Susan Lovik (Formerly Susan Berman), Fred Berman, Sophie Harris v. Minister of National Revenue, [1982] CTC 2593, 82 DTC 1616

Roland St-Onge:—The appeals of Fred Berman, Susan Lovik (formerly Susan Berman) and Sophie Harris came before me on June 4, 1982, in the City of Vancouver, British Columbia and it was agreed between the parties that the appeals be heard on common evidence and the valuation of the assets on V-Day be referred to the Minister.

The sole issue today is to determine whether the transaction between the trustee and the beneficiaries of the estate was an arm’s length transaction. In the affirmative, the appeals should be dismissed.

The facts of these appeals are well spelled out in paragraphs 3 to 10 of the Reply to the Notice of Appeal which read as follows:

3. On November 22, 1970, the Appellant’s father, Samuel Berman, died and by his Will created a spousal trust for the benefit of his wife, Sophie Berman, appointing the Canada Trust Company (hereinafter called “the trustee”) as sole executor and trustee and providing that upon the death of Sophie Berman the residue of the estate was to be divided between the Appellant and his two sisters, Karen Berman and Susan Berman (hereinafter called together with Sophie Berman “the beneficiaries”).

4. The trust described in paragraph 3 herein held, inter alia, the following assets:

3,000 preferred shares of Commercial Steel & Metals Ltd

333 common shares of Commercial Steel & Metals Ltd

2909 shares in S Berman Corporation Ltd, a personal corporation of the deceased.

5. A non-interest bearing loan receivable from Commercial Steel & Metals Ltd in the amount of $37,560.74 formed part of the assets of S Berman Corporation Ltd.

6. By letter dated December 12, 1972, the beneficiaries of the Will, described in paragraph 3 herein, jointly offered to purchase from the trustee the estate’s shares in Commercial Steel & Metals Ltd and the debt of Commercial Steel & Metals Ltd to S Berman Corporation for a cash consideration of $25,100, and by letter of January 3, 1973, the Trustee accepted this offer.

7. By agreement, dated January 23, 1975, between the trustee, the beneficiaries and Frederick Michael Dulien and Merle Jean Law, the majority shareholders of Commercial Steel & Metals Ltd (hereinafter called “the majority shareholders”), the assets described in paragraph 6 herein were sold to the majority shareholders for $400,000, apportioned as follows:

(a) for the debt to S Berman Corporation Ltd $ 37,560.74

(b) for the 3,000 preferred shares in Commercial Steel & Metals

Ltd 3,000.00

(c) for the 333 common shares in Commercial Steel & Metals Ltd 359,439.26

8. In his income tax return for 1975 the Appellant reported, inter alia, a taxable capital gain of $13,181.18 with regard to his share of the proceeds from the sale of the shares in Commercial Steel & Metals Ltd.

9. By Notice of Reassessment, dated October 20, 1978, the Respondent included an additional taxable capital gain of $30,398.16 in the Appellant’s income for 1975 with respect to the sale of the shares in Commercial Steel & Metals ltd.

10. In so assessing the Appellant, the Respondent relied, inter alia, on the following assumptions:

(a) the trustee was dealing at arm’s length with the beneficiaries in the transaction described in paragraph 6 herein;

(b) the offer accepted by the trustee was the highest offer available;

(c) prior to Samuel Berman’s death an offer of $4,000 was received from the majority shareholders with regard to the assets described in paragraph 6 herein;

(d) on May 31, 1971, the trustee received an offer of $10,000 from the majority

shareholders with regard to the assets described in paragraph 6 herein;

(e) prior to the offer made by the beneficiaries the trustee was prepared to sell the assets, described in paragraph 6 herein, to the majority shareholders for $25,000;

(f) the trustee is a Canadian Trust Company and is not related to the beneficiaries;

(g) the trustee and the beneficiaries were not acting in concert with regard to the sale of the trust described in paragraph 6 herein, and there was no de facto control exercised by the beneficiaries with regard to the disposition of these trust assets;

(h) the value of the shares in Commercial Steel & Metals Ltd sold by the trustee

to the beneficiaries was no more than $1 at the time of such disposition.

Mr Fred Berman testified as follows:

Karen Berman is an American non-resident and has no tax problem in Canada. His family owned a one sixth interest in a private company called Commercial Steel & Metals Ltd and consequently they were owners of one sixth of all of the shares and a debt of some $37,000. The difference in the value of the assets between the appellant and the respondent is some $88,000.

At the time of the transaction Mr Fred Berman was the general manager of Commercial Steel & Metals Ltd. He explained that after the death of his father, the beneficiaries had meetings and usually his recommendations were accepted.

Besides the assets enumerated in paragraph 4 of the Reply, the estate had life insurance, a one third interest in an apartment block in Vancouver, BC, some term deposits but no capital.

On May 31, 1971, the Dulien Group offered to purchase the one sixth interest and the debt for $10,000. On July 5, 1971, Mr Schmidt, a trust officer, wrote and explained to Mrs Samuel Berman that the Committee’s recommendation was to reject this offer. It was also mentioned that they had requested the opinion of the uncle, David Berman, who knew about the possibility of recuperating the loan and that if the debt was due whether a petition into bankruptcy would be the recourse.

Mr Fred Berman’s opinion is that this statement about the petition was probably made by Mr Dulien, in order to get the shares below the fair market value.

A year later, May, 1972, Mr Freeman, the trust lawyer, wrote to Canada Trust and gave his opinion as to the chances of recouping the $37,000 in court. He wrote and I state:

In the first place we are certain to be met with a vigorous defence based on Mr Dulien’s allegations that there was an express agreement with Samuel Berman to withhold any proceedings for enforcement.

Then he mentioned a legal expense of $5,000 to bring the action to trial and recommends to either accept Dulien’s proposal at $10,000 or have Mrs Berman match it.

No action was taken and the offer was rejected. Again, Mr Fred Berman believed that this manoeuvre was another way of influencing the sale of the assets.

On June 9, 1972, the mother wrote to the Trust to say that there was at no time any agreement of any kind given by her husband to Mr Dulien, or anyone else to release, sell or otherwise dispose of his shares in Commercial Steel & Metals Ltd, and while she was not anxious to sell the shares, she would entertain a reasonable settlement.

According to Mr Fred Berman, a reasonable settlement at that time would have been the repayment of the loan plus interest and $50,000.

On October 31, 1972, the beneficiaries signed a letter to the effect that they were prepared to acquire from the Executor these shares held by the Estate in Commercial Steel & Metals Ltd, and the debt owing to the deceased by the Company, by transfer in specie jointly to them in proportion to their interest in the estate at a realized value of $37,560.74.

In other words, if the estate gets the money, the beneficiaries will get the shares.

On October 26, 1972, Mr Dodd, Estate’s officer, wrote to Mr Osten, the S Berman Corporation’s lawyer, to the effect that if the Company “S Berman Corporation” received $37,560.74 cash as payment, Canada Trust as Executors of the Samuel Berman Estate would transfer the shares of Commercial Steel & Metals Ltd for a consideration of $1.

On October 31, 1972, Mr Dodd wrote back to Mr Osten to withdraw this offer of October 26, because of the objections received from the beneficiaries. The latter wanted preferred treatment. Mr Dulien refused the offer of $37,000 and made a counter offer of $25,000.

The beneficiaries decided not to sell and because the estate needed capital, they decided to offer $25,100 which was accepted.

Mr Fred Berman explained that there was no other party contacted and the suggestion to put a higher price than Mr Dulien’s offer came from the trustees. The latter was anxious to liquidate the note.

On December 12, 1972, the beneficiaries made an offer in writing to Canada Trust. (The debt and promissory note are to be assigned to the undersigned, or their nominee for a cash consideration of $25,100 payable against delivery of the endorsed note.)

We understand that the registration of transfer of shares on the books of Commercial Steel & Metals Ltd is subject to the approval of the Board of Directors of that company . . .”

“We understand that there may be rights of preemption in other shareholders of Commercial Steel & Metals Ltd, and we will take the shares subject to such rights. We jointly and severally agree to indemnify you and save you harmless in your Capacity as Executor from any liability, suits or claims made against you by virtue of your accepting this offer and selling and delivering to us the said assets.

On January 14, 1975, Mr Freeman for Canada Trust wrote to Mr Dulien to inform him that:

1. Canada Trust is the registered owner of one sixth of the isued shares of Commercial Steel & Metals Ltd.

2. The Berman family is the beneficial owner of those shares.

Mr Fred Berman explained that the majority shareholders had a discretion to register the shares and they were abusing the minority.

Nine days later, on January 23, 1975, Mr Dulien capitulated and the parties signed the agreement. The beneficiaries sold their share for $400,000.

Mr Fred Berman gave the history of Commercial Steel & Metals Ltd and an idea about its assets. Incorporated in 1954 by the grandfather, his father, an uncle, they operated in scrap metal in Burnaby on a 15-acre property. There was a warehouse, an office and equipment. Their family was very well known in that type of business.

Mr Dulien, a non-resident from Seattle, USA, was invited to become a partner on a 50% basis and his father remained the only outsider, but he had full information as to the activities of the company. As to the assets and liabilities in 1973, the net worth of the shares was two and one half million dollars.

The land in Delta, BC, which had a value of $75,000 in 1954, was transferred to Mr Dulien’s son and daughter at book value price ($68,000). Market value now was $100,000 to $150,000 an acre.

There was another piece of land, 70 acres on the Fraser River deep water sold to a steel mill for $450,000 with an option which was exercised. The Commercial Steel & Metals Ltd made a gain of $3,000 an acre. The depreciated value of the equipment on the books was less than the market value and there was a substantial addition of equipment (an automobile bailer).

As to the inventory, the company used the conservative method in the books and the depreciated value was less than the market value. The net value of the company was $2.4 million which means $400,000 for one sixth.

On cross-examination, Mr Fred Berman explained the Samuel Berman Corporation was a family company, (a personal corporation) in which the father, mother and children were shareholders and the loan was due to the said company.

The mother paid for the shares which were split in four equal parts and the money went to the personal corporation.

On January 14, 1975, Mr Freeman wrote to Mr Dulien, as Solicitor for Canada Trust and the members of the Berman family, because the beneficiaries needed Canada Trust to sue Mr Dulien. This letter was the end. Mr Dulien purchased the shares from the beneficiaries.

Mr Schmidt, the Canada Trust officer in charge of the account, filed numerous documents and was cross-examined by counsel for the appellant.

Counsel for the appellant argued that the facts indicated a non-arm’s length transaction, because the trust was much more concerned with minimizing the efforts and costs than maximizing the returns. The share value was much larger than the amount for which the beneficiaries acquired them, and the trust did nothing to get a better price.

There was no investigation to determine what the shares were worth. A trustee is to act in his best interest, but it was concerned with attitudes taken by the beneficiaries. It took the easy way out by selling to the beneficiaries. As trustee, the Trust did not act as an ordinary vendor would have to receive a better price for the shares, which price was far from being a fair market value.

Counsel for the respondent insisted on the fact that the transaction was at arm’s length. The Trust, as vendor, did what it had to do and the beneficiaries, aS purchasers, paid a good price in the circumstances. The parties did act as strangers and $25,100 was the best price the trust could get.

The Board takes the view that the trustee did what it had to do to settle the problem between Mr Dulien and the beneficiaries. it has to be remembered that it is not always easy in the case of minority shares to appraise their fair market value and dispose of them.

These minority shares had a great value for both the majority and the minority shareholders and it was more logical and equitable for the trustee to see that the minority shareholders did not get a bad deal.

The duty of the Trust was to settle this intricate situation with fairness and once it did act and when it did, it acted in its best interests. Furthermore, there is no evidence on the part of the appellant to prove that a better price for the shares could have been obtained by the trustee. Who is really interested in buying minority shares in a private company, especially when the facts show as the case is here what a majority shareholder could do with the assets.

The appellant had the onus to show that the Minister’s assessment was wrong in fact and law, but he failed to do so.

Consequently, the Board decided that the transaction was at arm’s length and the appeals are dismissed.

Appeals dismissed.