. Mr. Plaunt's group did not wish to sell as Bushnell’s financing for the acquisition depended on Bushnell acquiring not only the Sudbury television station but also CFCF-TV in Montreal; Mr. Plaunt also doubted CRTC would approve the licence transfer.

Mr. Plaunt testified that Bushnell’s price was based on Cambrian's total sales. Mr. Plaunt did not show Bushnell any of Cambrian's financial statements. In Mr. Plaunt's view a potential purchaser of a television station looks at the population the station serves and the structure of the community and determines "what he could do with the station”.

The directors of Cambrian decided in July 1969 that no further effort would be made to sell the television and radio operations until the position of the company was clarified by the CRTC.

In 1969 The Canadian Radio - Television and Telecommunications Commission ("CRTC") had a policy of encouraging expansion of the CTV network throughout the country as a secondary television service. In Mr. Plaunt’s view, 1969 was “decision time” for the CRTC in respect of the secondary service in Northern Ontario. His discussions with CRTC staff indicated that the CBC affiliated station in Timmins, owned by a corporation controlled by a Mr. Lavigne, would expand to Sudbury and North Bay and Cambrian would affiliate with CTV and expand to Timmins and to other areas in which Mr. Lavigne's station was operating. CRTC was encouraging Mr. Lavigne and Cambrian to find a solution to bringing the two services to Northern Ontario. Mr. Plaunt saw the secondary services as an inevitable and positive move for Cambrian. He anticipated the CBC buying out Mr. Lavigne's shares so that the CBC would own and operate the station. The significance of a CBC owned and operated station to Mr. Plaunt was that the CBC did not sell advertising locally and did not sell strong nationally. "We pinned our hopes that CBC would take over and we'd have the local market."

On August 5, 1970, the CRTC granted a licence to Mr. Lavigne's company for a new television broadcasting undertaking in Sudbury as a CBC affiliate and approved Cambrian's request for authority to disaffiliate CKSO-TV from the CBC television network and affiliate with the CTV network. At the same time Cambrian was granted licences to carry on new television broadcasting undertakings in Timmins and Kearns, Ontario. Cambrian's application for a television broadcasting undertaking in North Bay was denied by the CRTC. North Bay was to be included as part of the television service in Northern Ontario and the CRTC suggested that Mr. Lavigne's corporation and Cambrian "work out the most effective solution” to ensure secondary service for North Bay. In short, according to Mr. Plaunt, CRTC was encouraging Cambrian to purchase the shares of Tel Ad, which owned the North Bay television station, from the Thomson newspaper interests and affiliate the station to CTV. Mr. Plaunt stated CRTC made it clear to the Thomson interests that any sale of Tel Ad would have to be to Cambrian. Cambrian saw itself in a position to obtain the Tel Ad shares at an advantageous price. On October 1, 1971, Cambrian purchased the shares of Tel Ad from the Thomson interests for $550,000; in addition Cambrian assumed a debt of approximately $80,000 owed to Thomson by Tel Ad.

The fiscal year of Cambrian ends on August 31.

Mr. Plaunt explained that because of the time and energy spent on television, the results from the radio operations for 1971 were not good. He described the poor results as an "aberration" and said that "we knew we'd get radio back on its feet once we gave attention to it”.

Cambrian's overall performance for the period September to December 1971 was "quite satisfactory . . . (and) higher than in the past”. The directors of Cambrian realized however they "had lots to learn as part of CTV,” Mr. Plaunt said, but they were optimistic. He revealed Cambrian did "quite well” in competition with CBC in Sudbury and North Bay; they were satisfied with the Timmins results "even though there was work to do".

At the end of 1971 the shareholders of Cambrian were not interested in selling their shares. However if a sale was to have taken place on Valuation Day, the potential logical purchasers, in Mr. Plaunt’s view, were the proprietors of other CTV affiliates: Baton, Bushnell, the Pollock family who operated a television station in Kitchener-Waterloo and Multiple Access Limited (“Multiple Access") who owned CFCF-TV in Montreal. He said these parties may have wished to acquire Cambrian to have more "clout" on the CTV board of directors.

Mr. Bassett testified once his offer was rejected in 1969, he had no further discussions with the principals of Cambrian for purchase of their shares. He was never advised the shareholders were prepared to sell in 1971. Furthermore, on or about 1971, Baton was negotiating the purchases of broadcasting stations in Western Canada.

1972 was not a good year for Cambrian. At the beginning of the year International Nickel Company (“Inco”), Sudbury's largest employer, announced "massive" layoffs of employees in its mines and smelters over a two-year period. Eventually, Mr. Plaunt stated, 50 per cent of the Inco workforce was out of work. As a result retail sales in Sudbury declined and advertising on radio and, to a greater extent, television, was adversely affected.

Also Cambrian discovered that expenses for the television station were much greater than anticipated since, amongst other things, competition from another station in Sudbury caused prices for movies to increase; microwave and transmitter expenses also were greater than anticipated.

Cambrian in 1972 also lost its general manager who was described by Mr. Plaunt as "one of the top operators in the country" when he was in good health. Mr. Plaunt stated it took "a while" for Cambrian to find a new general manager.

In 1970 Revenue Canada officials had seized the books and records of Cambrian. For several years nothing was heard concerning the seizure and the investigation by the respondent. According to Mr. Plaunt this action caused Judge Cooper to insist in 1972 that Cambrian be sold. Judge Cooper was disturbed about the publicity surrounding Cambrian's problems with the respondent. He wanted to sell his group's shares, Mr. Plaunt said, for whatever he could get.

As a result of Judge Cooper's position, Mr. Plaunt and a Mr. Donald L. James, C.A., a partner in Thorne, Gunn, Cambrian's auditors, began, in 1972, to seek out purchasers. They did not however approach any specific person. On a visit to the CRTC offices in Hull, Quebec, Mr. Plaunt was told Mr. Bassett was a “persona non grata" at the CRTC and thus he excluded Baton as a potential purchaser. Mr. Plaunt did not want to be in a position where there would be an extended waiting period for a CRTC decision respecting the sale of the broadcasting licences since it is difficult to retain staff during a period of uncertainty. Mr. James sent out letters to his firm’s offices throughout Canada indicating the interest of the shareholders to sell.

Mr. James was approached by Multiple Access who, after discussions in 1973, offered the shareholders of Cambrian $3,972,282 for the shares. The purchase price included a non-interest bearing promissory note for $2,200,000 payable in 60 monthly instalments. In addition to purchasing the Cambrian shares Multiple Access also was to acquire shares in Ashmount Holdings Company Limited ('Ashmount"), a corporation owned by the shareholders of Cambrian in the same proportion as their Cambrian shares; Ashmount owned the real estate which Cambrian leased to carry on its operations. Mr. Plaunt said he opposed the sale but went along with Judge Cooper's wishes to sell and the offer was accepted. CRTC denied the application by Cambrian to transfer the shares to Multiple Access.

During 1974 to 1980 television revenue was not as high as expected and, according to Mr. Plaunt, the television operations lost money in some years. Radio revenue sustained the television operations.

According to Mr. Plaunt the shareholders sold their shares in Cambrian to Mid Canada Communications (Canada) Corp. for $5,900,000 [3] subject to a corporation owned. by the vendors purchasing the radio stations for $1,900,000; therefore, Mr. Plaunt concluded, the shares of Cambrian, assuming Cambrian owned only television stations, had a value of $4 million.

The appellant and the respondent called witnesses to give expert evidence as to the value of the Cambrian shares on December 31, 1971.

Evidence of Appellant's Experts

Mr. Thomas B. Dyson, C.A., works as a valuator with Thorne, Ernst and Whinney, a firm of chartered accountants, of which he is a partner. He testified in support of the appellant's position that each share in Cambrian had a value on Valuation Day of at least $156, or $6,240,000 for all the shares. In Mr. Dyson's opinion the fair market value of a share as at December 31, 1971, was between $143 and $156.

Mr. Dyson received his Bachelor of Arts degree from York University in 1971 and his Chartered Accountant designation in 1974. In 1976 he was granted the degree Master of Business Administration from York University. He has been a member of the Canadian Institute of Chartered Business Valuators since 1979 and a senior member of the American Society of Appraisers since 1984. He has conducted numerous valuations of public and private corporations for income tax, estate planning, securities legislation, family law legislation, shareholder disputes, expropriation, merger and acquisition purposes. He has lectured to the Law Society of Upper Canada on valuing a professional business as well as to the Advocate Society and the Chamber of Commerce of south western Ontario; he has provided expert witness testimony to the Ontario Land Compensation Board, Ontario Municipal Board, Land Value Appraisal Commission, Supreme Court of Ontario and the Federal Court of Canada.

Thorne, Ernst and Whinney is a successor to the partnership of Thorne, Riddell, the auditors of Cambrian prior to the sale in 1980, and their immediate predecessor partnerships, including Thorne, Gunn.

Mr. Dyson prepared his valuation report in 1980. In preparation of his report he reviewed Cambrian's audited financial statements for the period of January 1, 1967, to August 31, 1971, inclusive, as well as appraisal reports of property owned by Cambrian as at June 20, 1969, and Tel Ad as at October 8, 1970, as well as other corporate documents he considered necessary. He discussed Cambrian's history with Mr. Plaunt and Mr. Miller, toured the company's offices and studio and reviewed published market data and other public information as it related to the broadcast industry. He also reviewed the rent paid by Cambrian to Ashmount and concluded it was reasonable.

The determination of the "en bloc” fair market value of Cambrian was the first step in valuing the Cambrian shares. Estimates were made of the net realizable value of redundant assets, that is, assets not used in broadcasting operations, and of the fair market value of the radio and television broadcasting operations of the company. The net realizable value of the redundant assets was estimated to be approximately $825,000.

The broadcasting operations were split between radio and television for valuation purposes; net tangible operating assets used for both radio and television were also valued. The broadcasting licences and goodwill, if any, were also valued.

The radio stations were valued by Mr. Dyson on a "multiple of revenue" approach since, according to him, it is "the accepted approach used within the radio broadcasting industry”. Based on his experience and knowledge of that industry at Valuation Day he selected multiples of 1.8 to 2.0 which were applied to revenue, net of agency commissions, earned in fiscal year ended August 31, 1971, a poor year for radio operations according to Mr. Plaunt. The calculations of these multiples resulted in the fair market value of the radio operations to be $1,100,000 with a multiplier of 1.8 and $1,222,000 with a multiplier of 2.0.

The expert witness for the Minister stated in her evidence that there was no major disagreement between her and Mr. Dyson in respect of the value of the radio operations. The battle was with respect of the valuation of the television operations.

In valuing the television operations Mr. Dyson considered two methods, a multiple of revenue and a multiple of cash flow. The latter approach involves estimating future cash flow and applying a multiple to the estimate making adjustments for long term debt inherent in the shares of the company. This approach was rejected by Mr. Dyson because he had problems in estimating the cash flow of the station as a CTV affiliate. In addition, Cambrian, during its 1971 fiscal year, spent $683,085 on transmitters and tower equipment in the Timmins and Kearns areas and $255,000 upgrading the Sudbury facilities with additional microwave and other equipment. Such expenditures, he said, could have depressed the future cash flow.

Mr. Dyson preferred the multiple of revenue approach. He reviewed the Baton offer searching for an acceptable multiple. Assuming Baton’s offer for the radio stations, including a station in Regina owned by Cambrian, was two times revenue, the multiple for the television operations was 2.8. He did not attach too much weight to the Bushnell offer, noting it appeared the multiple was in excess of 2.8.

The Tel Ad transaction reflected a multiple of 1.4 times most recent revenue. This too was discarded by Mr. Dyson since Thomson was dealing with only one potential purchaser and CRTC, who had the right to disallow the sale, was encouraging the acquisition in 1971 of the Tel Ad television station by Cambrian. The North Bay television market was more fragmented than that of Sudbury and had a generally less profitable history than the Sudbury station.

Mr. Dyson's firm's files contained executed agreements to purchase shares of corporations which owned radio and television stations in central Ontario prior to Valuation Day. These transactions, which involved companies that received most of their revenue from television broadcasting, indicated multiples of 2.6 times the combined revenues of radio and television operations.

As a result, Mr. Dyson determined the multiple for Cambrian's television stations to be 2.2 and 2.4. He applied lower multiples than those used in the Baton offer and reflected in his files since in his view “it was not possible at the valuation date to quantify the detrimental effect that the presence of a competitive television station in Sudbury would have on earnings". Based on the multiples he determined the fair market value of the television broadcasting operations to fall within the range of $3,789,000 to $4,192,000. He obtained the result by multiplying 2.2 and 2.4 by the aggregate of television revenue of Cambrian and Tel Ad for the year ended August 31, 1971, net of agency commissions and deducting from the product long term debt identified with the television broadcasting facilities.

The fair market value of the operating assets of Cambrian and Tel Ad as at December 31, 1971 approximated $3,106,000 according to Mr. Dyson. Mr. Dyson assumed the aggregate book values of shareholders' equity in Cambrian and Tel Ad as at August 31, 1971 had not changed substantially as at Valuation Day but were adjusted to reflect an estimate of the replacement value of the land, buildings and equipment as estimated by an appraiser and adjusted further by net additions to fixed assets from the date of appraisal to December 31, 1971. Deferred income taxes not expected to be payable in the next term were eliminated. Also eliminated were assets not required for the operation of the broadcasting business and the amount Cambrian paid for the share of Tel Ad.

The value of the broadcasting licences and goodwill was also valued. Mr. Dyson considered Cambrian's “dominant position” in television broadcasting in the Sudbury area and the "significant" position in the radio broadcasting industry in the area; he also took into account the restricted supply of broadcasting licences and an active acquisition environment in the broadcasting industry in 1971 which disclosed to him that substantial amounts were being paid for broadcasting licences and goodwill.

Mr. Dyson estimated the value of the broadcasting operation and goodwill to be in the range of $1,783,000 and $2,308,000, the difference between his values for the radio and television operations, based on the multiples applied, and the fair market value of the net tangible operating assets.

Mr. Dyson was confident that based on radio operations the amount of goodwill he determined was not out of line. He indicated Baton paid $3 million for goodwill of a television station in Saskatchewan.

Redundant assets were valued by Mr. Dyson at $825,000. He was of the view that generally accepted valuation principles have the valuator look at the tax cost of withdrawing money from the corporation only if it is the intention of the shareholders to strip the company. A prudent businessman, he said, would use the assets to pay off debt which would increase profits and increase the value of the company. Thus in calculating the value of the redundant assets Mr. Dyson did not deduct the tax cost of liquidating the assets.

The fair market value of broadcasting operations was adjusted by the value of the redundant assets of $825,000 so that the value of the issued net outstanding common and class "A" preference shares of Cambrian on Valuation Day fell within a range of $5,714,000 to $6,239,000 as follows:

Mr. Dyson referred to an article in “Industrial Accounting", a magazine directed to the readership of U.S. accountants, which came to his attention in the course of his work. The article was adapted from a presentation delivered to a seminar on "Accounting Problems of the Radio and Television Industry" in New York on November 18, 1971, by Mr. Philip Zimmerman, M.B.A., C.P.A. and Mr. William I. Leffler, C.P.A. The authors stated that for AM radio stations licenced to broadcast twenty-four hours a day, the industry rule of thumb for value is a multiple of two times the gross sales or a multiple of seven to ten times the operating income. Television stations commanded higher multiples than radio stations since their income had been growing faster than radio's and competition had been less intense because there were fewer television stations licenced in one market.

The prime earnings ratio for publicly traded stocks of companies in the broadcasting industry on the Toronto Stock Exchange on Valuation Day was 25.33:1. Such a ratio applied to Cambrian would reflect a value of approximately $5,750,000. The average price earnings ratio of all stocks on the Toronto Stock Exhange at December 31,1971 was 17:1.

Mr. Dyson considered the Multiple Access offer but did not take it into account in his valuation.

Additional evidence for the appellants as to the value of Cambrian shares was offered by Mr. Donald L. James, C.A. who was the partner at Thorne, Gunn, chartered accountants, in charge of the Cambrian account from 1953 and 1978. Counsel for the respondent agreed to Mr. James' qualifications as an expert witness. His evidence of the history of Cambrian’s shareholders' efforts to sell their shares was of assistance to the Court.

Mr. James’ responsibilities as partner in charge of Cambrian included the preparation of the annual audited financial statements of the company and advising senior management of Cambrian each time they considered buying or selling a broadcasting facility. At the time that he performed the Cambrian audit, he audited the affairs of another corporation who owned and operated radio stations in Sudbury.

During Mr. James’ professional career he offered clients financial advice on numerous types of businesses, including that of radio and television broadcasting, for the purpose of negotiating the purchases and sales of businesses and valuations thereof. However my appreciation of his evidence is that the major part of his work with Thorne, Gunn was as auditor and general business advisor to clients. Mr. James retired in 1978 and now works as a consultant out of Oakville, Ontario.

In Mr. James’ opinion the fair market value of the shares of Cambrian on December 31, 1971, was in the range of $6,263,000 to $6,663,000. He consid- ered all of the shares to be of equal value without distinction between common and class "A" preferred shares and without any minority discount. He always assumed there was an unwritten but clear agreement among the shareholders of Cambrian that none of them would sell their shares unless a buyer agreed to purchase all the shares of Cambrian. He stated that this agreement was adhered to each time a share sale was considered, including the actual sale of shares in 1980.

When the shareholders of Cambrian were considering the sale of their shares in 1969, he worked with senior management of Cambrian in seeking potential buyers. On July 3, 1969, he attended a meeting with representatives of Cambrian and Baton at which time an offer was made to Cambrian's shareholders at a price dependent upon which television network the television station was affiliated with. He confirmed that the Cambrian shareholders did not accept Baton's offer but instructed management to apply to convert their television broadcasting licence from the CBC to a CTV affiliation as soon as possible, which Cambrian's management proceeded to do.

In arriving at his value of the shares of Cambrian as at Valuation Day Mr. James considered whether any increase or decrease in value likely occurred between the summer of 1969, when the Baton offer was under consideration, and the end of 1971. He took into account the fact that at Valuation Day, Inco had reduced slightly the number of its employees by attrition and that its major capital expansion program was winding down. However he stated that the degree of optimism in Sudbury remained high until after December 31, 1971 and that any slight decline in the level of economic activity in Sudbury did not alter the value of the Cambrian shares in the interim, that is between 1969 and the end of 1971.

Mr. James testified that during his career he experienced nine transactions concerning radio and television broadcasting stations. In his view, the prime determinant of the price at which a radio and television broadcasting business is bought and sold is whatever special value a prospective buyer subscribes to the business: . . you look for a buyer who could do something with the station. You seek out a special purchaser and if you find him you do very well.” He stated there were "few" television stations, and even "fewer" sales, in the 1970's and he did not know of any sale of a television broadcasting facility in 1971.

In Mr. James’ view the purchase and sale of a television broadcasting station differs markedly from sales of other types of businesses where the primary determinant of prices is the earnings or liquidation value. In his opinion the best indices of the fair market value of the Cambrian shares on December 31, 1971, were the Baton and Bushnell offers made in 1969. He stated that because Baton was involved in other acquisitions in 1971 it likely would not have been a prospective purchaser for the Cambrian shares on Valuation Day and the absence of such a prospective purchaser would have decreased the value of Cambrian's shares by as much as $500,000.

Mr. James testified that Cambrian's net operating income of $156,329 for the first four months of the 1972 fiscal year, that is September 1 to December 31, 1971, was reduced to $50,251 over the following eight months of the depression that hit Sudbury after December 31, 1971, as a result of Inco's announced layoffs.

Mr. James recalled that Cambrian's 1970 fiscal year operations suffered because of a strike at Inco for four months of 1969 which affected the economy of Sudbury. Mr. James testified that the January 1972 Inco an- nouncement of layoffs was only the first announcement and that two or three months later, additional layoffs were also announced. Between January 1st, 1972 to the 1st of March, 1972, 1,000 employees were laid off at Inco. As at June 30, 1972, there were 14,396 hourly employees at Inco compared to 18,431 employees a year earlier. In June 1973 the number of hourly employees was 13,330, in June of 1974, 14,550 and in June of 1975, 15,146.

The value of the shares was determined by Mr. James’ according a value of $3,106,000 to the tangible assets for television and radio, and adding values for redundant assets ($825,000), estimated radio licence and goodwill ($1,000,000 to $1,200,000) and estimated television licence, organization costs and goodwill ($1,600,000 to $1,800,000) for a total of $6,531,000 to $6,931,000. He would have deducted from the total $237,000 of long term debt he was not aware of until he heard the evidence of Mr. Dyson.

Mr. James was involved in the negotiations for the sale of the Cambrian shares to Multiple Access. He said the mood of the Cambrian shareholders, and in particular Judge Cooper, was to sell at any price since there was fear, in particular by Judge Cooper, that Inco would soon close its operations in Sudbury. Judge Cooper was prepared to accept the first offer by Multiple Access. Mr. James indicated that while the Multiple Access negotiations were taking place, interest for Cambrian was being expressed by other parties including "Q" Broadcasting in Vancouver. However the principals of Cambrian were not prepared to wait for any potential offers. In their view things were getting worse and worse in Sudbury on a day to day basis. “Panic”, according to Mr. James, described the mood of some of the shareholders.

In cross-examination Mr. James indicated that when, in August of 1972, he was instructed to assist in the sale of the shares of Cambrian, he considered a purchase price of $7 million. However as the depression in Sudbury worsened he thought $5.5 million would be a good price. As months went by things in Sudbury got worse and worse and he “had to take off another $1 million". In the meantime Mr. James was assembling information for potential purchasers which he distributed to various offices of his firm throughout Canada; this information was not produced in evidence. There had been some interest expressed by Mr. John Wintermeyer of Kitchener, Ontario and Power Corporation of Montreal; however nothing came to fruition.

Mr. James corroborated Mr. Plaunt's evidence as to Cambrian's difficulties with its general manager, due to the latter's illness. Mr. James indicated that by 1973 things were so bad at Cambrian that his negotiating power was "zilch".

Respondent's Expert Witness

Miss Claudine Averill Pyke, at present a Research Officer with the Public Service Alliance of Ottawa, testified as an expert witness on behalf of the respondent. Miss Pyke was employed by the respondent in the years 1975 to 1987, firstly as an auditor and from 1981 to November 1987 as a business equity valuator.

Miss Pyke has taken courses offered by the Canadian Institute of Business Valuators for the purpose of receiving the designation of Chartered Business Valuator but did not pass all the examinations required for such a designation. She also has taken courses towards receiving the designation of chartered accountant but to date has not accomplished this goal. Similarly Miss Pyke has taken courses towards a degree of Master of Business Administration but never completed the program for a degree. While working with Revenue Canada she stated she was "involved" in approximately 75 business valuations.

Miss Pyke valued the shares of Cambrian as at Valuation Day to be worth $3,550,000, or $89 per share.

Miss Pyke established her opinion of fair market value of the Cambrian shares by using a multiple of broadcast cash-flow approach. She defined broadcast cash flow as "the net profit from operations before deduction of depreciation, amortization, interest and income taxes". A multiple of broadcast cash flow consists of estimating the expected broadcast cash flow from broadcast operations and then multiplying the indicated broadcast cash flow by an appropriate multiple to arrive at the fair market value of the operating assets. To arrive at the fair market value of the shares, the indicated fair market value of the operating assets must be reduced by the amount of long term liabilities and by the present value of loss and tax savings on the purchase of shares as against assets and to be increased by the fair market value of its wholly owned subsidiary, Tel Ad, and in the net redundant assets held by the company.

Miss Pyke made no distinction between radio and television broadcasting cash flow and combined both radio and television operations. She said she realized different multipliers existed for radio and television and used composite multiples to take both broadcasting operations into consideration. She considered Cambrian's radio operations to be low risk, its value to be based on past earnings while its television operations were high risk with projections in an unknown market.

In arriving at her conclusion as to value of the company's shares as at Valuation Day, Miss Pyke considered several factors. Most important of these factors was that a second television service was established in the Sudbury area on October 31, 1971. For the first time in its operating history, Cambrian's television station had competition. She therefore concluded that revenues would be reduced in the future since its costs would increase if it wished to effectively compete. She also gave great weight to a brief submitted in late 1969 by Cambrian to the CRTC in opposition to a second television station being licenced for the Sudbury area at the time. The Cambrian brief included projected revenues and expenses for the 1972 and 1973 fiscal periods on the assumption that the Cambrian television station would be affiliated with CTV and that the competition would be a privately owned CBC affiliate. As well, Cambrian would be permitted to expand into the Timmins market. The projection did not consider the North Bay operations. The net income for television operations projected for 1971, 1972 and 1973 was $120,900, $73,400 and $41,400 respectively.

Miss Pyke relied on these projections because Cambrian was “probably the best person to reflect the scenario" for the future.

Miss Pyke did not consider the financial statements for the fiscal years ending prior to November 1, 1971 since in her view they do not reflect operating results of the company and the conditions similar to that were in effect at the valuation date. She put great weight in the assumption that the changes that took place on November 1, 1971, would reduce Cambrian's television earnings. It was her opinion that "a knowledgeable and prudent prospective purchaser would have attempted to quantify the amount by which earnings would likely be eroded before making an offer”. Miss Pyke did not put much weight into the argument that Cambrian acquired the shares of Tel Ad at a favourable price which was less than value, as put forth by Mr. Plaunt since the purchase took place only two months prior to Valuation Day; the purchase price was the best indication of fair market value of the Tel Ad shares notwithstanding Mr. James' evidence that the CRTC had directed the Thomson interests to sell to Cambrian. She did not adjust the Tel Ad purchase by the debt which Cambrian assumed.

She considered the earnings of three years prior to Valuation Day as the best indication of future expected net revenues from the radio operations.

Miss Pyke relied greatly on a United States publication issued by PK Services Corporation Limited, a consulting company organized by one Paul Kagan, who she referred to as a broadcasting financial analyst who conducts seminars on the value of radio and television stations and appraises broadcast properties. In Mr. Kagan's view the most frequently used, and abused, multiple is a revenue-to-purchase price.

Mr. Kagan's article is entitled "The Primer On Radio Station Investment" and was published in 1979. Mr. Kagan wrote that while it is common for people to discuss values as a multiple of revenues, a sophisticated buyer uses a more thorough analysis. Knowledgeable buyers, Mr. Kagan states, tend to speak in terms of multiples of the broadcast cash-flow that the station is likely to generate. Those multiples usually range from seven to ten times estimated cash flow, "but can exceed this range at both extremes". The cash flow multiple depends on the expected growth of the market, competition and quality of the station's physical assets. The talent of the operator of the station is also a significant factor in determining a multiple.

Miss Pyke preferred multiple of cash flow approach to that of revenue approach because the former approach considers the effects of different markets, circumstances or broadcasters. In her opinion a multiple of revenue approach, on the other hand, places too much emphasis on potential advertising revenues and expenses are not considered.

There was no audited financial statement of Cambrian prepared as at Valuation Day. In Miss Pyke's view the financial statements of August 31, 1972, more closely represented the financial status of the company as at Valuation Day than those of August 31, 1971 because of the affiliation with CTV which took place in the 1972 fiscal year.

The possibility of any special purchasers who would be in a position to acquire Cambrian's shares as at Valuation Day was ignored by Miss Pyke because special purchasers such as Bushnell and Baton were not being given permission to enter Northern Ontario by the CRTC. In 1970, she testified, the CRTC stated that it would protect broadcasters in Northern Ontario. She concluded that broadcasters most likely to benefit from this policy and also be acceptable as suitable transferees in the eyes of the CRTC would be other broadcasters in Northern Ontario.

The offer by Multiple Access did influence Miss Pyke in arriving at her valuation as the Multiple Access offer was based on the financial statements for the period ended August 31, 1972, and circumstances were not significantly different at the time of the offer from those existing as at Valuation Day in her view.

In cross-examination, Miss Pyke stated she did not consider the layoffs in Sudbury starting in 1972 a significant factor. She referred to an article in the Globe and Mail newspaper in the fall of 1972 which referred to a previous strike in 1969 at Inco and stated that the layoffs would not affect the long term results of Inco. She admitted that she was not aware of the extent of the layoffs.

She also acknowledged that she was not aware of the problems Cambrian management was having with its general manager, Mr. Connor, in 1972. She did not know that Mr. Connor was discharged in November of 1972 and that his illness, coupled with his termination, adversely affected the company. She admitted that such problems probably would have created an impetus for the vendor to sell.

In her report Miss Pyke stated that the expected annualized broadcast cash flow from operations, including radio and television, was estimated to range from $440,000 to $500,000. She assumed that the television revenues projected by the company in its brief to the CRTC correctly reflected the industry expectations for the company for the future, although the projections were based on an untested market. She downplayed the past television earnings of the company as a CBC affiliate since they were not indicative of future expected earnings. She assumed that prior years' revenue from radio operations could be used as an indicator of future radio revenues. To assess the reasonableness of the company's projections, she compared them to the actual operating results for the 1972 and 1973 fiscal years. To arrive at the expected broadcast cash flow, the operating income from television before administrative expenses, interest expense, depreciation expense and income tax expense, as projected by the company for 1972 and 1973, and the expected future revenues from radio, were reduced by the estimated administrative expenses. She assumed that as at December 31, 1971, it would have been possible to predict that the administrative expenses could have been reduced. She assumed that the rent paid to Ashmont for the use of the land was an economic rent thus obviating the need for any adjustments to the administrative expenses. Her estimated range of expected broadcast cash flows was $440,000 to $500,000 which she multiplied by 7.5 and 7, respectively, to arrive at a range of fair market value of the operating assets between $3,300,000 to $3,500,000. Miss Pyke multiplied 7.5 by $3,300,000, because the cash flow projection in her view was optimistic and she could not rely on television revenue to continue into the future. The multipliers used by her were a composite of lower radio and higher television multipliers.

Miss Pyke reduced the fair market value of the operating assets by the $667,000 of long term liabilities existing at August 31, 1972; she thus estimated the fair market value of "operating assets net of long term liabilities” to range from $2,633,000 to $2,833,000. She then adjusted the range to take into account future tax savings lost by a purchaser on the purchase of shares as against assets and concluded that a share transaction would result in a loss to the new shareholders of $402,000 of future tax benefits and additional capital cost allowance of $900,000. The fair market value of the Cambrian shares, before adjustments for the Tel Ad and redundant assets, was estimated by Miss Pyke to range from $2,231,000 to $2,431,000. She then added to the value range the fair market value of the shares of Tel Ad, $532,000 and the realizable value of the redundant assets, $680,000/ [4] to arrive at a fair market value of the Cambrian shares in the range of $3,463,000 to $3,663,000, which she adjusted to a range of $3,450,000 to $3,650,000.

She estimated the tangible assets of Cambrian, excluding Tel Ad's operations, to be worth $1,600,000 and the fair market value of those operations at $2,300,000; thus the goodwill and licences of the company's radio and television stations had a value of $700,000.

When preparing her valuation report Miss Pyke was not aware that Cambrian had a revenue of $156,000 for the four months, September 1 to December 31, 1971, and that television revenues from the last four months of calendar year 1971 were slightly above revenues for the same four month period a year earlier. She stated that had she known of the last four month results for calendar year 1971, she would have analyzed them closely.

Miss Pyke also considered factors in the Sudbury market place which would influence broadcast revenue such as average income, unemployment, and "per capita” advertising revenue.

Miss Pyke admitted that she did not know Cambrian had paid dividends of $96,000 to its shareholders during the 1972 fiscal year and acknowledged that she would have had to add to the value of the Cambrian shares the amount of dividends paid out after December 31, 1971. Mr. James testified Cambrian paid dividends on a monthly basis so that at the end of calendar year 1971, four-twelfths of the $96,000, or $32,000, was paid out, leaving $64,000 to be paid out during the balance of the 1972 fiscal year.

To verify her assumptions, Miss Pyke assumed a range of total expected advertising revenues of $2,200,000 to $2,500,000. The multiplier required to arrive at fair market value for the shares equivalent to $3,550,000 was 1.4 to 1.5. These revenues were only projections and did not take into account the company's costs to serve a densely populated area. She stated broadcasting stations were said to sell for 1.5 to 2 times revenues in 1971; however stations were known to have been sold for multiples of revenue both higher and lower than this range.

To further test the reasonableness of her conclusion, Miss Pyke estimated the fair market value of the shares using the capitalized cash flow approach. The multiplier required to arrive at the fair market value for the shares equivalent to $3,600,000 was 20, or a capitalization rate of five per cent. Since the prime rate at the time was six per cent, she found her conclusion of value to be reasonable.

She disagreed with Mr. Dyson's use of the multiple of revenue approach. In Miss Pyke's view the multiple of revenue approach ignores the expenses required to generate certain revenues. In cross-examination it was suggested to her that if the $680,000, the value of the redundant assets, is deleted from the $3,550,000, the mid-range of her value of the shares, the result is the company has assets worth $2,870,000. If $2,870,000 is divided first by $2,200,000, the lower end of the projected revenues, and then by $2,500,000, the upper end of the projected revenues, the indicated multipliers are 1.3 and 1.15 respectively, well below the multiples referred to by Mr. Kagan, counsel for the appellant suggested.

Valuation Conclusions

I prefer the opinion of Mr. Dyson to that of Miss Pyke. As I indicated earlier Mr. James' evidence was of assistance to me more to appreciate the negotiating position of Cambrian's shareholders over the years than as to indication of value on December 31, 1971.

Mr. Dyson's qualifications as an expert were overwhelmingly superior to that of Miss Pyke: his ability as a valuator has been recognized by professional societies in Canada and the United States. His work in performing the subject valuation appears to have been more extensive than that of Miss Pyke. Mr. Dyson interviewed the former officers of Cambrian and visited Cambrian's studios. He also, had available to him financial statements of Cambrian for the four month period ending December 31, 1971.

I appreciate that in the circumstances the former officers of Cambrian, if she had initiated a meeting to discuss the company, may not have been as forthcoming with Miss Pyke as they were with Mr. Dyson. She gave too much weight to the Multiple Access offer, which took place almost two years after Valuation Day during which time the area served by Cambrian was suffering a serious economic downturn and the weight to the offers received in 1969. Because of the economic situation in Sudbury starting in 1972, I also believe Miss Pyke placed too much reliance on Cambrian's financial statements for 1972. She failed to investigate when income was earned in the year or when dividends were paid during the year and make the necessary adjustments to Valuation Day. In the circumstances the financial statements for 1971, adjusted as of December 31, 1971, as was done by Mr. Dyson would have been of great assistance to Miss Pyke. I do not attach as much weight as Miss Pyke to the projections contained in Cambrian's brief to the CRTC since these projections were prepared in 1969 for reasons other than valuation purposes. Miss Pyke also placed very great reliance on Mr. Kagan's article, which was devoted to radio broadcasting, not television broadcasting. For these reasons I have accepted Mr. Dyson's “multiple of revenue" approach to that of Miss Pyke's "multiple of cash flow" approach. Mr. Dyson's reasons for rejecting the “multiple of revenue" [sic] approach because of difficulty in estimating the cash flow of the television operations as a CTV affiliate and because of recent capital expenditures are not unreasonable.

However I have a feeling that Mr. Dyson's estimate of value is slightly excessive. The evidence suggests that in 1969 it was anticipated by Baton that the CBC station in Sudbury would be owned by, and not affiliated with, the CBC notwithstanding the contrary assumption in the brief to the CRTC. Mr. Plaunt stated that competition from a CBC owned station would be worse than from a CBC affiliated station. In relying on the Baton offer, Mr. Dyson ought to have given more consideration to the competitive strength of a CBC affiliate in place on Valuation Day. Because of the competition Mr. Dyson applied the multiple to less than 2.6, as indicated by the Baton offer and his files, to between 2.2 and 2.4. The Baton offer may have been in excess of what another potential purchaser may have offered: Cambrian's television operations had a certain attraction to Baton, as well as other shareholders of CTV, in that Baton, on acquisition of Cambrian, would have the right to nominate another director to the Board of Directors of CTV. Also, Baton would have available an additional market to distribute its own television productions; there would be an advantage of synergy. However, there was no evidence Baton was a potential purchaser of Cambrian shares on Valuation Day.

I would therefore reduce the multiplier from the mid-range of 2.3 by ten per cent to 2.07. I would retain Mr. Dyson's other valuations including that of the radio operations. Therefore, in my view, the fair market value of the Cambrian shares is to be determined as follows:

Right to Reserve

As a result of the value determined by me, a capital gain will result. The appellants wish to take advantage of subparagraph 40(1)(a)(iii) of the Act and claim a reserve in respect of the proceeds of the sale that were not due to them until after each of the taxation years in question. The respondent, as previously indicated, denies the appellants the right to the reserve because the amount of the reserve that could ordinarily be deducted in 1980 cannot be brought into income for 1981 because more than four years have elapsed since the date of the first assessment for 1981. For 1980, subsection 152(4) read as follows:

(4) The Minister may at any time assess tax, interest or penalties under this Part or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or

(ii) has filed with the Minister a waiver in prescribed form within 4 years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year, and

(b) within 4 years from the day referred to in subparagraph (a)(ii), in any other case, .

reassess or make additional assessments, or assess tax, interest or penalties under this Part, as the circumstances require.

Subparagraphs 40(1)(a)(i), (ii) and (iii) read as follows with respect to 1980 and 1981:

(1) Except as otherwise expressly provided in this Part

(a) a taxpayer's gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, or

(ii) if the property was disposed of before the year, the amount, if any, claimed by him under subparagraph (iii) in computing his gain for the immediately preceding year from the disposition of the property,

exceeds

(iii) such amount as he may claim, not exceeding a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property; . . .

In the view of appellants' counsel, taxation years 1981 and 1982 are available for reassessment by the Minister notwithstanding the original assessments were issued more than four years ago because those years have been apealed in respect of disallowance of capital losses carried forward from 1980. Thus the Court may direct the Minister to reassess.

I do not agree with the arguments of either party. In so far as the appellants' argument is concerned, to allow the appellants to appeal from their 1981 and 1982 assessments to add income (that is, the amount of the reserve deducted in the immediately preceeding year) would result in an increase in tax for 1981 and 1982. This would run counter to the line of cases which do not permit a taxpayer to appeal an assessment for the purpose of increasing income for the year and thus his tax liability: No. 526 v. M.N.R., 20 Tax A.B.C. 114; 58 D.T.C. 497, L.J. Harris v. M.N.R., [1964] C.T.C. 562; 64 D.T.C. 5332, Shiewitz v. M.N.R., [1979] C.T.C. 2291; 79 D.T.C. 340, L. Boyko v. M.N.R., [1984] C.T.C. 2233 at 2237; 84 D.T.C. 1233 at 1237 and S. Cooper v. M.N.R., [1987] 1 C.T.C. 2287 at 2301; 87 D.T.C. 194 at 205.

Subparagraph 40(1)(a)(iii), as I read it, permits a taxpayer to claim in a year a reasonable amount as a reserve in respect of proceeds of disposition of property she has disposed of in the year which is not due to her until after the end of the year as may be regarded as part of her capital gain (less expenses). The right to claim the reserve is clear and is not subject to any qualification related to the ability of the respondent to include the amount of the reserve back into income for the following year.

What transpires, or cannot transpire, in a subsequent taxation year does not affect the right of the taxpayer to enforce his or her rights under the statute for a taxation year. In L. & M. Wood Products Ltd., et al. v. M.N.R., [1972] C.T.C. 556; 72 D.T.C. 6483 Mr. Justice Heald wrote, at page 560 (D.T.C. 6485) :

. . . The scheme of the statute applies to separate taxation years and to separate taxpayers. Each assessment in each year is, it seems to me, a separate cause of action. The object of the appeal procedures set out in the Act is to obtain an adjudication of the issues which have arisen between a particular taxpayer and the Minister of National Revenue as to his liabilities under the statute for a particular taxation year.

Subparagraph 40(1)(a)(ii) provides for the taxpayer to include in her gain for a year the amount of the reserve claimed in subparagraph (iii) in comput- ing a gain for the immediately preceeding year. If as a result of a reassessment, what a taxpayer genuinely believed was a capital loss is determined to be a capital gain, her rights under the statute ought not to be lost: in general she has the right to invoke any provision of the Act to reduce income that she could have invoked on the day she prepared her return of income for the year. [5] The question of estoppel is not an issue.

The respondent need not lose his ability to include in the taxpayer's income for the next year the amount of the reserve claimed in the immediately proceeding year. Prior to reassessing the respondent may request from the taxpayer whether she wishes to claim the reserve. Usually taxation years are assessed chronologically so if a year is assessed and a reserve is claimed, later years may be reassessed as well to include the amount of the reserve. It is arguable that in the alternative the respondent, in reassessing, may grant the taxpayer a reserve on his own initiative: Weinstein v. M.N.R., 68 D.T.C. 5232. The wording of subparagraph 40(1)(a)(iii) is not identical to that of subsection 85B(1) of the Act, as it read prior to 1972. The latter provision contains the words "there may be deducted a reasonable amount as a reserve". The present provision contains the phrase "such amount as he may claim”. The difference in wording may be significant but this question is not now before me and I do not propose to deal with it.

The appellants Franklin and Munn are entitled to claim a reserve for 1980.

1981 and 1982 Appeals

As a result of my determination of the fair market value of each share in the capital share of Cambrian as at December 31, 1971, no capital loss results and the appellants Franklin and Munn have no capital loss to carry forward to 1981 and 1982. For reasons previously mentioned a taxpayer is not permitted to appeal an assessment for the purpose of increasing her income for the year and thus her tax liability.

Decisions

The appeal for 1980 will therefore be allowed with costs and the notice of reassessment will be referred back to the respondent for reconsideration and issuance of the appropriate reassessment. The appeals for 1981 and 1982 are dismissed.

Appeals allowed in part.