Her Majesty the Queen v. National System of Baking of Alberta Limited*, [1978] CTC 30, 78 DTC 6018

Mahoney, J:—In issue is the fair market value on Valuation Day, December 22, 1971, of a common share of Canadian Wallpaper Manufacturers Limited, hereafter called "the company". Such share was prescribed to be a publicly-traded share and its value prescribed to be $85.50 pursuant to subsection 26(11) of the Income Tax Application Rules, 1971, SC 1970-71-72, c 63:

26. (11) For the purposes of this section, the fair market value on valuation day of any property prescribed to be a publicly-traded share or security shall be deemed to be the greater of the amount, if any, prescribed in respect of that property and the fair market value of that property, otherwise determined, on valuation day.

The company had only one class of shares, the common. Prior to Valuation Day, the last trading in the company’s shares recorded on the Toronto Stock Exchange, where they were listed, occurred October 29, 1971, when 100 shares traded. That day they were quoted at a high of $86 and a low of $85. There were no trades Valuation Day. On December 21 and 23, the bid was $83 and the ask $88 with no sales reported. The defendant questions the validity of the prescribed fair market value on two bases of some substance: firstly, that on Valuation Day a take-over bid was in the offing and the defendant knew it, and secondly, that the market before Valuation Day had been, historically, ephemeral or spasmodic.

A take-over bid, at $200, was made, November 20, 1972, to the other shareholders, by Arthur Sanderson and Sons (Canada) Limited, hereafter called “Sanderson”, theretofore owner of approximately 65% of the company’s outstanding shares. Acceptance by the defendant of that offer as to its 2,010 shares led to the assessment under the Income Tax Act that puts the fair market value of such shares on Valuation Day in issue. This action was tried on common evidence with actions by the plaintiff against R Hampson Gillean (Court No T-3032-76) and lan Gillean (Court No T-3034-76) who accepted the same offer as to their 1,000 shares and 1,690 shares respectively.

The company was incorporated in 1927 to acquire four independent Canadian wallpaper manufacturers. At all times material hereto it enjoyed about 80% of the Canadian wallpaper market, 10% being accounted for by a new competitor and the balance by imports. On Valuation Day, some 87,000 of the company’s 129,246 outstanding shares were owned by Sanderson, a wholly-owned subsidiary of The Wallpaper Manufacturers Limited, a British company controlled, in turn, by Reed Paper Group Ltd. Of the remaining shares, some 30,000 had been acquired by clients of Spicer Investment Counsel Limited, hereafter called “Spicer”, during the 1960’s. The defendant’s shares were among these. This portion of the company’s shares was held by its owners as long-term investments. Sanderson’s shares were not offered in the market and, except for a handful of shares sold by Spicer clients faced with liquidity problems, the shares offered in the market during the material period prior to the take-over bid, both before and after Valuation Day, involved only the remaining 12,000-odd shares, something less than 10% of the total outstanding.

There is before me in considerable detail the evidence of Philip M Spicer as to why he, and his late father, had recommended the company’s stock as a long-term hold. The most important factors were the company’s innovative and aggressive product and market development approaches, its commanding position in the Canadian market, its acquisition of a United States subsidiary and the understated values of its production equipment and real estate. I do not think it necessary to review this evidence in detail. I accept that Spicer had good reason to recommend the company’s shares to its clients as a long-term hold.

The shares held by Spicer clients were not subject to any binding arrangement. The only common thread disclosed in evidence is that the holders of 30,000-odd shares all received and acted on Spicer’s advice. Neither Spicer nor any of its clients were represented on the company’s board of directors; however, the late H S Spicer, at least, had maintained an exceptional rapport with officials of both the company and its controlling interest. He was well and routinely informed by them as to its affairs and prospects and felt, through the 1960’s, that they were receptive to his ideas and sympathetic to the interests of the minority shareholders. In 1970, for the first time, the controlling interests displayed a polite interest in Spicer’s view of its clients’ intentions as to their investments per se. Up to then, they had been receptive to Spicer’s representations on behalf of its clients. Now they were not. A change in dividend policy, said to be designed to benefit the minority shareholders without detriment to the controlling interest, was suggested and ignored. The Toronto Stock Exchange was actively and publicly considering prescribing conditions upon which the continued listing of stocks would depend. If it adopted the conditions being publicly discussed, the company’s shares would be delisted. A share split would avoid that. Spicer suggested it and, again, was ignored. Spicer smelled a take-over or a work-out proposal in the offing and so advised its clients.

Spicer was of the view that a take-over price in excess of $300 per share, perhaps as much as $500, could be expected. There was not, nor ought there have been, any public announcement of the pending take-over on or before Valuation Day. When the offer came, November 10, 1972, the price was $200. Spicer was disappointed but advised its clients to accept.

The delay of the better part of three years from when Spicer formed the opinion that some proposal from Sanderson was in the offing until it actually came does not raise doubt in my mind that the proposal was bona fide anticipated early in 1970. The offer to the company’s minority shareholders appears, per se, to comprehend a relatively simple and straightforward transaction. It was, however, only one transaction of a complex series concurrently undertaken by Reed Paper Group Ltd to reorganize its Canadian holdings.

I do not accept that the defendant’s 2,010 shares themselves constituted such a block as to call for a departure from the ordinary functioning of the open market in order to determine their fair market value. Neither do I accept that there is any basis for considering those shares as part of such a block, namely, the entirety of the Shares owned by Spicer clients; those 30,000-odd shares were not a block. On the other hand, I do accept that Spicer did anticipate a proposal from Sanderson to the other shareholders, that the anticipation was reasonably founded and that it was communicated to its clients, including the defendant. I further accept that, with that information, no shareholder would willingly have sold his shares for anything like $85.50 on Valuation Day. He would have demanded considerably more and a prospective purchaser, armed with the same information, would have expected to pay considerably more. However, it remains that what is to be determined is the fair market value on Valuation Day.

In Crabtree v Hinchcliffe, [1971] 3 All ER 967, the House of Lords applied United Kingdom legislation in a similar factual situation. The legislation provided that, on the initiation of the taxation of capital gains, the market value of shares quoted on the London Stock Exchange be determined with reference to its market quotations on April 6, 1965,

except where in consequence of special circumstances prices so quoted are by themselves not a proper measure of market value.” [1]

In November 1964 serious discussions had begun between the chairman of Vickers Ltd and the taxpayer’s father, chairman of R W Crabtree & Sons Ltd contemplating the acquisition of all of the latter company’s issued shares by Vickers Ltd. On January 14, 1965, when the shares were quoted at 47s 6d on the London Stock Exchange, a price of 72s was proposed to Vickers. The April 6, or Valuation Day, market value of 42s 6d was established with reference to London Stock Exchange quotations. On August 6, a price of 55s was agreed upon by the negotiators and on August 17, the public was made aware of the intended take-over, which was duly effected. It was common ground that no public intimation ought to have been given prior to Valuation Day.

The House of Lords was unanimous in. dismissing the taxpayer’s appeal against the 42s 6d determination, which had been allowed by the Special Commissioners but reversed by the Court of Appeal. Their Lordships’ ratio is most succinctly stated, at page 973, by Lord Reid:

It must happen every day that directors of many companies have in their possession confidential information which very properly they do not make public but which if made public would lead to a substantial alteration of the quoted prices of their companies’ shares. That could not possibly be a “special circumstance’’ and in my opinion that is all that happened here.

The defendant’s entire argument in this branch was predicated on ignoring the prescription that what subsection 26(11) requires be determined is fair market value, not value by some other standard. It would require affirmative proof of some situation rendering prices quoted on the open market something other than reflective of market value to justify adopting another approach to its determination. I do not think that the presence of the word “fair” in subsection 26(11) and its absence from the British statute distinguishes the Crabtree case from this one. Spicer’s accurate insight is no more a reason than the insider information available to the taxpayer in the Crabtree case to depart from the open market’s verdict as to market value. Be it market value or fair market value, it is the value in the market-place, not the value to a particularly situated or motivated investor, that is to be determined.

That market price is the best test of fair market value was the verdict of the Supreme Court of Canada in Untermyer Estate v Attorney General for British Columbia, [1929] SCR 84 at 91:

We were favoured by counsel with several suggested definitions of the words “fair market value”. The dominant word here is evidently “value”, in determining which the price that can be secured on the market—if there be a market for the property (and there is a market for shares listed on the stock exchange)—is the best guide. It may, perhaps, be open to question whether the expression “fair” adds anything to the meaning of the words “market value”, except possibly to this extent that the market price must have some consistency and not be the effect of a transient boom or a sudden panic on the market. The value with which we are concerned here is the value at Untermyer’s death, that is to say, the then value of every advantage which his property possessed, for these advantages, as they stood, would naturally have an effect on the market price. Many factors undoubtedly influence the market price of shares in financial or commercial companies, not the least potent of which is what may be called the investment value created by the fact—or the prospect as it then exists— of large returns by way of dividends, and the likelihood of their continuance or increase, or again by the feeling of security induced by the financial strength or the prudent management of a company. The sum of all these advantages controls the market price, which, if it be not spasmodic or ephemeral, is the best test of the fair market value of property of this description.

I therefore think that the market price, in a case like that under consideration, where it is shown to have been consistent, determines the fair market value of the shares. I do not lose sight of the fact that mining operations are often of a speculative character, that there is always a danger of depletion, and that a time will sooner or later arrive when no more minerals will be available, unless other properties are secured to keep up the supply. But all these elements have an effect on the price of the shares on the stock exchange, and no doubt they were fully considered by the purchasers of the stock at the then prevailing prices.

I take it that in referring to a spasmodic or ephemeral market price, Mignault, J was postulating a special circumstance in which prices quoted in the market would not be a proper measure of fair market value.

The second branch of the defendant’s argument turns on the proposition that the market for the company’s shares was spasmodic or ephemeral. The appropriate definitions of these words, as they appear in The Shorter Oxford English Dictionary, 3rd edition, are:

Ephemeral: Beginning and ending in a day; existing only for a day or a few days; shortlived, transitory.

Spasmodic: Occurring or proceeding by fits and starts; irregular, intermittent; not sustained.

The Federal Court of Appeal in Henderson Estate v MNR, [1975] CTC 485; 75 DTC 5332, appears to have extended the principle enunciated by the Supreme Court in the Untermyer case to embrace the market as well as the market price. It will be noted that Mignault, J said:

. . . the market price must have some consistency and not be the effect of a transient boom or a sudden panic on the market.

and again:

. . . the market price, in a case like that under consideration, where it is shown to have been consistent, determines the fair market value of the shares.

In the Henderson case, the Federal Court of Appeal, at page 492 [5337], held:

Given a consistent market in the sense of a market that is not “the effect of a transient boom or a sudden panic” or that is “not spasmodic or ephemeral”, to adopt the terms used by Mignault, J in the Untermyer case, the stock market is the best evidence of fair market value.

and again [p 493 [5337]]:

The stock market may be a consistent market, though prices of the stock in question vary fairly substantially, if the market is not significantly out of line with market patterns for the type of stock.

The weekly quotations and trading volume of the company’s shares on the Toronto Stock Exchange for the years 1969 to 1972 inclusive, as reported by the Financial Post, are in evidence. They were not challenged and I accept them. In the week ended January 3, 1969, 3,000 shares traded: the quotations were a high of $129 and a low and close of $124. During the balance of 1969, a total of 3,405 shares traded, only 905 after May. Trading occurred during all but about ten weeks and involved 400 shares one week, 300 during two weeks, 200 during three weeks, 100 during seven weeks and from as many as 90 to as few as 5 during the other weeks. Prices ranged to a high of $190 the week ended April 18, when 400 shares traded, and closed-for the year at a low of $110 the week ended December

12. During 1970 only 655 shares traded, one week’s trade involving 200 shares, two weeks’ trade involving 100 and the balance ranging from 35 to 5 shares in the 18 weeks that trading occurred. The high quotation for the year was the opening $110, which was pretty well sustained through April. A low of $75 was reached during the week of November 20 and the closing quotation for the year for the week ended November 27 was $82.

During 1971, a total of 1,483 shares traded during 23 weeks. Three weeks’ trading involved 200 shares; 6 weeks’ trading involved 100; and the other weeks ranged from 43 to 10 shares. Trading opened at $79 the week of January 8; prices rose steadily to a high of $115 the week ended May 14 and then fell to close for the year the week ended October 29 at $85. There were no trades thereafter until after Valuation Day, the week ended January 14, 1972, when 40 shares traded at $84. It is perhaps desirable to set forth what occurred in what appear likely to have been board lot transactions during 1971:

The evidence does not establish that the market price of the company’s shares quoted for the week ended October 29, 1971 nor the bid-ask quotations for December 21 and 23 were either spasmodic or ephemeral. On the contrary, they were quite consistent with the prices prevailing in the market during the preceding 18 months, save only the boomlet in April and May 1971, when 163 shares traded at over $100, the first to do so since the week of April 3, 1970. The quotations for that week are also consistent with the trend in prices established by the market once its interest in the shares, relatively speaking, waned around May 1969. Of 8,543 shares traded during 1969, 1970 and 1971, 5,500 were traded during the first five months of 1969. The market price fell rapidly from the $160 range then to $110 by year-end and to $80 by mid-1970. Thereafter, except for the boomlet mentioned, the market price ranged between $75 and $100.

Neither, as I apprehend its meaning, was the market for the shares ephemeral. There was a. real, continuing market. The market may be fairly characterized as spasmodic; however, there is no evidence that its intermittence was a function of any inconsistency in the market. It is obvious that it was intermittent because it was an extremely thin market. To paraphrase Lord Reid: it must happen every day that the market quotes prices for thinly traded securities either as a result of actual trading in a few shares, be it odd lot or board lot, or by bidask quotations in the absence of trading. The fact that the market in a given security is extremely thin is one of the myriad factors taken into account by those participating in the market in establishing what they are willing to pay or accept for that security at a given time; it is not a reason for rejecting the market’s verdict as to market value.

There is no foundation in the evidence for me to conclude that the market for the company's shares was significantly out of line with any appropriate market norm. In reaching this. conclusion, I expressly reject the validity of Philip Spicer’s relation of the company and its shares to such companies as Moore Corporation. and Canadian Tire and their shares, which were among the 40 most actively traded Canadian industrial shares on the Toronto Stock Exchange during 1971. The evidence does not lead me to conclude that the company was, in 1971, generally comparable to the component companies of any of Toronto Stock Exchange indices that are in evidence and that, therefore, the market value of its shares ought to be calculated by applying averages for those indices rather than the market’s actual verdict.

It is unlikely that this will be the last case of its kind to be dealt with by this Court. I therefore feel constrained to repeat something I said about expert evidence on another occasion:

The Court is not justified in jumping ‘with an expert to a conclusion that is sustained only by the evidence of his expertise; it simply must have evidence as to facts so that it can both understand and evaluate the process leading to the conclusion and the validity of the conclusion Itself.* [2]

The expert evidence submitted on behalf of the defendant did not meet that test. The expert evidence submitted by the plaintiff set forth a number of approaches to determining the fair market value of the shares on Valuation Day but concluded that the market itself provided the best measure and did not follow any of the other approaches to a determination. The witness, a qualified business valuer, concluded that the prescribed $85.50 was the fair market value.

I agree that, in this case, the market itself does provide the best evidence of fair market value. The legislation does not contemplate the determination of a fair value in the context of something other than the market; it contemplates the determination of a fair market value.

The prescribed fair market value of $85.50 is, of course, an average of the high and low quotations on the last day of trading prior to Valuation Day. Over 50 days separated those dates. Whether that, in fact, was the calculation made in its. prescription is not known to me but I assume that it was. I am of the opinion that a reference to actual trades, rather than bid-ask quotations in the absence of trading, is the more reliable basis for a calculation of fair market value. I further hold that, in the case of a security as lightly traded as the shares in issue, reference ought to be had to all trades over a reasonable period of time rather than to a single day or week’s trading.

I considered the apparent board lot trades during 1971 as the basis for the calculation. The average closing price for the weeks in which those occurred was $93.32. I rejected that basis both because I felt an entire year too long a period and, in the nature of the market for these particular shares, there seemed no reason to ignore apparent odd lot trading. I concluded that all trades during the last ten weeks that the shares actually traded was a more valid basis for the determination. There were no apparent aberrations in the market or market price for the shares during that period. I expressly rejected the validity of hindsight as probative of fair market value at a given date and took nothing that occurred after Valuation Day into account.

The average closing price on the Toronto Stock Exchange for the shares during each of the last ten weeks that it actually traded prior to Valuation Day was $92.55. I hold that the fair market value of a share of the company on December 22, 1971 was $92.55, not $85.50 as prescribed.

In the defendant’s appeal to the Tax Review Board, the fair market value was fixed at $170. That led to the action in this Court seeking to uphold the $85.50 determination. The plaintiff has been largely successful and is entitled to costs. There will be no order as to costs in actions T-3032-76 and T-3034-76. I do not see that the defendant’s counterclaim to establish a $200 determination had any bearing on the conduct of the action; it did not even require a defence. The counterclaim will be dismissed without costs and the assessment will be referred back to the Minister for reassessment in accordance with these reasons.