CBT Investments LTD v. Minister of National Revenue, [1976] CTC 2440

A W Prociuk (orally: October 15, 1976):—The appellant corporation, CBT Investments Ltd, appeals from the respondent’s reassessment of its income for the taxation year 1972, wherein some 3300 shares of the Income Disability and Reinsurance Company of Canada sold in July of 1972 at $13 per share were assessed by the respondent as having a fair market value of $6 per share as of December 22, 1971, being the valuation date for stocks and securities in accordance with the Income Tax Act and Income Tax Application Rules 26(3), (7) and

(11) and the relevant provisions thereof.

The appellant was assessed to tax on the capital gains resulting therefrom. The appellant was represented by its president, Charles A Read, CA, who contended that the respondent based his evaluation, as it stood, on the market price as recorded by the Toronto Stock Exchange on December 22, 1971 which, in Mr Read’s view, was unrealistic and completely out of touch with the factual situation surrounding this type of stock.

He points out that (1) as early as January of 1971 the company, Income Disability and Reinsurance Company of Canada, received an offer of $12.50 per share, as per Exhibit R-3, which was turned down by the trustees; (2) the sale which was effected in July 1972 for $13 a share, as evidenced by Exhibit R-4, was under discussion and negotiation for several months prior to that date; (3) there was no activity, nor were there any unusual circumstances in respect of the shares, that would cause such a wide margin (between the fair market value on December 22, 1971 and the sale price in July of 1972) as the respondent suggests.

Mr Read contended that the shares were worth $13 each on Valuation Day or, if not, were worth at least $12.50 each, as nothing occurred between January 1971 and the valuation date, that is, December 22, 1971, that would cause the price to go down to $6.

The facts of this case are essentially not in dispute and, in my opinion, are very well outlined in the Minister’s Reply to the Notice of Appeal, which reads as follows:

2. The Appellant is a Canadian controlled private corporation whose President, Charles A Read, was one of the founding members of Income Disability and Reinsurance Company of Canada (formerly known as Income Insurance Company of Canada).

3. In 1964 the Appellant purchased 3,300 shares of Income Disability and Reinsurance Company of Canada (IDRCC) from Mr Read at a cost of $7.50 per share.

4. In 1965 virtually all of the holders of Issued and Outstanding shares in IDRCC subscribed to a Voting Trust Agreement, (“the Agreement”) including the Appellant which made all the Appellant’s shares in IDRCC subject to the Agreement.

5. The Agreement gave absolute control over the shares of IDRCC to a group of trustees, (“the Trustees”) who did not, either individually or collectively, own or control the ownership of a majority of the issued and outstanding shares of IDRCC.

6. The Trustee’s [sic] absolute control over the shares included, inter alia, control over the right to sell any shares, and any proposed sale of shares required the approval of three-quarters of the Trustees.

7. IDRCC made a a public offering of its shares in April, 1965, at a price per share of $12.00, which public offering was fully subscribed.

8. At December 22, 1971, the Toronto Stock Exchange listed the value of the shares of IDRCC at $6.00 per share.

9. On or about July 12, 1972, Canadian General Insurance Company purchased all the issued and Outstanding shares of IDRCC, including the 3,300 shares owned by the Appellant, for an amount of $13.00 per share.

With reference to the voting trust agreement, I would refer to the right of the holders of the voting trust certificates as therein set out in paragraphs 7 and 8 8 of the said agreement, filed as Exhibit R-2.

Mr Read states that voting trust certificates were traded to a small extent, and suggests that only a small number of purchases were made by insiders who knew what was likely to happen. He states that one shareholder in particular acquired a substantial number of the voting share certificates at a low price, knowing that he would gain handsomely when the takeover occurred.

According to Mr Read, this shareholder’s holding was so substantial that he was able to obtain a quarter of a million dollars in addition to the $13 per share at the time of the takeover.

It should be noted that the trading on the Toronto Stock Exchange was in voting trust certificates only, subject to certain limitations as set out in the voting trust agreement, which was in effect and was expected to remain in effect, until December 31, 1975, as same are set out in Exhibit R-2, whereas the issue here is the fair market value of the shares themselves, unfettered by any conditions or any further control.

The situation in the case of the Estate of Isaac Untermeyer v Attorney General for British Columbia, [1929] SCR 84, to which I was referred by counsel for the respondent, does not obtain here. At page 91 Mr Justice Mignault states the following:

. . » 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.

Now, as I said earlier, the situation here is substantially different because the trading on the Stock Exchange was private trading in trust certificates only, and there is some evidence that suggests that the trading occurred amongst shareholders knowledgeable, or that at least the purchaser was knowledgeable as to what was likely to happen, that is to say, the eventual sale and takeover by another company.

Viewing the evidence in its totality, l am of the opinion that the market price quotation of $6 for only 6 voting trust certificates traded a few days before December 22, 1971 is not a realistic price. I am further of the opinion that the fair market value of the shares on December 22, 1971 was at least $12.50 each, since this was the price offered as early as January 1, 1971.

Therefore I would allow the appeal and refer the matter back to the respondent on the basis that the fair market value, on Valuation Day, of the shares sold by the appellant was $12.50 per share.

Appeal allowed.