Guy
Tremblay:—
This
case
was
heard
at
Halifax,
Nova
Scotia,
on
June
14,
1978.
1.
Point
at
Issue
The
point
at
issue
is
whether,
by
giving
to
his
son
in
April
1975,
5,000
shares
of
Starr
Manufacturing
Limited,
the
appellant
made
a
capital
gain
of
$12
per
share,
a
lesser
gain,
no
gain
or
a
loss
of
$14.73
per
share
or
a
lesser
loss.
The
crux
of
the
matter
is
the
valuation
of
the
said
shares
on
December
31,
1971
and
in
April
1975.
2.
Burden
of
Proof
The
burden
is
on
the
appellant
to
show
that
the
respondent’s
assessment
is
incorrect.
This
burden
of
proof
derives
not
from
one
particular
section
of
the
Income
Tax
Act,
but
from
a
number
of
judicial
decisions,
including
the
judgment
delivered
by
the
Supreme
Court
of
Canada
in
R
IV
S
Johnston
v
MNR,
[1948]
CTC
195;
3
DTC
1182.
3.
The
Facts
The
taxpayer
is
an
individual
resident
in
the
City
of
Halifax,
Province
of
Nova
Scotia.
He
is
the
president
of
Starr
Manufacturing
Limited
(hereinafter
called
“Starr”),
a
Nova
Scotia
company
carrying
on
primarily
the
business
of
a
plastic
pipe
manufacturer
at
Dartmouth,
Nova
Scotia.
He
is
the
controlling
shareholder
of
Starr.
3.02
On
February
12,
1975,
Starr
declared
to
the
shareholders
a
dividend
in
the
amount
of
$7.50
per
share.
3.03
As
at
December
31,1971,
the
taxpayer
was
a
beneficial
holder
of
19,998
of
the
20,000
issued
and
outstanding
common
shares
in
the
capital
stock
of
Starr.
3.04
On
or
about
April
7,
1975,
the
taxpayer
transferred,
by
way
of
gift
to
his
son,
Gordon
S
Stanfield,
5,000
shares
in
the
capital
stock
of
Starr.
The
taxpayer
now
holds
14,998
of
the
20,000
issued
and
outstanding
common
shares
of
Starr.
3.05
In
his
income
tax
return
filed
for
his
1975
taxation
year,
the
taxpayer
claimed
a
capital
loss
of
$14.73
per
share
with
respect
to
the
gift
of
the
said
5,000
shares
to
his
son.
3.06
The
loss
is
based
on
the
contention
of
the
appellant
that
the
values
of
the
said
shares
are
as
follows:
|
at
31
December,
1971
|
$43.74/share
|
|
at
7
April,
1975
|
$29.01/share
|
3.07
By
notice
of
reassessment
dated
June
28,
1977,
Revenue
Canada,
alleging
that
the
said
shares
had
a
value
of
$22.00
per
share
at
December
31,
1971,
and
$34.00
per
share
at
April
7,
1975,
assumed
the
taxpayer
had
realized
a
capital
gain
by
virtue
of
the
disposition
by
way
of
gift
to
his
son
of
the
said
5,000
shares,
and
sought
to
increase
the
taxpayer’s
taxable
income,
and
consequently
income
tax
payable,
for
his
1975
taxation
year.
3.08
By
notice
of
objection
dated
September
19,
1977,
the
appellant
objected
the
reassessment.
3.09
In
answer
to
the
notice
of
objection,
the
respondent
not
only
confirmed
the
first
reassessment
dated
January
26,
1978,
but
by
a
new
notice
of
reassessment
dated
January
28,1978,
increased
the
appellant’s
revenue
by
$12,206.65,
asserting
that
by
virtue
of
the
dividend
of
$7.50
per
share
paid
out
of
the
tax-paid
undistributed
surplus
of
the
company,
the
adjusted
cost
base
of
the
gifted
shares
had
been
reduced.
3.10
At
the
beginning
of
the
hearing,
the
appellant
stated
that
the
$7.50
of
dividend
declared
in
February
1975
must
reduce
the
value
of
each
share
at
April
7,1975.
The
respondent
admitted
that
at
the
same
date
the
amount
of
$4
must
reduce
its
own
retained
figure.
It
was
proven
by
the
appellant
that
in
fact
the
right
amount
could
be
$8.82.
3.11
To
arrive
at
the
figures
$43.74
per
share
in
December
1971
and
$29.01
per
share
on
April
7,
1975,
the
appellant’s
appraiser,
Price
Waterhouse
&
Co.,
investigated
two
alternative
methods
(as
explained
in
Exhibit
A-1,
part
D-1):
Method
1:
Re-Valuation
of
Assets
Method
Computing
a
revised
book
value
of
the
shares
by
re-valuing
assets
on
the
basis
of
replacement.
Method
2:
Future
Earnings
Method
Establishing
the
value
of
the
shares
as
a
result
of
applying
an
adequate
capitalization
rate
to
projected
future
earnings.
3.12
The
appraiser
detailed
the
assumptions
and
the
sources
of
information
of
the
two
methods.
The
Board
studied
the
whole
matter.
3.13
The
results
of
the
two
methods
are
as
follows:
|
Dec.
31,
1971
|
Nov.
30,
1974
|
|
Re-Valuation
of
Assets
Method
|
$31.43
|
$47.27
|
|
Future
Earnings
Method
|
$43.74
|
$29.01
|
It
was
admitted
that
the
figures
would
be
the
same
on
April
7,
1975
as
those
of
November
30,
1974.
According
to
the
appraiser,
“the
future
earnings
method
or
method
2,
is
the
method
we
believe
to
be
the
most
reasonable
approach”.
3.14
The
respondent’s
appraiser,
M
C
A
Piper,
also
investigated
two
methods
of
valuing
the
shares
of
Starr
(as
explained
in
exhibit
R-3):
Method
1
Valuing
the
shares
as
a
going
concern
based
on
a
capitalization
of
estimated
future
maintainable
earnings.
Method
2
On
an
equity
basis
refined
to
a
liquidation
calculation
where
an
earnings
value
cannot
support
a
value
in
excess
of
liquidation.
3.15
The
appraiser
detailed
all
the
information
and
figures
to
justify
the
used
method
and
to
arrive
at
his
conclusion.
3.16
The
results
of
the
two
methods
are
as
follows:
|
December
31,
1971
April
7,
1975
|
|
Liquidation
Method
|
$22
|
$29
|
|
Going
Concern
Method
|
$12.25
|
$34
|
4.
Comments
A)
General
Comments
On
many
occasions
it
is
affirmed,
both
by
valuators
and
by
counsels
for
both
parties,
the
science
of
valuation
cannot
be
precise
or
exact.
In
studying
the
reasons,
the
basis
and
the
computation
of
the
figures
of
the
different
methods
used
by
the
parties
in
the
present
case,
the
Board
cannot
find
obvious
mistakes.
The
error
underlined
in
paragraph
B)
below
is
one
of
another
kind.
The
counsels,
in
their
written
submissions,
underlined
many
mistakes
of
the
other
party
but
in
the
Board’s
opinion,
they
are
not
obvious
important
mistakes
but
rather
mistakes
concerning
wrong
application
of
the
philosophy
or
thesis
advanced
by
the
other
party.
However,
the
conclusions
of
each
valuator
are
far
apart
from
each
other
($14.73
of
capital
loss
and
$12
of
capital
gain).
It
may
be
said
in
the
present
case
what
Mr
F
J
Dubrule,
Assistant
Chairman
of
the
Tax
Review
Board,
said
in
Ralph
G
Mersereau
v
MNR,
[1977]
CTC
2412;
77
DTC
290:
.
.
.
both
expert
witnesses
impressed
me
with
their
candor,
demeanor
and
ability.
In
light
of
this
it
seems
strange
that
they
can
be
so
far
apart.
It
is
my
opinion
and
also
the
opinion
of
the
other
members
of
the
Tax
Review
Board,
that
generally
a
case
of
valuation
should
be
settled
between
the
parties
when
each
one
has
a
competent
appraiser
and
a
competent
counsel.
However,
the
Board
understands
that
sometimes
because
of
the
importance
of
an
amount
of
tax
involved,
because
of
psychological
reasons
(as
conflict
of
personality),
it
is
better
for
both
parties
that
the
case
be
heard
before
a
tribunal.
Ordinarily,
the
chairman
of
a
tribunal
is
not
a
valuator
and
probably
it
is
a
good
thing
because
I
wonder
whether
he
would
not
be
biased.
B)
Findings
As
the
two
valuators
are
honest
and
intelligent,
the
Board
would
not
make
an
error
by
totaling
up
the
figures
retained
by
the
two
valuators
for
December
31,1971
and
by
doing
the
same
with
the
figures
for
November
30,
1974
(and
by
dividing
by
two
the
two
totals
and
by
subtracting
$7.50—see
paragraph
3.10
of
the
Facts—from
the
figure
found
for
November
30,
1974
(or
April
1975)).
However,
this
aforesaid
method
would
be
justified
only
if
the
Board
had
not
found
an
important
error
in
the
reasoning
of
one
of
the
parties.
The
Board
thinks
it
has
found
an
important
error
in
the
appellant’s
reasoning.
The
error
is
not
in
the
application
of
the
two
methods
of
valuation
nor
in
the
computation
of
the
figures.
According
to
the
Board,
the
error
is
in
the
choice
of
the
right
figure
established
in
November
1974.
The
appellant
arrived
at
$47.27
per
share
according
to
the
re-valuation
of
assets
method
and
$29.01
per
share
according
to
the
future
earnings
method.
The
appellant
retained
the
figure
$29.01.
It
is
the
Board’s
opinion
that
the
figure
$47.27
must
be
retained
in
lieu
of
$29.01.
Indeed,
it
is
obvious
to
the
Board
that
when
an
appraisal
of
the
shares
of
a
company
is
made
according
to
the
valuation
of
assets
method
and
according
to
the
future
earnings
method,
the
highest
price
must
be
retained
(if
the
evidence
adduced
to
base
the
two
methods
is
pertinent
and
well
founded).
The
Board
has
found
a
good
explanation
of
this
principle
in
the
respondent’s
valuation
report
(Exhibit
R-3):
If
an
earnings
valuation
indicates
a
value
less
than
liquidation
value,
then
the
highest
value
a
business
could
have
is
that
based
on
liquidation.
This
is
a
fairly
simple
concept
and
the
rationale
is
that
if
a
business
cannot
earn
a
reasonable
return
on
capital
invested,
then
from
an
economic
and
practical
point
of
view
the
only
other
alternative
is
to
liquidate
and
invest
the
capital
in
a
more
attractive
field
to
obtain
an
economic
return.
Moreover,
a
party
is
not
bound
by
one
method
for
the
date
of
November
30,
1974,
because
it
is
the
one
it
has
chosen
for
the
date
of
December
31,
1971.
The
challenge
is
to
find
the
best
figure
for
each
date.
The
most
appropriate
method
must
be
used
for
each
date.
The
correction
being
done,
the
computation
is
as
follows:
|
V/D
1971
|
V/D
of
Gift
’75
|
|
Corrected
appellant’s
figures
|
$43.74
|
|
$47.27
|
|
respondent’s
figures
|
$22.00
|
|
$34.00
|
|
$65.74
|
|
$81.27
|
|
Divided
by
2
|
$32.87
|
|
$40.63
|
|
-
|
7.50
|
|
—see
paragraph
|
|
$33.13
|
|
$33.13
|
|
3.10
of
the
Facts
|
|
|
—capital
gain
$33.13
-
$32.87
=
$0.26
|
|
However,
as
the
science
of
valuation
is
not
an
exact
one,
and
as
the
difference
in
the
present
case
is
not
substantial,
it
is
the
Board’s
opinion
that
the
price
could
be
the
same
at
the
two
dates.
It
is
decided
that
at
the
two
dates
the
price
is
$32.87,
so
there
is
no
capital
gain
and
no
capital
loss.
5.
Conclusion
The
appeal
is
allowed
in
part
and
the
matter
referred
back
to
the
respondent
for
reassessment
in
accordance
with
the
above
Reasons
for
Judgment.
Appeal
allowed
in
part.
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