George H. Trynor and Elizabeth J. Boyd v. Minister of National Revenue, [1988] 1 CTC 2425, 88 DTC 1294

Kempo, T.CJ.:—George Trynor's appeals concern his 1981 and 1982 taxation years. The appeal of Elizabeth Boyd concerns her 1981 taxation year. These appellants’ appeals were, on application and by consent, joined to be heard on common evidence as the two basic issues raised were common to both.

The Issues

The basic issues, as identified by counsel, were whether each appellant had made valid elections under subsection 26(7) of the Income Tax Application Rules, 1971 (“ITAR”) so that the cost of their Silver Sands Limited ("Silver Sands") shares, which were sold in 1981, would be deemed to be their fair market value on December 31, 1971 ("V-Day") and if so then, in determining that V-Day value, whether Silver Sands’ right to exploit sand and gravel from its beach property was calculable and properly included therein. The final issue was whether the V-Day value of Ms. Boyd's shares was subject to any minority discount.

The Elections

Ms. Boyd owned three shares and Mr. Trynor owned twelve shares in Silver Sands before and at V-Day and in 1981 when they were disposed of, the latter year being the first taxation year in which capital property owned by them on V-Day had been disposed of. The 1981 income tax returns of both appellants had apparently been prepared by Ms. Boyd and they were late filed. Ms. Boyd's was dated May 10, 1982 and Mr. Trynor's was dated May 14, 1982. The decision to use the V-Day fair market value of the shares was not portrayed in these returns by the filing therein of the prescribed form T2076. Rather, as indicated in a separate document contained in each return (Exhibits A-1 (a) and A-2(a) respectively) the intention to use V-Day value was clearly stated.

Ms. Boyd testified that it was her recollection that following discussions with their accountant she and Mr. Trynor had filed elections pursuant to ITAR 26(7) back in 1972 or 1973. She neglected to bring copies of these returns with her for review at the hearing because she had been told that it would not be necessary. For 1972 the prescribed personal income tax return form 11-1972 in its Schedule 2 had provided a space for an ITAR 26(7) election. For 1973 and following years section 4700 of the Income Tax Regulations ("ITR") applied and form 12076 (Exhibit R-3) was prescribed for this purpose. Ms. Boyd said she could not recall ever having seen form 12076.

Respondent's evidence as to their not having on-hand any permanent record file with respect to each of these appellants prior to 1982 would not be conclusive in itself, would be of limited weight in any event and certainly would not tip the evidentiary scales in any significant way in this case. However, it is another piece of evidence to be considered even though its probity is about par with that of Ms. Boyd's recollections. Given all of the circumstances, including the evidence that no capital property had been disposed of by them in either of those earlier years which could have triggered the making of any such election, I do not subscribe to counsel's submission that it has been shown, on the balance of probabilities, that each appellant had made proper elections in 1972 or 1973.

Turning now to whether an election had been properly made for 1981, ITAR 26(7) mandates both the timing and manner of the election. The applicable part reads:

26(7) Where, but for this subsection, the cost to an individual of any property actually owned by him on December 31, 1971 would be determined under subsection (3) or (4) otherwise than by virtue of subsection (5) and the individual has so elected, in prescribed manner and not later than the day on or before which he is required by Part I of the amended Act to file a return of his income for his first taxation year in which he disposes of all or any part of such property. . .

the cost to him of each capital property . . . actually owned by him on December 31, 1971 shall be deemed to be its fair market value on valuation day.

The Timing of the Elections

The timing was stated to be "not later than the day on or before which [the individual] is required by Part I of the amended Act to file a return of his income for his first taxation year in which he disposes of all or any part of such property". Subsection 150(1) of Part I mandated the filing of a return in prescribed form and containing prescribed information for each taxation year for which tax was payable, in which case paragraph 150(1)(d) mandated that that return be filed before April 30 of the immediately following year. A review of the appellants' returns showed that, with the election, there was no taxable income and no tax payable for 1981 and that all tax withheld from their employment income was to be refunded to them.

The Exchequer Court decision in the case of M.N.R. v. Topham, [1954] C.T.C. 54; 54 D.T.C. 1027 is authority for the proposition that the ability granted to farmers and fishermen to elect to have their previous years of income block-averaged for fiscal purposes was in the nature of a special privilege, that the averaging provision was thereby to be strictly construed and that the late filing of a return for a previous year in which there had been tax payable was fatal to that taxpayer because the elective provision had mandated a timely filing in those circumstances. However the Court noted (at page 58; D.T.C. 1029) the recognition of the Tax Appeal Board and the concession by the Minister that if such a taxpayer had had no taxable income in any one of the previous years the filing of a return therefor by the following April 30 would not have been required.

In my opinion the reasoning and decision of Judge Bonner of this Court in the recent case of Maurice Fisher et al v. M.N.R., [1988] 1 C.T.C. 2054; 88 D.T.C. 1027 are applicable to the case at bar. Because Fisher had completed and attached the election Form 12076 with his late-filed return does not in my view render that case substantially distinguishable. Like the Fisher situation, if these appellants' elections were to be effective, the disposition of their shares in 1981 occasioned a business investment loss resulting in no taxable income and no liability to pay tax for that year. Counsel for the appellants submitted that the Fisher case was authority for the proposition that where the Income Tax Act (the "Act") itself did not set a deadline for the filing of a return because no tax was payable, no such deadline had been imposed by the wording of ITAR 26(7). I agree. And I note Judge Bonner's views at page at 2055 (D.T.C. 1028) where he said:

ITAR 26(7) clearly expresses an intention to incorporate by reference the filing requirements of the Act. Those requirements are to be found in section 150. Counsel submitted that the words of ITAR 26(7) must be taken to refer to dates. I agree. They do. Those dates can be ascertained by reference to section 150 without any difficulty at all.

Counsel for the respondent has not convinced me that Judge Bonner had erred in either his interpretative approach or his decision. The substantive argument and legislative provisions are identical in both cases, and surely the decision with respect to the timing matter is to be the same.

The Manner of Electing

I now turn to the issue of the manner in which the election was to have been made. ITAR 26(7) specified that the election was to be in prescribed manner. According to Regulation 4700 the election under ITAR 26(7) “shall” be made by filing the form prescribed. The form prescribed by order of the Minister was form T2076. Counsel for the Minister submitted that the Regulation was mandatory and not merely directory, that there was a statutory imperative that the election, to be effective, was to be made on the prescribed form (12076), that this was to be strictly construed and that the appellants’ failure to file on the T2076 form was fatal to their alleged election.

That this argument has merit is obvious. However in my opinion the submissions and arguments of counsel for the appellants are to be preferred and adopted that the requirements of electing and filing on the specific form in this case were directory and that the appellants were in substantive compliance therewith.

While not too much turns on this, nonetheless it had been pointed out by appellants’ counsel that Parliament, by a statutory rule, had required the election to be made in prescribed "manner" and then by a subordinate level of legislation, a regulation, had required the "form" prescribed to be filed with the Minister. Accordingly, it was urged, this was not a situation where the statutory rule had in and of itself mandated, as a condition of the validity of the election, both the prescribed form and the prescribed manner which was the situation in M.N.R. v. Topham, supra. No authority was tendered to support the theory that the rule/regulation methodology would have made any significant difference. I have doubts that it would have.

On the other hand, no authority had been submitted wherein a taxpayer had been denied elective relief specifically because a wrong, or out-dated, form had been filed. Here the respondent had been given all the substantive information required by form 12076, that is a clear written declaration of intention that they had wished to use the V-Day values. It is in this factual aspect that the case of Knight v. M.N.R., [1984] C.T.C. 2463; 84 D.T.C. 1586 is readily distinguishable.

The use of the word “shall” in a Regulation is not necessarily conclusive as to whether the provision was mandatory or directory. In my opinion consideration must be given to the nature of the provision and whether it is substantive or procedural. If procedural, regard must be had as to whether a failure to adhere thereto would cause surprise, uncertainty or prejudice to the Minister. The information and decision to use V-Day values as per form T2076 required a mere statement of intent. Here this decision was made and had been clearly communicated. No surprise, confusion or prejudice to the respondent had been alleged or argued. I agree with appellants’ counsel that to hold otherwise would have the result of mandating form above substance.

There are many authorities in support of the principle that substance should take precedence over form when characterizing a transaction for fiscal purposes. In this particular case I see no compelling reason why this principle should not be applied to the subject procedural rule and regulation of the Act where such has not been foreclosed, either expressly or by compelling implication, founded on some rational and reasoned necessity. No reasons had been advanced as to why the substance over form principle could or should not be employed as an indicator in the determination as to whether this particular procedural requirement was mandatory or directive.

In the final analysis, and having already determined that the lateness of filing was not to be fatal to the validity of the purported election, it would lead to taxation by mere form over that of substance if the clear declaration made by these appellants in their returns to use V-Day value was held to be other than as substantively valid and fully effective for fiscal purposes. Any decision to the contrary would have brought about a manifestly anomalous and unjust situation not necessarily mandated by or flowing from the legislation itself. The matter in Topham was a case in which it was discerned (at page 58; D.T.C. 1029) that there had been a clear parliamentary intent to make the conditions of the election “of such an imperative nature that, if not complied with, the right to the special benefits [would] be unavailable to the taxpayer". In my opinion the requirement of Regulation 4700 was not of an imperative nature and was thus only directory. Therefore, the mere failure to use form 12076 was not fatal to the validity of an election having been made by these appellants, substantive compliance thereto having been shown.

V-Day Value of the Shares

The next matter of contention concerned the "en bloc” fair market value at V-Day of the shares of Silver Sands. The appellants and the respondent have substantially agreed on all amounts that had been used by both sides in the calculations of the fair market value of the shares with the exception of whether an additional amount should be allocated to the beach area owned by Silver Sands. The evidence and position of the respondent was that no such additional value should be allocated, and that the "en bloc” value of the shares was $390,000 or $26,000 per share. The evidence and position of the appellants was that an additional allocation and value is to be made for the beach land in the range of $353,452 (Towle report, Exhibits A-7 and A-9) to $589,000 (Kent report, Exhibit A-6) resulting in an "en bloc" value (after some adjustments) in the range of $796,655 to $885,741, or $53,110 to $59,049 per share. The appellants had elected a V-Day fair market value amount of $47,800 per share (or $717,000 “en bloc"); their counsel submits that given all of the evidence this value was supportable, reasonably conservative and should be upheld.

The valuators called by the appellant were agreed that a liquidation basis should be used to determine the V-Day value. It was the rather unique circumstances surrounding the Silver Sands beach operation that had perpetrated valuation difficulties, and various future operational assumptives had to be employed to arrive at any meaningful amount. What was sought to be valued was Silver Sands' right at V-Day to receive compensation for not being able to extract gravel from this beach. A brief summary of the pertinent facts is required.

Silver Sands was incorporated in Nova Scotia in 1955. In 1971 it was the owner of the beach in question and it had orally granted to Trynor Construction Company Limited ("Trynor Construction") the exclusive right to remove sand and gravel from the beach upon payment of a stumpage fee which varied from time to time depending on the relative (cash and/or tax) positions of the two companies. It was not disputed that the dealings and arrangements between these two companies were not at arm's length. Trynor Construction had been engaged in the building of roads and airport runways and crushing gravel. Mr. Trynor was the controlling shareholder and president of both companies. In a fiscal sense it would not be generally inaccurate to describe Silver Sands as the holding company and Trynor Construction as the operating company.

On August 31, 1971, without prior notice to or knowledge of the appellants, the Governor in Council designated the Silver Sands beach as a protected beach under the provisions of the Beaches Protection Act. Thereafter Ministerial permission had to be obtained to extract beach material and Ministerial refusal entitled the applicant to compensation. Section 5 of this enactment as it stood in 1971 read:

5(1) A person, who, if it were not for this Act, would have the lawful right to remove sand, gravel, stone or other material from a designated area, may apply to the Minister for permission to remove sand, gravel, stone or other material from the designated area during a period of time stated in the application.

(2) The Minister may grant permission to remove sand, gravel, stone or other material from the whole or any part of the designated area.

(3) If a person, who if it were not for the provisions of this Act would have the lawful right to remove sand, gravel, stone or other material from a designated area,

(a) applies to the Minister for permission to remove sand, gravel, stone or other material from a designated area;

(b) is refused permission;

(c) has use for the sand, gravel, stone or other material;

the Minister shall compensate that person for any loss or damage necessarily resulting from the refusal of the Minister, and any claim for such compensation not mutually agreed upon shall be determined under the provisions of the Expropriation Act in the same manner as a claim for compensation is determined under that Act.

On March 18, 1975 this designation was lifted and at the same time new legislation was implemented removing the right to compensation. The probability was that if attempts thereafter had been made by either Silver Sands or Trynor Construction to remove sand and gravel, the beach would likely have been redesignated with no statutory compensation then available.

In any event Silver Sands and Trynor Construction commenced litigation in the Nova Scotia Supreme Court for compensation. The judgment of the Court of Appeal is reported at 23 N.S.R. (2nd) and 32 A.P.R. at page 273 and the judgment of the Trial Division commencing at page 297 of those reports. The headnote of the Court of Appeal judgment reads as follows:

This case arose out of a claim for compensation pursuant to Section 5 of the Beaches Protection Act. The claimant's beach was designated as a protected beach pursuant to the Beaches Protection Act. The claimant requested permission to remove 100,000 tons of sand and gravel during each of the years 1973 and 1974. The Minister of Lands and Forests refused permission and the owner claimed compensation for loss of profits pursuant to Section 5 of the Beaches Protection Act. The Trial Court fixed compensation at $25,000.00 plus interest at 10%. The Trial Court calculated compensation based on 25,000 tons of sand and gravel for each of the years 1973 and 1974. The judgment of the Trial Court is set out below - See paragraphs 57 to 98.

On appeal to the Nova Scotia Court of Appeal, the appeal was allowed in part. The Nova Scotia Court of Appeal fixed compensation at $169,270.00 plus interest at 6%. The Nova Scotia Court of Appeal held that compensation should be based on 100,000 tons of sand and gravel for each of the years 1973 and 1974, provided the owner had a use for the material in those years.

In the case of Henderson Estate v. M.N.R., [1973] C.T.C. 636; 73 D.T.C. 5471 (F.C.T.D.), Cattanach, J. stated at page 644 (D.T.C. 5476) that the words "fair market value":

. . .must be construed in accordance with the common understanding of them. That common understanding I take to mean the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. These definitions are equally applicable to “fair market value" and "market value” and it is doubtful if the use of the word “fair” adds anything to the words "market value”.

The appellants’ Pat King appraisal report (Exhibit A-3) which had been accepted by the respondent gave no independent specific value to the beach land and operation. He had allowed a higher value to Silver Sands' surrounding land that was to be developed because of its enhancement occasioned by its proximity to the beach. Correspondingly, value would have been reduced if the beach was either destroyed or defaced. The evidence in this case was that an annual extraction of 100,000 tons per year would not have had this result. Indeed, the evidence was that the removal of the gravel enhanced the beach area for beach use. Counsel for the appellants correctly observed that the King report had not attempted to ascertain and value the legal nature of Silver Sands' right to compensation.

The appellants’ Kent report (Exhibit A-6) had attempted this. It was dated April 6, 1972. It is long, detailed and most impressive. However incisive cross-examination of its author had shown up some of its shortcomings. The first major one was that the projections as to gravel need, business revenues and costs were not based on independently gained material and information. They had been derived from Mr. Trynor. The second was that the report was admittedly a negotiating document that had been prepared to convince the province, which had informally offered to buy the property, that it was worth more than the $250,000 offered. The third was that it had been premised on Trynor Construction's assets and costs and that it would need and utilize 100,000 tons of gravel per year from 1971 and on. And finally it failed to address any notional adjusting factors, such as risk, that a reasonably prudent and informed purchaser may have had that would have impacted on the price they would have been willing to pay.

The appellants’ Towle opinion of value (Exhibits A-7 and A-9) was admittedly made with the knowledge of and reliance on the Kent report. Paragraphs 4, 12 and 13 of the Towle report (Exhibit A-7) are as follows:

4) Subject to the assumptions, restrictions and qualifications noted herein, in our opinion the fair market value of the shares falls in a range of $40,000 per share to $55,600 per share.

BASIS OF VALUATION

12) Following our review, we concluded that at the valuation date, based on

liquidation value, a suggested range of fair market value for the shares of the Company of $600,000 to $835,000.

13) Liquidation value was used instead of going concern value as this was thought

to be more appropriate in view of the Company's marginal profits from operations over the proceeding five years.

In view of the level of uncertainty involved in the action for damages noted in paragraph 14 below, a range of settlement of 60% to 100% of the appraised value of beach gravel operations was used for valuation purposes.

To the two figures reflected in paragraph 12 there should be added an additional $77,800 which all parties agreed was the value of some property missed out in error in the original King report.

Having regard to all of the facts and circumstances of this case, the appellants have shown that the respondent had erred in not allocating a value to Silver Sands' right to commercial exploitation of their beach. Valuation adjustments would be required because a prudent purchaser would not only have reasonably contemplated the inherent financial risks in the predicting of future economics, but also would have called for immediate termination of the arrangement with Trynor Construction. Crusher equipment would need to be obtained so that Silver Sands would have its own autonomous operation. There was no suggestion here that Mr. Trynor and Ms. Boyd would have acted other than in full harmony and unison to such a purchaser's demands, including the acquisition of Trynor Construction's crusher.

My global appreciation of all of the evidence is that the non-contested amount of $390,000 should be used for all other assets except the beach property. A $250,000 offer for the beach property had been refused, risk-free compensation for the loss of the right to exploit its sand and gravel property had been valued at $589,000 (Kent) and that a 40 per cent discount could be applied to the latter figure (Towle) making it $353,452. I have no reason to believe that a 40 per cent discount would be unreasonable. With the discounted value for the beach, the "en bloc” value of the shares is therefore $743,452.

In my view the reported "en bloc" amount of $717,000 has been established, on the balance of probabilities, as reasonably conservative and is therefore to be upheld.

Further I concur with the position of counsel for the appellant, Ms. Boyd, that because of her minority shareholding some discount may be appropriate but that given her long-term amicable business relationship with Mr. Trynor and the probability that a reasonably prudent purchaser would have wanted to acquire all of the issued shares and that they would have been readily forthcoming, only a nominal discount should be employed. In this respect I would assess the discount to be five per cent which would reduce the fair market value at V-Day of Ms. Boyd's shares from the reported amount of $47,800 per share to $45,410 per share.

Conclusion

The appeals of George Trynor for his 1981 and 1982 taxation years are to be allowed. The appeal of Elizabeth Boyd for her 1981 taxation year is to be allowed in part and the matter referred back to the Minister of National Revenue for reconsideration and reassessment on the basis that the fair market value of her shares in the capital stock in Silver Sands Limited on December 31, 1971 was $45,410 per share.

These appeals being heard on common evidence, there will be one set of costs on a party to party basis.

Appeals allowed in part.