Harry Kushnir, Leon Kushnir v. Minister of National Revenue, [1985] 1 CTC 2301, 85 DTC 280

Cardin, TCJ:—The appeals of Harry Kushnir and Leon Kushnir for the 1972 taxation year were heard on common evidence. By notice of reassessment dated November 1, 1978, the Minister of National Revenue added to Harry’s Kushnir’s income a taxable capital gain of $22,985 arising from the sale to his son David, in November 1972, of one common share and 2,000 preferred shares in Harbord Fish Company Limited. By notice of reassessment of the same date, the Minister of National Revenue added to Leon Kushnir’s income a taxable capital gain of $62,250 resulting from the sale to his brother David, in November 1972, of 100 common shares in the said company.

There are two issues in each of the appeals, the first being whether the Minister was correct in deeming that the appellants in the above transactions were not dealing at arm’s length within the meaning of paragraph 251( l)(a) of the Income Tax Act, RSC 1952, c 148, and whether subparagraph 69(l)(b)(i) of the Act is applicable. If the latter provision is found to be applicable, the second issue becomes whether the Minister is correct in his evaluation of the fair market value of the shares at the time of disposition on which his reassessments were based. Paragraph 251(1)(a) reads as follows:

251.(1) Arm’s length.—For the purposes of this Act,

(a) related persons shall be deemed not to deal with each other at arm’s length; and

Subparagraph 69(l)(b)(i) reads as follows:

69.(1) Inadequate considerations.—Except as expressly otherwise provided in this Act,

(b) where a taxpayer has disposed of anything

(i) to a person with whom he was not dealing at arm’s length for no proceeds or for proceeds less than the fair market value thereof at the time he so disposed of it, or

The question with respect to the first issue is whether the deeming provision of paragraph 25 l(l)(a) is a conclusive or a rebuttable presumption.

The blood relationship between Harry Kushnir and his two sons, David and Leon, is not disputed nor is the fact that active hostility existed between David and Leon and between David and Harry for many years prior to the transactions under review. It is the overwhelming evidence that the sale of the shares to David in 1972, was related to the sustained disagreement between the shareholders of Harbord Fish Company Limited.

The appellants contended that in the circumstances there could be no collusion between the parties in negotiating the sale price of the shares. Indeed, the lawyers who had represented each of the parties during the negotiations found the shareholders unbelievably hard and bitter toward one another during the meetings. Legal action was even contemplated by David against his father with respect to the sale of the father’s shares (Exhibit A-6). Counsel also pointed out that no consideration could have been given to possible tax advantages when the question of the price of the shares first arose in November 1968 (Exhibit A-2) and in April 1969 (Exhibit A-9), prior to capital gains tax legislation coming into effect.

The appellants contend that in the circumstances, even though they may have been related to David, the transactions between them were in fact more than at arm’s length, the final sale price of the shares being the result of protracted, unusually hard and uncompromising negotiations. The appellants’ position is that the deemed presumption of subsection 251(1)(a) is rebuttable and that the evidence has clearly shown that David and the appellants dealt at arm’s length in the share transactions entered into in 1972.

Among the several cases cited by the appellants’ solicitor was the Supreme Court of Canada’s decision in Gray v Kerslake 11 DLR (2d) 225, in which Mr Justice Cartwright referred first to the case of Hickey v Stalker, [1924] 1 DLR 440; 53 OLR 414, in which Meredith, CJCP, at DLR 442, OLR 416, was cited as stating that the word “deem” may mean “conclusively” or “deemed until the contrary is proved”. Mr Justice Cartwright then cited the case of Rex v Fraser (1911), 45 NSR 218, in which Sir Charles Townshend, then CJ, stated at 220:

I should be sorry to believe that our Legislature was capable of enacting such an unreasonable law, and I am quite confident the Legislature never contemplated anything so contrary to natural justice .. .

Chief Justice Townshend’s remarks that the true meaning to be given the word “deemed” is prima facie evidence, “held until the contrary is proved”, was not unamimously endorsed by his brothers. Mr Justice Cartwright in Kerslake (supra), however, seems to have adopted that interpretation when he stated the following at 239:

In the case at bar, and in many cases which can easily be imagined, to construe the word “deemed” in s 134(1) as “held conclusively” would be to impute to the Legislature the intention (i) of requiring the Court to hold to be the fact something directly contrary to the true fact, and (ii) of asserting the power to alter the terms of a contract made and to be wholly performed and in fact wholly performed in a foreign state. This result can, and in my opinion should, be avoided by construing the word to mean “deemed until the contrary is proved”. In the case at bar the contrary has been proved and indeed admitted.

For her part, counsel for the respondent placed on record a statement made by Mr Justice Jackett, then President of the Exchequer Court of Canada, in Viking Food Products Ltd v MNR, [1967] CTC 101; 67 DTC 5067, where in considering non-arm’s length transactions, he stated in part at 106 (DTC 5070), the following:

While it is impossible to generalize with any degree of precision, it is probably not too inaccurate to say that, where special rules are made for situations where persons are not dealing at arm’s length, the legislative purpose is to guard against tax avoidance, which tax avoidance would put some persons in a specially favoured position with a resultant unfairness to taxpayers not in a position to make similar arrangements.

Although the above, dealing as it does with provisions of the Income Tax Act, may appear to be more binding on the present issue, Mr Justice Cartwright’s interpretation in Kerslake (supra) of “to be deemed” is also in my opinion a pertinent and valid consideration in determining whether, in the circumstances described, the appellants are to be “deemed conclusively” as not dealing at arm’s length with David Kushnir within the meaning of paragraph 25 l(l)(a).

The facts in Kerslake (supra) are quite different from those of Fraser (supra) or Viking Foods (supra) and, indeed, distinguishable from those of the case presently under review; however, in each case the interpretation to be given to the expression “deemed” is very much in issue. Case law on that point does not appear to be definitive.

In his text, Construction of Statutes, second edition, at page 22 et seq, E A Driedger states that both the word “deemed” or the expression “shall be deemed” raise a statutory presumption which can be either conclusive or rebuttable depending largely on the context, the circumstances and the intention of Parliament. At page 25, Mr Driedger states:

The decisions indicate that where a deeming clause states the legal consequences that are to flow from described circumstances, it is prima facie conclusive; but where it merely states a fact that is to be presumed in described circumstances, it is prima facie rebuttable.

In Kerslake (supra), as I understand it, one of the issues was whether the beneficiary of an insurance contract made in the State of New York, to be performed wholly in that State and subject to the laws of New York State as to its effect and validity, must be conclusively deemed under subsection 134(1) of the Ontario Insurance Act to have been made in the Province of Ontario, if the place of residence of the insured is stated in the insurance policy as being in the Province.

It would appear to me that what is to be “deemed” in subsection 134(1) of the Ontario Insurance Act is merely a presumption of fact, with no reference to any legal consequences arising therefrom. These are circumstances under which Mr Driedger considers that the deeming presumption should “prima facie" be rebuttable. Mr Justice Cartwright appears to be of the same opinion with respect to the deeming provision of subsection 134(1) of the Ontario Insurance Act where he stated in Kerslake (supra) at 240:

This result can, and in my opinion should, be avoided by construing the word to mean “deemed until the contrary is proved”.

The deeming provision of paragraph 251( l)(a), however, does state the legal consequences of transactions between related persons in that, for tax purposes, they shall be deemed not to deal with each other at arm’s length. In this context, the deeming clause in Mr Driedger’s view is not rebuttable but is “prima facie" conclusive, which is also the conclusion reached by Mr Justice Decary in The Queen v Alroy Industries Ltd, [1976] CTC 388; 76 DTC 6220, where at (DTC 6224), it is stated:

I do not believe that in the Income Tax Act the word “deemed” created a presumption that can be rebutted because, in my view, to say so would amount to assert that something that is deemed to be one thing might very well not be so for income tax and I cannot agree with that contention unless there are provisions to that import.

I can accept the appellants’ argument that no tax benefit could possibly have been sought in 1969 with respect to the negotiated price of the shares, that there was no collusion in the negotiations and that there existed deep and bitter hostility between the appellants and David Kushnir prior to and during the sale transactions.

These arguments, unfortunately, have no legal weight because the “deeming provision” of paragraph 251( l)(a) in the circumstances cannot be rebutted and is a conclusive presumption in my opinion.The fact that the appellants and David negotiated in an atmosphere of hostility does not make them any less related; it does not prove that they were dealing at arm’s length within the meaning of the Act and it does not, of itself, establish that the negotiated price of the shares is neither more nor less than their fair market value at the time of their disposition.

It appears to me that the intention of Parliament was to ensure that whatever circumstances might exist between related contracting parties, they should not result in raising or lowering considerations above or below the fair market values — the basic criteria in all arm’s length business transactions.

With respect to the appellants’ suggestion that interpreting the deeming provision of subparagraph 69(l)(b)(i) as being a conclusive presumption is contrary to the Charter of Rights and Freedom, there is no provision in the Canadian Charter of Rights and Freedom which precludes the Minister from legislating so as to ascertain that all business transactions will give rise to the same tax consequences whether the parties thereto are related or strangers.

Subparagraph 69(l)(b)(i) is, in my opinion, applicable and the question now becomes: what were the fair market values of the shares of Harbord Fish Company Limited on December 31, 1971, and November 27, 1972, the date of sale of the shares?

The company was started in the 1920’s by Harry Kushnir, the father of David and Leon, on Harbord Street, close to the Kushnir residence and both boys, at an early age, helped in the operation of the business. In 1954, the company was incorporated and 100 common shares were issued to each of the two sons. Harry Kushnir was issued one common share and 2,000 voting preferred shares (non- cumulative six per cent) with a par value of $10. The company’s business was the purchase, the grading, smoking and the wholesale and retail sale of fish.

Tension between David and Leon arose and grew into open and continuous hostility toward one another. Harry caught in between his two sons, also became involved and in turn, incurred David’s wrath. Notwithstanding, the business prospered handsomely over the years. In 1967, however, the discord was such that the continuation of the business under such circumstances was threatened.

In November of 1968, David offered to sell his shares for $100,000 (Exhibit A-l). Harry made a counter-offer to buy at $85,000 which was not accepted (Exhibit A-2). In 1969, David tried unsuccessfully to purchase both Harry’s and Leon’s shares (Exhibit A-9). In the meantime, there is evidence that some effort was made to sell the company to Booth Fisheries (Exhibit A-3) and Harry Shen- delman but without success. Because of the nature of the business and the special skills required to operate it successfully, the number of potential buyers was limited.

In 1972, David, who by then no longer wanted to be in business with either Harry or Leon, tried again to buy their shares. After hard bargaining on September 1, 1972, Harry offered to sell David his shares for $75,000. On November 13, 1972, David and Leon entered into a sale agreement for Leon’s shares, conditional upon David’s acquisition of Harry’s shares. The transaction was completed shortly thereafter. On November 27, 1972, David made a counter-offer to purchase Harry’s shares for $69,000 which was accepted and the sale concluded.

The proceeds of disposition of Harry’s one common share and 2,000 preferred shares on November 27, 1972, were $69,000. The proceeds of disposition of Leon’s 100 common shares at or about November 27, 1972, were $427,400. Neither of the appellants, in their 1972 tax returns, included taxable capital gains with respect to the sale of shares. The respondent reassessed the appellants on the basis that the V-Day value of the common shares was $3,029 per share. The V-Day value of the 2,000 preferred shares, with a par value of $10 held by Harry Kushnir, was established by the Minister at $20,000. Harry Kushnir was therefore assessed a taxable capital gain of $23,209.45 on the disposition of his shares. Leon Kushnir was assessed on the basis that the V-Day value of his 100 common shares was $302,900 and a taxable capital gain of $62,250 was imposed accordingly. Mr Albo, of the firm Campbell, Albo, Low Limited (Business and Security Valuations), testified as an expert witness on behalf of the appellants and presented a valuation report of Harbord Fish Company Limited filed as Exhibit A-7. Mr Albo was accepted by the Court as an expert witness.

The appellants, on the basis of Mr Albo’s report, contend that except for company earnings from December 31, 1971 to November 27, 1972, there was no increase in the overall value of the company and no increase in the value of the appellants’ common shares during that eleven month period. No capital gains were realized, according to the appellants, on the disposition of their shares on November 27, 1972.

The respondent’s contention is that the value of the common shares increased from $3,029 per share on December 31, 1971 to $4,274 per share on November 27, 1972. The respondent supported his assessment in part with a valuation re- port of Harbord Fish Market Company Limited prepared in 1983 by Mr Murray Game, an expert evaluator who testified on behalf of the respondent (Exhibit R-2). Mr Game was also accepted by the Court as an expert witness.

It was established at the hearing that the 2,000 preferred shares, issued to Harry in 1954 on incorporation of the company, were six per cent non- cumulative shares with a par value of $10. With respect to the value of Harry’s preferred shares on November 27, 1972, the respondent established a value of $20,000. The appellants, as I see it, do not disagree with that figure. The appellants’ position is that although Harry’s preferred shares may not have been worth more than $20,000, his interest in the company on December 31, 1971, as a going concern (which is what was negotiated with David) was worth more than $20,000 in preferred shares and $3,029 for his one common share, the basis on which the Minister computed Harry’s capital gain.

An agreement between Harry, David and Leon, signed on June 3, 1969 (Exhibit A-4), provided as follows, among other things:

23. . . . However, in the event of the sale of the business undertaking of the Company as a going concern during the lifetime of Harry Kushnir and while he is a shareholder of the Company, the parties agree that Harry shall receive twenty-five per cent (25%) of the net proceeds of such sale minus the sum of $20,000.00 represented by the 2,000 preferred shares he now holds in the Company which shall be redeemed by the Company forthwith upon such sale. [Emphasis mine.]

For the purpose of establishing the V-Day value of Harry’s interest in the company in the event of such a sale, his entitlement to 25 per cent of the proceeds would necessarily be taken into account. Based on Mr Albo’s estimate of the V-Day value of all the company shares at $425,000 (referred to later), Harry’s 25 per cent of the proceeds would theoretically increase the V-Day value of his interest by approximately $106,000 over and above his $20,000 in preferred shares.

Harry’s entitlement to 25 per cent of the proceeds of an eventual sale which in my opinion has an inherent value, must be considered however, in the light of another provision of the same June 1969 agreement by which David could, after Harry’s death, buy 1,000 of Harry’s 2,000 preferred shares. I do not doubt that both these factors were considered in arriving at a negotiated price of $69,000 for Harry’s interest in the company. Nor do I believe that an independent buyer would not be willing to pay more than the par value of the preferred shares and the one common share issued in 1954 to acquire Harry’s interest in the company as a going concern and as a profitable enterprise which resulted, in fact, to a large extent from Harry’s leadership and hard work in the company since 1920.

I am satisfied that the V-Day value of Harry’s interest in the company was more than the sum of his preferred shares and his one common share. On the basis of the evidence, I am of the opinion that an amount of $69,000 for Harry Kushnir’s interest in the company is as reasonable and as close an estimate of its fair market value on December 31, 1971 as is possible under the circumstances. I have found no evidence that leads me to believe that there occurred a significant change in the fair market value of Harry’s interest in Harbord Fish Company Limited from December 31, 1971 to November 27, 1972.

Turning now to the value of the common shares of the company, David Kushnir in a document dated July 26, 1972 offered to sell his shares to Harry or, alternatively, to purchase all of Harry’s shares at a price of $3,000 per common share and $10 per preference share (Exhibit A-5). The price offered by David for the common share is almost identical to the V-Day value of the common shares estimated by Mr Game in his evaluation report, to be $3,029 (Exhibit R-2) which was used by the respondent in computing the appellants’ alleged capital gains.

The issue arises because in Mr Game’s opinion report, the fair market of the common shares had risen from a V-Day value of $3,029 to $4,274 as at November 27, 1972. The appellants’ evaluator contends that no significant change occurred in the value of the common shares from December 31, 1971 to November 27, 1972.

In his 1983 evaluation report, Mr Game arrived at a common share value of $4,274 as of November 27, 1972 (used as the basis of the assessment) by means of “capitalization of maintenance earnings approach” to value. Having made a weighted average of net income after adjusting for miscellaneous income and management salaries based on the company’s financial statements for the years ending December 31, 1970 and 1971 and the financial statement ending November 28, 1972, the evaluator arrived at a value of $859,100 for the 201 common shares (Exhibit R-2, page 16).

Using the “liquidation approach”, also included in Mr Game’s 1983 report (Exhibit R-2, page 10), the value of the common shares on December 31, 1971, was found by Mr Game to be $1,350 per share and on November 27, 1972, the value estimated by Mr Game was $1,630. With the “adjusted book value approach”, he found the V-Day value of the common shares to be $1,760 per share and $2,075 at November 27, 1972 (Exhibit A-2, page 11-13).

On May 21, 1976, Mr Game in a letter to the appellants’ attorney had already indicated the fair market values of the appellants’ common shares which the respondent proposed to use as a basis of his reassessments. They were $1,450.75 as at December 31, 1971 and $1,737 on October 23, 1972 (Exhibit A-16).

There are in Mr Game’s computation astounding differences in both the ‘‘en bloc” value of the company and the fair market values of the common shares, as set out in his letter of May 21, 1976 (Exhibit A-16), as well as those he estimated in his first two approaches to value in his 1983 evaluation report, compared to the “en bloc” value of the company and the value of the common shares which he used as a basis of his assessments.

By the “liquidation” and the “adjusted book value” approaches in his 1983 report, the respondent’s evaluator arrived at a fair market value of the shares of $348,068 and $417,236 respectively as at November 27, 1972 (Exhibit R-2, pp 11-13). In his letter of 1976, he had found the value of the shares in November 1972 to be $349,200 (Exhibit A-16). The figures he used in assessing the appellants, however, were substantially higher than any of his previous estimates. The “en bloc” value of the shares jumped to $608,800 on V-Day and estimated to be $879,100 on November 27, 1972 (Exhibit R-2, pp 14-15).

No valid reasons were given as to why the first two approaches to value in his 1983 report or the estimate of value as set out in his letter of May 21, 1976 were completely ignored and the assessment made on the substantially higher figures arrived at by using the “capitalization of maintenance earnings approach”. Surely, the great disparity in the respondent’s estimate of values, which in my view warranted a double check, is sufficiently serious to raise doubts as to the accuracy of the basis of the Minister’s assessment. Particularly with respect to the respondent’s alleged increase of $270,300 in the overall value of the company shares from December 31, 1971 to November 27, 1972. The uncontradicted evidence is that the only increase in the company’s value in 1972 was its earnings in an amount of approximately $40,000 — which would not necessarily reflect itself on the value of the common shares.

The appellants’ “en bloc” value of the company shares on November 27, 1972 is $425,000, which is somewhat higher but within the range of the respondent’s earlier estimate of values of the company shares for the same date (viz $348,068, $349,200 and $417,236). The estimate of the fair market value of the company shares at $425,000 on November 27, 1972, was arrived at by Mr Albo on the basis of the company’s financial statements of 1971 and 1972, from which the total operating assets were calculated to be $520,701 on V-Day and $516,091 on November 27, 1972 (Schedule 2 & 3, Exhibit A-7).

The after-tax earnings in 1972 were $42,000 which were capitalized on the basis of a 16.7 per cent return. The value of the operation in 1972 was $252,000, to which were added the 1972 redundant assets for an “en bloc” value of the company shares on November 27, 1972 of $425,000 (Exhibit A-7, page 13), a figure which, in the light of the respondent’s three earlier evaluations, appears to me to be reasonable.

Adjustments in estimating the value of the common shares depending upon which shareholder had control of the company (particularly after the 1969 agreement), adjustments relative to acceptable levels of remuneration of shareholders and adjustments with respect to special considerations of a forced sale (if indeed the sale of shares to David was what is generally conceived as being a forced sale) must, as suggested by counsel for the respondent, be considered in arriving at a fair market value of the shares.

Although there was disagreement as to how these adjustments should be calculated, both evaluators did take these factors into account in arriving at their opinion of the fair market value of the shares on both December 31, 1971 and November 27, 1972.

What the Court has to decide here, as I see it, is much simpler and is whether, on the basis of the evidence and having compared the expert opinion of both evaluators, it is reasonable to conclude that the overall value of the company could have increased from $608,800 to $879,100, and the common shares accrued in value from $3,029 to $4,274 in eleven months between December 31, 1971 to November 27, 1972 — at a time when the relationship between the appellants and David had grown to the point where David, who had been successfully in charge of the processing plant and wholesale outlet (a major source of the company’s income), had physically left the company in 1972 and no longer worked there? I do not think so.

The appellants have, in my opinion, satisfied the onus and established that the respondents reassessments are wrong in that the Minister’s estimate of the fair market values of the shares on both December 31, 1971 and October 27, 1972, on which he based his assessments, are inaccurate.

The appeals for the 1972 taxation year are allowed in part and the matter referred back to the Minister for reconsideration and reassessment on the basis that the proceeds of disposition of $69,000 from the sale of 2,000 preference shares and one common share of Harbord Fish Company Limited received by Harry Kushnir, and the proceeds of disposition of $427,400 from the sale of 100 common shares of the said company received by Leon Kushnir in November of 1972, represent the fair market value of the shares at that date. Furthermore, I find that there was no increase in the value of either appellants’ interest in Harbord Fish Company Limited from December 31, 1971 to November 27, 1972, and no capital gains realized as a result of the transactions. In all other respects, the appeals are dismissed. The appellants are allowed to party and party costs.

Appeals allowed in part.