Gilles Trepanier v. Minister of National Revenue, [1979] CTC 3164, 79 DTC 923

Guy Tremblay [TRANSLATION]:—This case was heard at Quebec City, Quebec on October 16, 1979.

1. Point at issue

The fair market value as at December 31, 1971 of shares in the company Immeubles Bourgeois Ltée must be determined for the purpose of computing the capital gain. The respondent’s valuation is $7 per share, based on the value of $6.93 determined by the appellant’s accountant as at July 31, 1971. The appellant’s valuation is $9.25. The shares in question were sold for $10 each in 1974.

2. Burden of proof

The appellant has the burden of showing that the respondent’s assessments are 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 W S Johnston v MNR, [1948] CTC 195; 3 DTC 1182.

3. Facts

3.01 Immeubles Bourgeois Ltée was incorporated in 1967 as a result of the amalgamation of three companies. Its principal object is the purchase and sale of property.

3.02 The appellant, the only witness in this case, has been a professional engineer since 1948. He has speculated a great deal in land and buildings. He is not a qualified appraiser or accountant, but says that as a result of his business experience he can read financial statements as competently as an accountant. He has on a number of occasions appraised land and buildings and valued shares for purposes of his own business. He has not, however, been consulted by others in this connection, except on a few occasions by contractors wishing estimates.

3.03 In December 1973, the secretary-treasurer of the company, Mr Roger Bernier, issued a notice stating that 29,843 of the 60,114 ordinary shares in the company were to be sold (Exhibit I-3).

3.04 It appears from a list of the shareholders who sold their shares and the number of preferred and ordinary shares sold in each case (Exhibit I-4) that this sale was completed in January 1974. Each ordinary share was sold for $10. The preferred shares were sold at par and no tax problem arose in relation to them.

3.05 The appellant, who was among those who sold shares, disposed of 5,071 ordinary shares. Of these, 4,978 shares had been purchased in 1969 for $1 and the remaining 93 shares in 1973 for $8.40.

3.06 The appellant stated in his evidence that when the shares were sold he acted as the vendors’ representative and made the final decision to accept the offer of $10 per share. He stated that the shares were nevertheless worth as much as $14 or $15 each. For what he said were very complex reasons, not explained to the Board, the offer of $10 was, however, accepted. No evidence was adduced to establish that the shares in question might have been worth $14 or $15 each at the time.

3.07 The appellant stated in his evidence that the company’s accountant, Mr Mainguy, had valued the company’s ordinary shares on the liquidation basis as follows:

No details of the bases of these calculations were submitted in evidence.

3.08 Moreover, the appellant disputed these figures, since in his view they amount to undervaluations. On page 3 of Exhibit A-1 the appellant stated in relation to the 1971 valuation:

The accountant would have better served the real interests of all the shareholders if he had overvalued the shares instead of undervaluing them.

The appellant explained this statement by referring to the tax aspect; an overvaluation as at December 31, 1971 would have resulted in a smaller capital gain on resale.

The appellant stated that the accountant, Mr Mainguy, consulted the respondent’s employees before submitting his report to the shareholders. Both he and the respondent used the liquidation method. The appellant noted that they arrived at an identical result; he regards this as an amazing coincidence.

3.09 The appellant disputed the respondent’s valuation of the shares at $7 each as at December 31, 1971. He argued for a value of $10.33, which he later reduced to $9.25.

3.10 In his valuation report (Exhibit A-1) the appellant set out the respondent’s figures. The Department used the liquidation method to determine the value of the shares and the appellant agreed with one part of this and disagreed with another. He agreed with the following figures, which are the basis of his own valuation as at December 31, 1971:

The appellant stated that after agreeing to part of the fictitious expenses to which he made later reference, he determined a liquidation value as at December 31, 1971 or $9.25 per share.

3.11 The appellant also referred to those of the respondent’s figures which he did not accept. He grouped these under the heading “fictitious expenses’’. These are as follows:

3.12 The appellant added the following note to his report (Exhibit A-1):

The respondent rounded the figure to $7 for assessing purposes.

3.13 The appellant told the Board that the value of the company’s shares had continually risen since 1971.

3.14 The appellant filed financial statements for 1972 (Exhibit A-2). The 1971 figures appear for the purpose of comparison. The appellant referred to the land and building administration expenses:

3.15 The appellant stated that he had been involved in many liquidations and that the administration expenses of liquidation, even those covering a number of months, are more or less the same as the ordinary administration expenses of a going concern. He did not, however, produce any figures or actual examples.

3.16 The respondent called no witnesses.

4. Act— Comments

4.1 Act

The sections of the new Income Tax Act relevant to this case are sections 38, 40 and subsection 152(7), and sections 24 and 25 of the Income Tax Application Rules. These sections will be cited in full where necessary.

4.2 Comments

4.2.1 Is the appellant an expert in valuation?

During the hearing, counsel for the respondent objected that the appellant, who was the only witness in this case, could not be regarded as an expert in valuation. The Board made a ruling at the time and is here confirming its decision that the witness cannot be regarded as an expert. At this point, the Board will briefly summarize what has already been said in Schaefer Brothers Inc v MNR, [1979] CTC 2379; 79 DTC 288 and in MNR v Les Meubles de Maskinongé Inc, [1978] CTC 2285; 78 DTC 1235.

With rare exceptions, anyone who represents himself as an expert in valuation should be a member of a professional corporation of valuators. If an exception is to be made, it must be shown, for example, that the individual not only has a great deal of experience but has also worked in the property field for a number of years.

4.2.2 The “fictitious” expenses

The appellant’s main argument was that the expenses he described as “fictitious”, amounting to $408,726 (paragraph 3.11), should be regarded as “exaggerated, imaginary and unrealistic” and that they should not be deductible in calculating the actual value of the shares on the liquidation basis.

In his experience, administration expenses during liquidation are no greater than a company’s normal administration expenses (paragraph 3.15). The company’s normal administration expenses for 1971 and 1972, in the region of $11,000, are relatively low (paragraph 3.14).

Is this evidence sufficient to discharge the burden of proof which falls on the appellant?

4.2.3 The evidence as a whole

It is appropriate to consider the evidence as a whole.

Firstly, the Board notes that according to the evidence of the appellant himself the respondent’s position is more or less the same as that of the company’s accountant, Mr Mainguy, CA. Both originally arrived at the same figure of $6.93 in 1971. The respondent rounded the amount to $7 (paragraphs 3.07 and 3.12).

The company’s accountant, a member of the order of chartered accountants, remained in the company’s employment for at least three years after the valuation of the shares as at July 31, 1971, even though, according to the appellant, this valuation was incompetent. The appellant entered as evidence the share valuations for 1972, 1973 and 1974, calculated by the same accountant (paragraph 3.07).

Furthermore, the same accountant prepared the company’s financial statements for 1973, which the appellant entered as evidence (Exhibit A-2). These statements show that the company’s ordinary administration expenses in connection with land and buildings were about $11,000 a year.

Since the accountant is properly qualified in that he is a member of a professional corporation and since he continued to prepare the company’s financial statements for at least three more years, there is a certain presumption in favour of the financial statements so prepared, and the calculations made to determine the value of the shares by the liquidation method.

In short, this presumption of fact supports the already existing presumption in the respondent’s favour, since he based his conclusions on information prepared by the company’s accountant.

Is the appellant’s experience in connection with a number of liquidations enough to discharge this double burden?

The appellant is not an accountant but an engineer. In referring to the expenses described by him as fictitious, he stated that he would find it very difficult to establish their “existence or non-existence”. As far as the Board is concerned, however, certain expenses appear in the calculation of the cost of the shares. These expenses are the crux of the appeal. If they have no basis in fact, the Board’s view is that the appellant should have submitted more convincing evidence. There was nothing to prevent his subpoenaing the appropriate witnesses.

The appellant has not discharged the burden of proof which fell on him. The appeal must be dismissed.

5. Conclusion

The appeal is dismissed in accordance with the above reasons for judgment.

Appeal dismissed.