Hans Johansen v. Minister of National Revenue, [1972] CTC 2645, 72 DTC 1528

A W Prociuk (orally):—The appellant herein appeals from the Minister’s reassessment in respect of the 1967 taxation year. The reassess- ment in question was made pursuant to the provisions of subsection 79C(17) by reason of the fact that the appellant, in the Minister’s Opinion, acquired a share of common stock from a deferred profit sharing plan of Golden West Seeds Ltd for a consideration less than the fair market value.

The facts of this case are not in dispute. Since 1952 the appellant was manager of Golden West Seeds Ltd, of which the only shareholders were Mr and Mrs Lloyd L Robertson. The total shares issued and outstanding was 12. In February 1955 the appellant and his wife entered into an agreement with Mr and Mrs Robertson to purchase the said 12 shares at a price of $8,435 per share, payable over a period of 15 years. To date the purchasers have paid for and had transferred into their names 7 of the said shares, the remaining 5 shares being still registered in the names of the vendors.

Since 1964 Golden West Seeds Ltd employed 12 people inclusive of the appellant and his wife. In November 1964 a preferred profit sharing plan was established for the company. In June 1965 the plan purchased one common share from the appellants for $14,700 and one more in June 1966 for $16,960.

The Income Tax Act was amended by Parliament in 1966 when, inter alia, section 105E was added. The effect of this section caused the trustees of the plan aforesaid to make arrangements for the sale of the said two shares at the best price procurable in order to protect the interests of the participants in the said plan.

From the evidence adduced it is obvious that there was no market for the said shares as the would-be purchaser could never hope to have any control over the affairs of the company. The trustees approached the appellant and requested that he purchase the shares at the same price for which he sold them to the plan, but he refused to do so on the ground that he could buy all the remaining issued shares from the Robertsons at $8,435 each. It should be noted that by this time the appellant was in full control of the affairs and management of the company and one wonders what additional advantage he was to gain by acquiring these two remaining shares.

According to the evidence, the appellant and his wife, after considerable negotiation, agreed to purchase the said shares at $8,435 each and the sale was consumated on December 5, 1967. The Minister, using the sale price of the said shares to the plan aforesaid as a base, reassessed the appellant pursuant to the provisions of subsection 79C(17), the shares having been valued prior to that at $15,830 each.

Evidence as to the fair market value of the said shares at the material time was adduced by both the parties. The respondent’s witness, John B Whalley, holding a Bachelor of Commerce degree and being employed by the Department of National Revenue as a business evaluator since 1964, did an analysis of the company’s balance sheets over a 10-year period commencing with 1958. He stated that in his opinion, on the basis of the statistics he had and assuming that the shares represented control, the value per share would be $15,217. He stated further that this valuation was also based on the same method that he used for valuing shares for estate tax purposes. However, he stated further that in the circumstances surrounding this company these shares would be worth very little.

Edward Robert John MacGregor, CA testified on behalf of the appellant and stated that in his opinion the two shares in the circumstances had very little value unless there were added fairly extensive legal safeguards for the minority shareholders.

The appellant stated that he finally agreed to purchase the said snares because he felt a moral obligation to the employees and did not wish to see them lose too much by reason of the legislative changes mentioned previously. He was under no legal obligation to buy and it is obvious that he gained no particular advantage in so doing.

Considering all the evidence it appears that the trustees of the plan could not have obtained a higher price for the shares by any stretch of the imagination. The fact that the shares could, under special circumstances, represent greater value than the consideration paid is not the criterion for determining the fair market value thereof. Accordingly, the appeal is allowed.

Appeal allowed.