Estate of Harold J Bonthron v. Minister of National Revenue, [1981] CTC 2391, 81 DTC 337

D E Taylor:—This is an appeal heard in London, Ontario, on April 7, 1981 against an assessment for tax for the year 1975 in which the Minister of National Revenue assigned a V-Day value of $40.14 each to the common shares of a company Bonthron & Son Limited, which shares were held by the Estate. It was the position of the appellant that a value of $87.50 per share was in order. The sole issue before the Board was the determination of that value.

The background as put forward by the appellant was as follows:

Mr Harold J Bonthron died on August 7, 1973 after a prolonged period of depression of approximately 2 years. He was the owner of 1,500 pfd shs, being all the issued pfd shares and 502 of 1,000 common shares of a company known as Bonthron & Son Limited, being a company engaged in the retail furniture business in conjunction with a funeral parlour. The business was incorporated on October 1, 1970 having previously operated as a sole proprietorship by Harold J Bonthron. During the period of Mr Bonthron’s illness, he was assisted in the day to day operation of the business by one of his sons, Bevan Bonthron.

Within a matter of a few weeks after the death of Harold Bonthron, the son Bevan expressed his desire to the Corporate Executor to purchase the business from the Estate and an agreement was reached whereby Bevan purchased the business at the price to be settled with the Ontario Succession Duty Department. This price was ultimately settled at par for the pfd shares and $87.50 for the common shares. An agreement of purchase and sale was drawn up reflecting this purchase on arm’s length terms.

In 1974, upon the filing of the T3 return for the Estate a V-Day Valuation was completed by the Corporate Executor. Although there were some changes in the economic conditions of the country during the 17 months from V-Day to date of death, there was no significant change in Bonthron & Son Limited and a value equivalent to the date of death value of $87.50 per common share was determined and declared.

In late 1976 the Revenue department in Kitchener began to question the V-Day valuation, alleging the shares had a value of $40.14 on December 31, 1971. Since the taxpayer could not agree to this value, believing it to be grossly wrong on the basis that a scant 17 months later it was sold on an arm’s length basis with no material change in the operation at $87.50 per share, Revenue Canada issued an assessment in November of 1979.

The taxpayer does not believe that the Minister has given proper consideration to all the facts and is wrong in his determination of V-Day value by at least $40 per share.

The respondent asserted that:

— Bevan Bonthron purchased 502 of the common shares of Bonthron & Sons Ltd, from the Estate of Harold J Bonthron during the appellant’s 1975 taxation year at a price of $87.50 per share, but denies that the sale of shares to Bevan Bonthron was on an arm’s length basis;

— the appellant failed to include any amount as a taxable capital gain from the disposition of 502 common shares of Bonthron & Sons Ltd, the appellant, to the respondent’s knowledge, employing an adjusted cost base equivalent to the proceeds of disposition of $43,483.24 in computing a nil gain or loss.

Evidence

Mr Carl Morrison, a business evaluator with many years’ experience, testified that as an officer with Canada Trust Company Ltd, he had prepared the information underlying the value of $87.50 per common share attributed to the holdings of Mr Harold J Bonthron at the date of his death (August 7, 1973) for succession duty purposes. His work on the valuation had been done late in 1973 or early in 1974, and it was clear to him that the value to be attributed to the shares as of V-Day should be no less than the same $87.50, since at that date (December 31, 1971) all projections for the furniture industry were highly optimistic. Indeed, the sales of the appellant company in 1972 had increased substantially over previous periods (about 50% greater). He based his valuation of $87.50 per share on the statistical historical evidence available in the financial statements. For purposes of Mr Morrison’s testimony, complete sets of financial statements were filed for the following periods:

Year ended February 28, 1968

Year ended February 28, 1969

Year ended February 28, 1970

Seven months ended September 30, 1970

Year ended September 30, 1971

Three months ended December 31, 1971.

Mr Morrison had ignored the two years immediately prior to V-Day (1970 and 1971) in his calculations because of: (a) the incorporation of the company; (b) the illness of Mr Bonthron Sr; and (c) the fact that the entire furniture industry had been depressed during those two years. He had taken into account the financial statements of 1967 (not filed with the Board), and those for 1968 and 1969 which were made available to the Board because, in his view, those were the stable years and indicative of the operation. In arriving at a true “net profit” figure upon which he could apply certain “valuation” factors, he had allowed for a “management salary” of about $10,000 per year and the end result was that the “net profit” after such a charge for 1968 and 1969 would have been $11,673.20 and $17,067.31 repectively. Taking 1967 into account together with the above apparently indicated to Mr Morrison that an annual “net profit” of about $11,000 or $12,000 per year could realistically be expected. Considering the economic conditions and optimistic forecasts for the industry, he applied a multiplier of 71/2 (which would give an investor a rate of return of about 12%) and calculated a value for the business which, when translated into the 1,000 shares of outstanding common stock, produced a per-share value of $87.50 as at the date of death of Mr Bonthron Sr on August 7, 1973. Again his view was that the similar value at December 31, 1971, could not have been less.

Mr David Aldridge, a business evaluator with Revenue Canada, whose qualifications were similar to those of Mr Morrison, gave contrary evidence but presented a written valuation report. The basic difference between his opinion and that of Mr Morrison was that he did not agree the operating results for the years 1970 and 1971 should or could be ignored. His summary read in part:

Sales <& Earnings — 5 Year Period

				'Earnings
Fiscal	Sales- Sales-		Sales-	before	No of
Period	Retail	Retail	Funeral	Taxes Taxes	Months
Feb 28/68		$137,869	$20,843	$11,559	12
Feb 28/69		137,137	22,077	16,468	12
Feb 28/70		122,053	26,516	2,789	12
Sep 30/70		76,290	8,898	795	7
Sep 30/71		134,091	13,745	1,385	12
Dec 31/71		48,171	11,102	2,865	3
					58

*Earnings to and including fiscal September 30,1970 have been adjusted to reflect a management salary of $10,000 per annum. This is necessary since reported proprietorship earnings do not reflect the management salary expense of the proprietor.

Valuation Indicators

1) Average Earnings

(a) For the four most current fiscal periods, March 1, 1969 to December 31, 1971 a total of 34 months — average annualized earnings before Income Taxes included therein). A “profit” of about $1,765 for the three months in 1971 would then produce an estimated annual profit of $7,460 — virtually identified to his own average of $7,416. If anything, the $7,416 average might be considered high in his opinion since the method and statistics he used had been as favourable as possible to the appellant. Mr Aldridge was of the opinion that if consideration were given to optimistic industry forecasts at December 31, 1971 (rather than some of the more modest forecasts also available and referenced by him), a purchaser might be willing to pay the $40.14 per share (roughly the mid-point between $37.50 and $43) which had been used in assessing by the Minister. He could find no basis for any higher value to be used.

Argument

Counsel for the appellant stressed that Mr Morrison was entitled to adopt an optimistic posture in valuing the shares. There was every indication by the industry forecasts that the company could easily expect to return from the 1970 and 1971 lowered levels of profits to those he considered standard and applicable shown in the results of 1968 and 1969. Applying the 7 /z multiple to an average profit of $1,100 or $1,200 was not unreasonable since both figures were on the conservative side. The ultra conservative view taken by the Minister was not in keeping with the buoyant economy at December 31, 1971 and the future indications for the industry. The fact that during the immediately succeeding years (1972 and 1973) such optimism had not been borne out by the results in the industry was only a reflection that the “upswing” took a little longer, not that such optimism was in error. The value of $87.50 each attributed to the common shares at both December 31, 1971 and August 7, 1973 by the appellant was completely in line with the conditions of those times.

Counsel for the respondent pointed out that there had been no evidence presented in support of the $87.50 valuation used for succession duty purposes and attributed to the shares at August 7, 1973. In any event, in his view that figure was irrelevant. The critical thing was the value at December 31, 1971 — $40.14 in the opinion of the Minister — and the financial results for the years 1970 and 1971 could not be ignored in determining that value.

Findings

The point in time which is critical is December 31, 1971, not August 7, 1973. The testimony presented by Mr Morrison related to the date of August 7, 1973 and he merely qualified his evidence by an opinion that there should be no downward revision of the amount of $87.50 to reflect the value at December 31, 1971.

The appellant has relied upon a valuation of $87.50 allegedly accepted for purposes of succession duty but has not shown that such a valuation for that purpose would necessarily have any relationship to a valuation under the Income Tax Act. The basis, the logic and the requirements could have been entirely different. It is difficult to comprehend how a value of $87.50 per share could be attributed to those shares at August 7, 1973 (and accepted by the estate) when the financial statements themselves at December 31, 1971 support only a value of $3.28 per share, even including the intangible assets (goodwill) of $10,000.

I have great difficulty even accepting the assertion of Mr Aldridge that a “knowledgeable and willing buyer ... acting at arm’s length, ... under (no) compulsion ..would seriously consider a price of $40 (actually $40.14) per share, let alone accepting the opinion of Mr Morrison that under similar circumstances the price would have been $87.50 per share. In my opinion, the major significant facts arise from the financial results for the years 1970 and 1971, and they have been rejected by the appellant in favour of using hypothetical information as the basis for his valuations. The evidence does not support the appellant’s valuation of $87.50 per share as at December 31, 1971.

Decision

The appeal is dismissed.

Appeal dismissed.