Bendix Automotive of Canada Limited v. Minister of National Revenue, [1974] CTC 2080

The Chairman (orally: November 29, 1973):—This is an appeal by Bendix Automotive of Canada Limited against a reassessment of the Minister of National Revenue for the taxation year 1969. It involves the appellant’s failure to withhold 15% non-resident tax on an alleged dividend received by the Bendix Corporation (which I shall hereinafter refer to as “Bendix”) from the appellant taxpayer, Bendix Automotive of Canada Limited, and the exact amount of that dividend is also in question.

In listening to the argument of learned counsel, it would seem that it is a simple case but, after considering the exhibits and hearing the evidence, I have reached the conclusion that it is obviously a most complicated case. In fact, at the outset, the only conclusion of which I am certain is that it is simply a most complicated case.

The issue is that the amount of shares in Computing Devices of Canada Limited which were owned by the taxpayer, and which were paid in kind, by dividend, to Bendix, should not be valued as or considered to be worth the amount that they would fetch as shares of Computing Devices of Canada Limited, but that they should be valued at what those 517,313 shares of Computing Devices of Canada Limited could be exchanged for in the form of shares of Control Data Corporation on a five-for-one basis which left the non-resident Bendix Corporation with 103,462 common shares in Control Data.

At this point I should mention that there are four corporations involved. There is the appellant which, on the evidence of Mr Charles Donnelly, is a wholly-owned subsidiary of “Bendix”, which is a US resident corporation. There is Computing Devices of Canada Limited, which was 66% controlled by the appellant, and then there is Control Data Corporation, which I shall refer to as “Data”, a separate and distinct corporation with which “Bendix” was dealing at arm’s length.

The facts, as brought out in evidence by Mr Donnelly, are that, in or about the early part of 1969, negotiations began for the exchange of the Computing Devices shares held by the appellant to “Data” on a five-for-one exchange, that is, five shares of Computing Devices of Canada for one share of Control Data. A letter dated April 11, 1969, and subsequently agreed to on May 1, 1969, constitutes the contract upon which the arrangements for this exchange were carried out. Exhibits have been filed which support and confirm the completion of the requirements of that agreement, and I do not think it is necessary, for the purposes of this judgment, to refer to them in detail.

The essence of the agreement between “Bendix” and “Data” was that after the exchange “Bendix” would dispose of no more than 25% of the shares in each of the first two years and, after that the remaining 50% of the shares would be available for distribution or sale. The reason for this, I suppose, is quite obvious. To “dump”—to use the language of the stock market—100,000-odd shares on the market would or could depress the value of Data shares.

Mr Donnelly’s evidence also indicated that the appellant was a wholly-owned subsidiary and that they—and when I say “they” I mean Bendix-US—treated themselves as the beneficial owners of the approximately 66% of the shares of Computing Devices registered to, or at least held by, the appellant.

The transaction was completed, I believe, on August 9, 1969, when approximately 98% of Computing Devices’ shares were transferred to “Data”; 517,000-odd, as I have said, came from the appellant, through “Bendix”, to “Data”.

In order to determine for American tax purposes, and also for Canadian tax purposes, what, in the minds of the officers of “Bendix”, was the value of what they received, they had three independent valuations of the Data shares made. Three letters, constituting Exhibit A-3, have been filed, and they show that companies by the name of Blyth & Company Incorporated, of Wall Street, New York; Morgan Stanley & Company, of New York City; and Paine, Webber, Jackson & Curtis of New York City, made independent valuations. Two of the valuations, the Blyth and the Morgan Stanley valuations, were almost identical. The Paine Webber valuation was low. I suppose out of an abundance of caution, Bendix-US accepted the average of the two higher valuations, and arrived at a value of approximately $130 per share of Control Data.

Mr Haythe, of Morgan Stanley & Company, a highly qualified financier who was in charge of the group—or “team”, as he called it—that made the evaluation, gave his credentials, which were quite impressive. He said that his valuation contained input of the various members of the team, weighed in the light of his experience in the market place, which is considerable, in connection with what is known in the trade as “investment letter stock”. This is stock that is traded subject to restrictions but in a less acceptable form of stock disposition than that contained in the appellant’s Exhibit A-1, which was a clear agreement which, in the opinion of Mr Haythe, allowed Bendix-US to dispose of the stock at the end of three years. He made his calculation and allowed no discount whatsoever for the first year, because he felt that, having regard to the value of $150 per share enjoyed by Control Data stock at that time, the infusion of 25%, or about 25,000 shares, would not seriously affect the market. As he described it—and perhaps I paraphrase—there are peaks and valleys. So, for the second year he allowed a 12% discount and, for the shares that could not be disposed of until the third year, a 20% discount. He gave as examples people who had been badly burned by investment letter stocks, and said that the latter were no longer as popular as they had once been; but, in any event, had this been a true “investment letter’’ type transaction, his discount would have been much higher.

I have no hesitation whatsoever in accepting Mr Haythe’s evidence that the fair market value of the Data stock that “Bendix” received in its exchange pursuant to Exhibit A-1 was approximately $130 per share.

The question then is: Is that the figure that I should apply to the dividend in kind, having in mind the provisions of paragraph 106(la)(a) of the Income Tax Act as it then was, in valuing what was received by Bendix-US in this transaction? As I have said, the taxpayer in this case was a wholly-owned subsidiary of Bendix-US. Although many advantages accrue to such corporations, there are also many disadvantages. They are so common as to be defined specifically in section 139 of the Income Tax Act as applicable to the 1969 taxation year, and are a common vehicle in this country of US corporations.

What ! am asked to do, as I understand the proposition in this case, is to completely ignore the existence of Bendix Automotive of Canada Limited, the appellant in this case, and allow the dividend to pass Straight through to the parent company without reference, as I have said, to the part played by the Canadian taxpayer. To me this would be completely contrary to my concept of the taxability of individuals and corporations in this country. To me, to allow such a transaction to proceed on that basis would be no more than to allow and to condone a “dividend strip” of the most subtle kind by removing 517,000 ‘shares from a Canadian taxpayer and transferring them to an American, Or non-resident, corporation, without regard to the corporate existence, and the taxpaying existence, of the appellant in this case.

That does not completely solve the problem before me, because the problem still is: What value did the shares of Computing Devices of Canada Limited have when they went, in one transaction, from the appellant to Bendix-US? This was not simply a case of the appellant complying with, and fulfilling its obligations under, the contract filed as Exhibit A-1, because, on the evidence of Mr Donnelly, and from a reading of the contract itself, the appellant was in no way privy to the contents thereof. All that the appellant did was comply with the instructions of its controlling shareholder, Bendix-US, and declare and pay a dividend.

Now, is there a value of that dividend other than the $130 that ! have found to be fair and reasonable for each share received by Bendix-US from Control Data? In my view, there is. Computing Devices was a stock which, over a period of some months, passed 450,000-odd shares through various stock exchanges. It was a listed stock. There is no reason to accept the proposition that the correct or fair value of a stock is the stock exchange value, because all of us know that stocks on the market can be manipulated or altered by background facts that are not known to the general public. They can be affected by insider trading, and by many other factors of which I need not give examples. Nevertheless, although it may seem that I am taking the easy way out, I feel that the onus of proving that the figure used by the Minister, in the light of the number of shares traded over the months immediately preceding and following the completion of this agreement to which the taxpayer was not privy was wrong in either law or fact is on the taxpayer. I cannot see where there is any such evidence of error on the part of the Minister or his officials. In fact, to the contrary, Mr Donnelly, who was a very senior officer of the appellant from the time the agreement was entered into, clearly stated that no attempt was ever made to evaluate the shares of Computing Devices of Canada Limited before making this five-for-one trade, and Mr Haythe clearly stated, as I recollect his evidence, that he did not do so because he was not asked to do so.

I must find, therefore, on all the evidence, that the Minister has not erred, either in fact or in law, and the assessment must be upheld and the appeal dismissed.

Thank you, gentlemen, for your assistance.

Appeal dismissed.