The
Assistant
Chairman:—In
1958
Mr
Mersereau
(hereinafter
called
‘the
appellant’’)
started
a
trucking
business
in
the
Province
of
New
Brunswick,
which
prospered.
In
1962
he
caused
a
company
to
be
incorporated
pursuant
to
the
laws
of
that
province,
which
company
was
called
Ralph’s
Transport
Limited
(hereinafter
referred
to
as
“the
company’’)
and,
for
shares
of
its
capital
stock,
he
sold
to
it
his
complete
business.
He
received
preferred
shares
for
his
goodwill,
the
value
of
which
was
reflected
on
the
books
of
the
company
at
$50,000.
Before
the
issue
in
dispute
in
this
appeal
arose,
the
company
had
redeemed
all
its
preferred
shares.
On
the
sale
the
appellant
also
received
50
fully
paid
common
shares
in
the
company
for
the
remaining
assets
of
his
business.
At
all
relevant
times
the
appellant
owned
all
the
issued
common
stock
of
the
company.
By
agreement
dated
December
29,
1972
the
appellant
agreed
to
sell
all
those
common
shares
in
an
arm’s
length
transaction
for
a
price
of
$642,000.
The
sale
was
completed
about
April
1,
1973.
The
appellant,
when
he
filed
his
income
tax
return
for
the
1972
taxation
year,
did
not
show
a
capital
gain
or
loss
with
respect
to
the
sale
of
the
shares.
The
Minister,
in
due
course,
considered
the
facts
of
the
case
and
concluded
that
the
appellant
had
had
a
capital
gain
as
a
result
of
the
transaction
and
so
assessed
him
to
tax
on
one-half
of
that
gain.
The
appellant
duly
objected
and,
following
confirmation
of
the
assessment,
appealed
to
this
Board.
The
appellant
contends
that
the
Valuation
Day
value
of
the
shares
in
this
private
company
was
$620,000.
The
Minister’s
position
was
that
the
value
of
those
shares
on
that
day
was
$494,270.
The
former
position
produces
a
taxable
gain
of
$11,000,
while
the
latter
produces
a
taxable
gain
of
$73,865.
The
issue
thus
becomes:
What
was
the
value
of
those
50
common
shares
on
December
31,
1971?
It
is
to
be
clearly
noted
that
there
was
no
sale
of
those
shares
on
that
date
or,
for
that
matter,
at
any
time
other
than
the
sale
by
the
agreement
of
December
29,
1972.
Three
witnesses
were
called
at
the
hearing.
Mr
Mersereau
gave
general
evidence
as
to
the
type
of
business
carried
on
by
the
company,
the
identity
of
its
customers,
and
he
filed
the
company’s
financial
statements
for
the
years
1968
to
1971
inclusive
(unaudited),
the
agreement
for
sale
by
which
he
sold
the
shares,
and
other
relevant
information.
It
should
be
mentioned
that
counsel
agreed
and
filed
on
consent
(when
the
hearing
of
the
case
was
nearly
completed)
an
audited
copy
of
the
company’s
1972
financial
statements.
I
must
say,
no
reference
was
made
by
either
party
to
the
fact
that
the
earlier
Statements
were
unaudited.
In
addition,
each
party
called
an
expert
on
valuation.
Mr
Brian
Usher-Jones,
CA,
of
Montreal,
Quebec,
member
of
the
accounting
firm
of
Coopers
&
Lybrand,
was
called
on
behalf
of
the
appellant.
He
stated
that
neither
he
nor
any
member
of
his
firm
had
acted
for
the
appellant
in
any
respect
or
on
any
occasion
except
for
the
valuation
opinion
he
was
to
give.
Mr
Leonard
Brian
Moore,
also
a
chartered
accountant,
gave
expert
testimony
on
behalf
of
the
respondent.
Mr
Moore
was,
and
had
been
for
about
two
and
one-half
years,
the
Chief
Valuation
Supervisor
for
the
Atlantic
Region
of
Revenue
Canada,
Taxation.
As
a
general
observation
I
must
say
I
found
that
all
three
witnesses
gave
their
evidence
clearly,
quickly,
frankly
and
unequivocally.
There
was
no
pause,
delay
or
hesitation.
I
found
all
to
be
very
good
witnesses.
Needless
to
say,
the
fine
character
of
each
of
the
witnesses
makes
my
task
of
determining
the
value
of
the
business
on
Valuation
Day
all
the
more
difficult.
Mr
Mersereau,
as
to
be
expected,
was
the
manager
of
the
business.
The
company
had
about
twelve
employees:
(a)
himself;
(b)
his
wife,
whose
work
was
in
the
office;
(c)
a
foreman,
whom
one
might
call
an
assistant
manager;
(d)
a
yardman;
and
(e)
eight
drivers.
The
company
had
no
mechanics.
The
White
Motor
Corporation
of
Canada
Ltd
did
the
repairs
to
the
trucks.
The
business
of
the
company,
while
it
could
be
classed
as
trucking,
would
be
accurately
described
if
it
were
called
specialized
trucking.
The
type
of
business
could
best
be
shown
by
reference
to
the
licences
issued
to
the
company
by
the
New
Brunswick
Motor
Carrier
Board.
The
licences
(Exhibits
A-1
and
A-2)
read
respectively
as
follows:
A-1:
.
.
for
a
License
to
operate
a
public
motor
truck
under
the
MOTOR
CARRIER
ACT
for
the
transportation
of
property
for
compensation,
as
follows:
CLASS:
C-X.
Over
all
roads
in
New
Brunswick
for
the
carriage
of
goods
for
Joseph
A
Likely,
Limited,
Saint
John,
New
Brunswick,
and
for
furtherance
into
the
Provinces
of
Nova
Scotia
and
Prince
Edward
Island,
as
authorized,
and
return.
CLASS:
PC-X.
Over
all
roads
in
New
Brunswick
for
the
carriage
of
structural
steel,
concrete
and
cement
products
and
reinforced
concrete
and
cement
products
with
the
right
to
extend
into
the
Provinces
of
Nova
Scotia
and
Prince
Edward
Island,
as
authorized
therein,
and
return.
A-2:
.
.
for
a
License
to
operate
a
public
motor
truck
under
the
MOTOR
CARRIER
ACT
for
the
transportation
of
property
for
compensation,
as
follows:
1.
Class:
C-PC-X
Over
all
roads
in
New
Brunswick
for
the
carriage
of
goods
for
Joseph
A
Likely,
Limited,
Saint
John,
New
Brunswick,
and
for
furtherance
into
the
Provinces
of
Nova
Scotia
and
Prince
Edward
Island,
as
authorized
therein,
and
return.
The
Contract
portion
of
this
License
is
valid
only
during
such
period
as
there
is
in
effect
a
Contract
between
the
Licensee
and
Joseph
A
Likely,
Limited.
2.
Class:
S-PC-X.
Over
all
roads
in
New
Brunswick
for
the
carriage
of
structural
steel,
concrete
and
cement
products
and
reinforced
concrete
and
cement
products
with
the
right
to
extend
into
the
Provinces
of
Nova
Scotia
and
Prince
Edward
Island,
as
authorized
therein,
and
return.
3.
Class:
S-PC-X.
For
the
carriage
of
fresh
and
unprocessed
fish
from
the
Province
of
Nova
Scotia,
as
authorized
therein,
to
all
points
in
the
Province
of
New
Brunswick
and
through
the
Province
of
New
Brunswick
to
other
jurisdictions,
as
authorized
therein
and
return.
4.
Class:
S-PC-X.
For
the
carriage
of
goods
originating
at
Saint
John,
New
Brunswick,
for
the
account
of
Ferro-Chemi-Crete
Ltd
over
all
highways
in
the
Province
of
New
Brunswick
with
the
right
to
extend
to
the
Provinces
of
Nova
Scotia
and
Prince
Edward
Island,
as
authorized
therein
and
return.
Exhibit
A-1
was
issued
on
May
26,
1965
and
Exhibit
A-2
on
February
2,
1972.
It
is
to
be
noted
that
the
first
two
authorizations
of
Exhibit
A-2
are
the
same
as
those
given
by
Exhibit
A-1.
The
last
two
authorizations
on
Exhibit
A-2
are
new.
Mr
Mersereau
stated
the
company
had
been
carrying
the
goods
referred
to
in
those
two
latter
authorizations
for
a
substantial
part
of
1971
under
temporary
licences.
While
other
licences
were
received
from
the
Provinces
of
Prince
Edward
Island
and
Nova
Scotia,
I
believe
nothing
substantial
turns
on
the
extra
licences.
It
can
readily
be
seen
that
the
business
was
not
that
of
a
common
carrier;
it
was
virtually
restricted
to
the
business
of
Joseph
A
Likely
Limited
and
structural
steel
and
concrete
products.
Those
licences
were
issued
in
the
1960’s
and,
in
1972,
a
licence
was
issued
to
include
the
haulage
of
fish
as
well
as
the
carriage
of
goods
Originating
at
Saint
John,
New
Brunswick
of
Ferro-Chemi-Crete
Ltd.
In
addition,
from
the
Province
of
Nova
Scotia,
a
licence
was
received
for
hauling
fresh
herring
from
points
in
Nova
Scotia
to
points
in
New
Brunswick
and
the
State
of
Maine.
I
believe
this
licence
was
received
late
in
1971.
Licences
were
also
received
from
both
the
Provinces
of
Nova
Scotia
and
Prince
Edward
Island
to
carry
the
same
goods
it
was
authorized
to
carry
in
New
Brunswick
to
its
destination
in
either
one
of
those
two
provinces.
With
the
exception
of
the
licence
from
Nova
Scotia
to
carry
herring,
the
company
did
not
have
authority
to
carry
goods
in
those
two
provinces
other
than
the
licences
already
referred
to.
From
the
licences
it
may
be
readily
observed
that
a
client
of
the
company
was
Joseph
A
Likely
Limited.
In
addition,
it
had,
up
to
the
end
of
1971,
three
other
main
clients;
namely,
Ocean
Steel
&
Construction
Limited,
Strescon
Limited
and
Ferro-Chemi-Crete
Ltd.
The
evidence
pointed
out
that
the
last
three
mentioned
companies
were
part
of
the
K
C
Irving
organization.
They
were
referred
to
as
though
they
were
one
company.
I
have
concluded
that
the
three
companies
are
associated
with
each
other
within
the
meaning
of
the
Income
Tax
Act
in
that
they
were
controlled
by
the
same
person
or
group
of
persons.
It
was
likewise
made
clear
that
there
was
no
relationship
from
the
same
“associated”
concept
between
Joseph
A
Likely
Limited
and
the
other
three
companies.
Joseph
A
Likely
Limited
dealt
largely
in
cement
products,
pre-stressed
beams,
pipes
and
lumber
business.
It
was
one
of
the
largest
companies
in
Saint
John.
Ocean
Steel
&
Construction
Limited
was
one
of
the
largest
steel
companies
in
Saint
John.
Strescon
Limited
dealt
in
concrete
products,
prefab
panels
and
structural
beams.
Ferro-Chemi-Crete
Ltd
manufactured
styrofoam
insulation.
The
trucks
of
the
company
carried
open-type
freight—sewer
pipes,
road
construction
pipes,
prefab
building
panels,
bridge
girders
and
other
similar
goods.
To
do
so
special
equipment
was
needed,
especially
steering
trailers,
so
that
the
rear
of
the
trailer
could
navigate
sharp
turns.
There
was
a
motor
affixed
to
the
back
of
the
trailer
with
a
steering
pole
so
those
wheels
could
be
turned.
Because
of
the
size
of
the
beams,
etc
carried,
the
trailers
had
to
be
extra
long—they
were
over
the
usually
permitted
length
(about
45
feet)
and
exceeded
the
normal
load
limit
of
22
tons.
Sometimes
the
loads
went
to
weights
of
50
tons
and
had
lengths
up
to
about
150
feet.
Special
permits
were
obtained
to
carry
such
loads.
Competitors
did
not
have
steering
trailer
equipment
and,
with
respect
to
the
specialized
trucking,
there
was
not
a
great
deal
of
competition.
The
appellant
estimated
that
from
two-thirds
to
three-quarters
of
the
company’s
business
originated
with
the
four
companies
I
have
mentioned.
The
company
provided
efficient
delivery
as
needed
by
those
companies
in
their
work.
A
truck
arrived
at
a
site
on
a
given
schedule,
was
promptly
unloaded
by
a
crew
and
crane,
and
then
on
its
way
out
so
that
a
second
truck
carrying
the
material
next
needed
could
be
unloaded
as
needed.
The
whole
scheme
was
prompt
orderly
delivery
so
that
a
contractor
would
not
be
held
up.
Mr
Mersereau
was
of
the
opinion
that
the
rates
the
company
charged
were
a
little
higher
than
those
charged
by
others.
The
customers
were
paying
for
an
efficient
service
and
they
got
it.
The
haulage
for
the
four
above-mentioned
companies
was
mainly
in
the
period
April
to
November,
although
there
was
some
haulage
in
the
winter.
The
other
haulage
business
of
the
company
was
a
dump
operation.
Fish
was
hauled
in
the
winter
as
was
salt
for
the
highways.
Anything
would
be
hauled
in
a
dump—gravel,
stone,
etc.
Mr
Mersereau
stated
the
company’s
business
increased
over
the
years;
the
trend
of
the
business
was
on
the
increase.
In
February
1972
the
appellant
had
what
was
originally
considered
to
be
a
heart
seizure
and
was
immediately
confined
to
a
hospital.
He
was
there,
as
I
recall
the
evidence,
about
two
weeks.
It
later
turned
out
that
he
had
not
had
a
heart
seizure,
but
rather
had
a
hiatus
hernia.
He
was
off
work
for
some
time,
returning,
he
believes,
fully
back
to
work
before
June
1971.
About
a
month
after
his
release
from
hospital,
his
family
physician
informed
him
that
he
could
have
a
heart
attack
which
could
affect
him
permanently,
and
recommended
he
get
out
of
the
business.
He
had
to
decide,
from
a
health
point
of
view,
whether
or
not
he
should
continue
to
do
as
he
had
been
doing
or
“sell
the
business”.
Not
only
could
the
company’s
business
activity
not
be
reduced
nor
go
on
at
least
as
it
was,
but
rather
it
should
have
been
expanded
at
that
time.
A
decision
was
made
to
sell.
It
would
appear
that
the
appellant
made
the
first
move
in
keeping
with
his
doctor’s
advice
in
the
early
summer
of
1971,
possibly
around
June.
The
appellant
informed
the
company’s
foreman
that
he
was
going
to
sell
out
the
business.
The
foreman
stated
he
was
interested
in
buying,
but
he
later
told
the
appellant
that
he
could
not
get
the
financing
and
so
could
not
buy.
Later,
in
September
or
October
1972,
at
a
restaurant
where
he
ate
on
occasion
the
appellant
met
a
friend,
Bill
Dolon,
and
talked
of
the
selling
of
the
trucking
business.
The
appellant
asked
Dolon
whether
or
not
he
was
interested
in
buying
and
he
stated
he
was.
In
a
few
days
he
turned
over
to
Dolon
a
few
financial
statements
and
some
work
was
done
by
each.
While,
as
laymen
would,
the
parties
talked
in
terms
of
selling
or
buying
the
trucking
business,
as
is
shown
by
subsequent
events,
in
reality
it
was
a
question
of
establishing
a
selling
price
of
the
shares
of
the
company,
all
of
which
were
owned
by
the
appellant.
The
appellant
informed
Dolon
he
wanted
$332,000
for
the
trucks,
trailers
and
parts,
together
with
$100,000
for
the
licences.
White
Motor
Corporation
of
Canada
Ltd
and
Trailmobile
Limited
valued
the
trucking
and
trailer
equipment
and
parts
at
the
total
figure
of
$332,000
and
so
I
assume
that
those
assets
had
been
valued
before
the
appellant
spoke
to
Dolon.
Dolon
made
no
counter-proposal
to
the
appellant
and,
by
agreement
dated
December
29,
1972,
the
appellant
sold
all
the
shares
he
owned
to
a
company
which
Dolon
had
caused
to
be
incorporated,
Alpha
Beta
Holdings
Ltd.
The
total
consideration
turned
out
to
be
$642,000.
This
sum
was
broken
down
among
four
items
as
follows:
$432,000,
$163,000,
$3,000
and
$44,000.
The
first
three
of
these
items
are
in
paragraph
2
of
the
agreement
of
sale
which
reads
as
follows:
2.
Subject
to
the
proviso
hereinafter
set
out,
the
purchase
price
to
be
paid
by
the
purchaser
to
the
vendor
for
the
shares
(hereinafter
referred
to
as
“the
purchase
price”)
shall
be
tht
[sic]
total
of
the
sum
Four
hundred
and
thirty-two
thousand
dollars
($432,000.00)
plus
a
sum
equivalent
to
Eighty-Five
per
centum
(85%)
of
the
quoted
bid
market
value
of
investments
owned
by
the
company
on
the
date
hereof;
provided
that
if,
on
the
basis
of
the
audited
financial
statements
referred
to
in
paragraph
3
hereof,
(a)
the
current
assets
of
the
company
as
at
December
31,
1972,
are
determined
by
the
auditors
to
exceed
the
current
liabilities,
the
purchase
price
shall
be
increased
by
the
amount
of
such
excess;
or,
alternatively,
(b)
the
current
liabilities
of
the
company
as
at
December
31,
1972,
are
determined
by
the
auditors
to
exceed
the
current
assets,
the
purchase
price
shall
be
decreased
by
85%
of
the
amount
of
such
excess.
Paragraph
5
of
the
agreement
called
for
the
closing
to
be
completed
on
February
15,
1973.
It
was
not
completed
until
about
April
1,
1973.
A
memorandum
‘‘as
of”
February
14,
1973
was
made
as
of
February
14,
1973
with
respect
to
the
said
agreement.
It
stated
the
closing
date
would
be
March
15,
1973,
and
that
‘‘the
price
of
the
shares,
determined
under
paragraph
2
of
the
agreement,
shall
be
$642,000
(‘the
purchase
price’)”.
The
memorandum
acknowledged
receipt
of
$50,000
and
stated
the
balance
of
the
purchase
price
of
$592,000
would
be
paid
on
closing.
The
fourth
item
of
$44,000
which
produced
the
selling
price
of
$642,000
and
which
was
not
referred
to
in
the
agreement
or
in
the
memorandum
was
described
by
the
appellant
as
‘‘cost
for
delay
and
interest”.
The
reason
for
the
delay
in
closing
was
that
the
purchaser
had
difficulty
in
raising
the
purchase
price.
It
is
noted
that
all
the
purchase
price
was
to
be
paid
in
cash.
No
one
suggested
that
it
was
not.
The
intended
purchaser
went
to
the
company’s
bank,
the
Bank
of
Nova
Scotia,
for
assistance
in
financing
the
transaction,
but
without
success.
The
bank
nonetheless
suggested
to
the
appellant
that
he
give
the
purchaser
time
to
raise
the
money
and
concurrently,
in
effect,
stated
that,
if
it
heard
of
a
potential
purchaser,
it
would
let
him
know.
A
few
days
later,
having
received
a
phone
call
from
his
bank
manager,
the
appellant,
with
the
assistant
manager
of
the
bank,
attended
Mr
Phil
Oland,
an
officer
of
Moosehead
Breweries
Limited
at
Saint
John,
New
Brunswick.
At
that
meeting
(which
was
a
Monday
in
March),
Mr
Oland
was
advised
that
Dolon
had
till
a
week
from
the
following
Friday
to
complete
his
purchase
even
though,
if
I
recall
the
evidence
correctly,
he
was
in
default
on
the
written
agreement
at
that
time.
If
Dolon
did
not
purchase,
the
appellant
stated
that
the
price
to
Oland
would
be
as
per
the
existing
document
plus
the
revenue
(presumably
net)
out
of
the
operation
until
the
end
of
April
1973.
On
Thursday,
Oland
orally
stated
he
would
pay
that
price.
Shortly
after,
an
agreement
(unsigned)
was
presented
to
the
appellant
by
Oland
to
buy
the
appellant’s
shares
for
$500,001.
The
answer
was
that
Dolon
still
had
until
the
next
Friday.
Early
the
following
Monday,
Oland
again
appeared
saying
he
would
increase
the
amount
by
a
further
sum
of
$50,000
if
the
shares
were
sold
“today”.
The
answer
was
the
same—not
till
Friday.
On
Friday
Dolon
paid
the
$50,000
and
then
signed
a
memorandum
as
to
the
completion
and
set
the
purchase
price
at
$642,000.
This
document,
while
it
is
a
“memorandum
as
of
February
14,
1973”
and
“made
as
of
February
14,
1973”
was
prepared
and
signed
around
March
15,
1973,
when
the
deposit
was
paid.
The
balance
was
paid
about
April
1,
1973.
As
mentioned
previously,
it
was
a
cash
purchase.
Up
until
1970,
in
so
far
as
the
business
of
the
company
was
concerned,
its
only
revenue
was
its
receipts
from
its
customers.
Late
in
1970
another
source
of
revenue
was
added,
namely,
a
subsidy.
The
federal
government
commenced
paying
a
subsidy
of
17%
on
charges
by
the
trucker
(the
company)
on
goods
picked
up
and
delivered
at
a
point
more
than
15
miles
distance
from
the
pick-up
point.
The
trucker
filed
a
report
each
month
showing
the
pick-up
and
delivery
point
with
its
charge,
and
in
about
two
months
it
would
receive
a
cheque
in
payment
of
the
subsidy.
As
everyone
knew,
there
was
no
assured
permanency
to
the
subsidy.
As
well,
there
was
no
assurance
that
the
rate,
even
while
the
subsidy
was
paid,
would
remain
constant.
It
could
be
reduced
or
wiped
out
by
the
government.
While
operating,
the
company
had
increased
its
rates
but,
with
the
advent
of
the
subsidy,
the
company
in
that
year
did
not
increase
its
rates.
The
subsidy
was
reduced
in
amount
and
the
appellant
knew
of
one
company
which
increased
its
prices
as
a
result
of
that
decrease.
As
far
as
rates
for
trucking
were
concerned,
they
were
not
controlled
by
a
board
in
the
sense
that
the
board
had
to
approve
them
before
they
could
be
changed
by
the
company.
However,
the
company
had
to
advise
a
board
if
it
were
to
change
them.
The
sale
of
the
shares
was
duly
completed
in
April
1973,
and
the
appellant
no
longer
had
any
connection
with
the
company
although,
as
required
by
the
agreement,
he
remained
an
employee
until
June
30,
1973.
As
previously
stated,
the
sole
issue
becomes:
What
was
the
fair
market
value
of
the
shares
on
Valuation
Day?
As
I
mentioned
earlier
in
these
reasons,
both
expert
witnesses
impressed
me
with
their
candour,
demeanour
and
ability.
In
light
of
this,
it
seems
strange
that
they
can
be
so
far
apart.
Each
valuator
filed
his
valuation
report
and
explained
his
source
of
information.
The
reports
were
dated
well
in
advance
of
the
hearing,
and
I
believe,
if
the
reports
had
not
been
exchanged,
the
substance
of
each
was
known
to
the
experts.
Revenue
Canada,
early
in
January
1975,
let
the
appellant’s
representatives
know
that
in
their
opinion
the
“maintainable
earnings”
of
the
appellant
were
$76,130
and
the
computation
to
reach
that
figure.
Mr
Usher-Jones
agreed
with
Revenue
Canada’s
computations
to
this
point
and
the
figure
for
maintainable
earnings.
However,
at
this
point
a
marked
divergence
in
approach
is
made.
Revenue
Canada
proceeded
from
this
point
using
the
maintainable
earnings
mentioned
above
of
$76,130.
The
appellant’s
expert
took
the
position
that
this
figure
actually
came
from
two
sources—operating
earnings
($42,130)
and
government
subsidies
($34,000)
for
the
same
total
of
maintainable
earnings
of
$76,130.
Revenue
then
capitalized
the
maintainable
earnings
at
20%.
This
rate
was
used
after
considering
all
factors,
especially
the
factor
that
a
large
portion
(the
same
amount
as
used
by
the
appellant)
of
those
maintainable
earnings
was
in
the
form
of
a
government
subsidy.
The
appellant’s
expert
however
did
not
consider
the
two
as
one
for
capitalization
purposes,
rather
he
capitalized
the
subsidy
income
at
the
same
rate
as
Revenue
Canada
capitalized
the
maintainable
earnings,
namely
20%,
and
he
capitalized
the
maintainable
earnings
from
operations
at
12.5%.
Based
solely
on
these
two
approaches
(and
there
are
no
differences
between
the
two
experts
on
subsequent
calculations
to
reach
the
value
of
the
shares),
Revenue
Canada
reaches
a
value
of
$494,270
while
the
appellant’s
value
is
$620,000,
a
difference
of
about
$126,000.
One
cannot
say
that
the
difference
between
the
experts
is
the
rate
chosen
at
which
to
capitalize
the
operating
earnings
as
the
appellant
used
this
word
to
mean
“not
including
revenue
from
subsidy”
while
in
effect
the
respondent
used
this
word
as
being
“all
revenue
from
operations”.
The
respondent,
in
effect,
after
considering
all
factors
including
subsidy,
came
to
the
conclusion
that
the
proper
rate
was
20%
while
the
appellant
was
of
the
view
that
that
rate
was
appropriate
for
subsidy
revenue
only.
It
should
be
mentioned
that
both
experts
stated
that
the
determination
of
the
rate
of
capitalization
to
be
used
is
a
judgment
determination
by
the
person
making
the
decision.
All
that
person
can
do
is
consider
all
the
facts
available
and
come
to
his
conclusion
based
on
his
experience.
In
argument
it
was
submitted
that,
were
the
two
rates
the
appellant
used
combined
to
one
to
produce
the
same
valuation
as
that
reached
by
Mr
Usher-Jones,
the
capitalization
rate
would
have
been
slightly
in
excess
of
15%.
Many
factors
were
mentioned
as
things
to
be
considered
in
arriving
at
the
appropriate
rate,
such
as
risk,
yield
on
other
investment,
maintainable
earnings,
past
history
as
to
growth,
the
underlying
asset
coverage,
depreciation
or
capital
cost
allowance
re
assets
which
are
valued
for
determining
value
of
shares
but
not
sold
to
give
a
new
base
for
capital
cost
allowance,
the
type
of
industry
involved,
the
number
of
customers
and
the
competition
in
the
field.
Each
expert
made
other
calculations
to
confirm
and
corroborate
the
position
taken
or
to
indicate
the
reasonableness
of
the
conclusion
he
reached.
Comments
were
made
as
to
whether
or
not
the
sale
by
the
appellant
of
the
shares
in
question
was
a
forced
sale.
The
second
unsigned
offer
was
used
not
only
to
endeavour
to
confirm
the
appellant’s
valuation
but
also
to
support
the
submission
that
the
selling
price
in
the
agreement
was
in
fact
low.
Of
course
it
was
pointed
out
that
the
sale
was
a
cash
sale—there
was
no
risk
and
no
financing
of
the
purchaser—hence
the
selling
price
would
be
lower
for
cash
than
if
it
were
some
cash
and
a
note
or
mortgage
back.
Much
more
was
said
by
each
expert
witness
but
I
cannot
see
where
anything
can
be
gained
by
recounting
everything
each
stated.
I
cannot
say,
since
the
rate
of
capitalization
to
be
used
is
a
judgment
call,
that
either
expert
is
clearly
wrong.
It
is
obvious
both
experts
agree
that
the
risk
with
respect
to
the
subsidy
income
is
greater
than
that
attributable
to
maintainable
earnings
from
operations
yet
the
appellant’s
expert
put
the
multiple
at
five
times
earnings
for
subsidies
alone
while
the
respondent’s
expert,
after
considering
risk
as
only
one
of
the
factors
to
be
considered,
puts
all
maintainable
earnings
at
the
same
rate.
It
would
seem
from
this,
respecting
both
of
those
witnesses
as
experts,
that
the
multiple
for
subsidies
alone
should
have
been
somewhat
lower
than
five
times
earnings.
It
must
be
remembered
that
the
subsidies
only
came
in
very
late
in
1970,
really
1971.
There
was
no
assurance
they
would
continue
for
any
specified
length
of
time,
and
even
if
they
did
continue,
there
was
no
assurance
as
to
rate.
I
do
not
agree
with
the
expert
for
the
appellant
that
it
(the
subsidy)
should
have
a
multiple
slightly
lower
than
normal
(operating
earnings).
The
report
of
the
appellant’s
expert
at
paragraph
6
states
as
follows:
6.
We
are
in
agreement
with
the
maintainable
earnings
of
$76,130
as
utilized
by
Revenue
Canada
which
included
government
subsidies
of
approximately
$56,000
before
income
tax.
The
earnings
multiple
of
5
(capitalization
rate
of
20%)
we
consider
too
low
under
the
circumstances.
We
are
in
agreement
with
the
principle
adopted
by
Revenue
Canada,
that
the
subsidy
income
should
warrant
a
lower
earnings
multiple,
however,
we
are
of
the
opinion
that
the
maintainable
portion
of
the
earnings
from
operations
exclusive
of
the
subsidy
income
would
command
a
higher
earnings
multiple.
By
the
same
approach
the
respondent’s
expert
put
all
the
maintainable
earnings
at
a
multiple
of
five
times
after,
in
his
opinion,
making
the
allowance
for
the
considerable
risk
with
respect
to
subsidies
as
well
as
to
all
other
considerations.
He
also
stated,
if
I
recall
his
evidence
correctly,
that
the
construction
industry,
to
which
the
business
of
the
company
was
closely
related,
was
a
high-risk
business
and,
after
noting
that,
stated
that
the
construction
industry’s
multiple
was
seldom
more
than
five
times
earnings
and
then
he
applied
that
multiple
to
include
the
allowance
for
the
subsidy
income.
The
result
is,
I
am
of
the
view,
the
respondent’s
multiple
is
too
low.
All
things
being
considered,
and
it
being
especially
noted
that
while
the
income
of
the
company
did
have
its
ups
and
downs
over
five
years
the
trend
of
the
income
was
clearly
up,
and
in
argument
it
was
submitted
that
once
a
subsidy
was
paid
by
a
government
it
was
unlikely
it
would
be
abolished
or
wiped
out
even
though
the
evidence
indicated
that
the
subsidy
was
in
fact
reduced,
I
am
of
the
view
that
the
appellant’s
rate
on
the
income
from
the
subsidy
is
too
high
and
the
respondent’s
rate
on
all
maintainable
earnings
too
low.
I
believe
a
multiple
of
about
3.5
or
a
capitalization
rate
of
about
28.5%
would
be
more
accurate
to
determine
the
value
of
the
subsidy
income.
Having
then
considered
this
risk
separately,
I
believe
the
capitalization
rate
of
12.5%
on
the
income
from
operations
is
reasonable.
The
result
is,
I
would
hold
that
the
fair
market
value
of
the
common
shares
of
the
company
was
$570,000
including
the
amount
of
$113,620
(net)
for
the
value
of
the
redundant
assets.
This
amount
on
the
respondent’s
approach
would
reflect
a
capitalization
rate
of
about
16.6%
or
a
multiple
of
about
six
times
maintainable
earnings.
The
result
is
the
appeal
of
the
appellant
is
allowed
and
the
matter
remitted
to
the
Minister
for
reassessment
on
the
basis
that
the
total
value
of
the
shares
on
Valuation
Day
was
$570,000.
Appeal
allowed.
Email this Content