Walsh, J:
1 This is an appeal from a notice of assessment dated May 5, 1972 in respect of 15% non-resident tax levied under Part III of the Income Tax Act, RSC 1952, c 148. Plaintiff appealed the assessment, which related to plaintiff's 1969 taxation year, to the Tax Review Board and by judgment dated November 29, 1973 the appeal was dismissed.
2 The issue arises out of the valuation placed on 517,313 shares of the common stock of Computing Devices of Canada, Limited (hereinafter referred to as “CDC”) paid by plaintiff as a dividend on August 7, 1969 to its parent company in the United States, The Bendix Corporation (hereinafter referred to as “Bendix”) which owned 100% of its shares. Bendix, through its control of plaintiff, caused this dividend in kind to be declared and distributed in fulfilment of an agreement which it had entered into on May 1, 1969 with Control Data Corporation (hereinafter referred to as “Control Data”), another American corporation with which it was dealing at arm's length, to exchange these shares of CDC on the basis of one share of common stock of Control Data for each 5 shares of CDC. Plaintiff contends that the value to be placed on the shares of CDC so distributed by plaintiff is a dividend for the purpose of calculating the 15% withholding tax payable by virtue of the provisions of paragraphs 106(1a)(a) and 139(1)(a) of the Income Tax Act should be based on the value of the Control Data shares acquired by Bendix in exchange for the CDC shares after taking into account the restrictions on transfer of same incorporated in the exchange offer, which value it fixes at $130 US per share on the basis of expert evidence, or $26 for each share of CDC.
3 Defendant however based its valuation on the figure of $31 per share, being the price at which a block of 50 shares of CDC was traded on the Toronto Stock Exchange on August 7, 1969. Defendant submits that plaintiff withheld and remitted $2,017,030 US or $2,175,126.89 Can of withholding tax on the amount of $13,450,060 US at which it valued the shares, but contends that the value of the shares paid as a dividend was actually $16,036,703 rather than $14,500,845.94, the tax on the difference amounting to an additional $230,378.56 with interest of $31,101.09 to May 5, 1972 on which date defendant assessed the plaintiff for the aforesaid unremitted amount.
4 There is very little dispute as to the facts. The exchange offer made on May 1, 1969 by Bendix with Control Data was dependent on Control Data's acquiring at least 90% of the outstanding CDC shares. The 517,313 shares of CDC owned at the time by plaintiff and subsequently declared as a dividend and transferred to Bendix represented approximately 66.75% of the capital stock of CDC so that, for the exchange offer to take effect, it was necessary that Control Data also acquire an additional 23.25% of the outstanding CDC shares from other shareholders, as well as receiving a favourable ruling from the US Internal Revenue Service. Accordingly, a prospectus and take-over bid circular, dated May 15, 1969, made the exchange offer of Control Data available to all shareholders of CDC—that is to say, an exchange of one share of Control Data for each 5 shares of CDC common stock tendered, and by July 31, 1969 the condition of Control Data acquiring 90% control had been fulfilled so that on August 7 Bendix took the necessary steps to fulfil its part of the May 1, 1969 agreement by arranging for a directors' meeting of plaintiff to declare the dividend to it and it then immediately tendered these shares to Control Data, receiving 103,462 Control Data shares in exchange. The closing sale price of shares of Control Data on the New York Stock Exchange at the close of trading on August 7, 1969 was $149.50 US. However, for certain taxation reasons which need not concern us, Control Data had insisted as a condition of agreement, because it wished to adopt pooling of interest accounting, that Bendix should not sell in excess of 25% of the Control Data shares received by it in the exchange during the first year after acquiring them, and not in excess of 50% of such shares prior to two years from the date of acquisition. While the other shareholders of CDC who had exchanged their shares for Control Data shares pursuant to the exchange offer could dispose of the shares so received in exchange at any time at the market price, Bendix was restricted and could only dispose of 25% immediately and the balance over a period of two years as indicated. This restriction on the disposal of these shares reduced their value below those of unrestricted shares which resulted in expert opinion giving an average value of $130 US per share for all the shares of Control Data acquired by Bendix. This actual valuation was established on the basis of the valuation by three experts, one of whom, Mr Madison H Haythe, vice-president of the well-known investment firm of Morgan Stanley & Co, testified in Court. His affidavit as an expert witness was taken as read, and the delay for production of same pursuant to Rule 482(1)(d) was waived by consent. This valuation was not disputed. Defendant did not bring any evidence with respect to the value of Control Data shares with the said restrictions on transfer as it contended that the value of Control Data shares is entirely irrelevant in the determination of the value of the CDC shares distributed as a dividend by plaintiff. An objection was made to the introduction of Mr Haythe's evidence, which objection was taken under reserve as the entire issue hinges on the question of whether the value of the Control Data shares received in exchange for the CDC shares can have any bearing on the valuation of these shares, declared by plaintiff as a dividend to Bendix and exchanged by it the same day for the Control Data shares.
5 Plaintiff contends that the valuation of the CDC shares by defendant at $31 a share based on the sale of 50 shares on August 7, 1969 was attributable to the increased value which the shares had acquired as a result of the exchange offer as they had risen substantially from the time the exchange offer became known and the figure of $31 is as a result of this. Since Control Data by August 7, 1969 had in fact control of 97.9% of the outstanding CDC shares as a result of the exchange offer, the market for any shares which were available for sale was extremely thin. Plaintiff contends that this market valuation should not be applied to the shares which were received by Bendix as a dividend in view of the restrictions on disposal of Control Data shares received by Bendix in exchange for same so that had Bendix wished to realize the monetary value of its dividend at the date it was declared, it could not have realized more than $26 a share US. It could not have sold the CDC shares on the Toronto Stock Exchange since it had undertaken to exchange them for Control Data shares.
6 Defendant on the other hand contends that any obligation which Bendix may have undertaken to deal with the subject matter of the dividend in a certain manner after it was received has no bearing on the value of the actual dividend paid by the plaintiff and in fact represents a transaction separate and apart from that which must be examined for the purpose of determining the withholding tax payable by the plaintiff.
7 Both parties submitted written notes of argument and while there is some jurisprudence dealing with the evaluation of shares for taxation purposes, which is of some assistance, the facts in none of them are identical to those encountered in this somewhat unusual transaction. The relevant portions of the sections of the Act in issue as they read at the time are as follows:
106. (1a) Every non-resident person139. (1) In this Act,
Defendant contends that there is no basis upon which subsection 106(1a) can be construed so as to permit the valuation of a dividend in kind by reference to something other than the subject matter of the dividend itself. The payment of the dividend by plaintiff to Bendix was an entirely separate transaction to the substitution of the CDC shares received by Bendix as a dividend for the Control Data shares, and plaintiff was not legally a party to the second transaction even though, as a result of its control by Bendix and the fact that, of its six directors, five are employees of Bendix as were four of its officers including its Chief Executive Officer, it was undoubtedly aware of what was subsequently to be done with the shares of CDC which it was paying as a dividend and was, in fact, obliged to declare this dividend on the instructions of its parent company Bendix in order to fulfil the latter's contractual obligations to Control Data. Defendant contends that it would be absurd if a plaintiff, declaring a dividend in kind of stock which it owns in another corporation to all of its shareholders, were obliged to determine what its non-resident shareholders received subsequently on disposal of these shares in order to evaluate the shares for the purposes of the 15% withholding tax. Defendant contends that except where the market is “spasmodic or ephemeral” the market price is the best test of the fair market value. Evidence was produced showing that CDC shares traded actively on the Toronto Stock Exchange between January 1 and August 31, 1969, the closing prices ranging from a low of 231/8on February 28 to a high of 34 on August 20. Sales volume was as high as 29,772 shares on January 24 and 36,990 shares on May 24, but the last day on which there was a substantial volume of shares traded was July 11, when 3,825 shares were sold. After that the volume fell substantially often being no more than 50 or 100 shares a day although 590 were sold on August 1 and 540 on August 5. On the day in question, August 7, as already stated there was only one sale of 50 shares at $31. As already stated the agreement between Bendix and Control Data was made on May 1 and the prospectus to Control Data offering the exchange to all shareholders of CDC was issued on May 15. CDC shares closed on May 1 at 29 and on May 15 at 30. Although the market was thin, as has been pointed out, after July 11, prices continued to rise even after August 7 and, with a few exceptions, were above $31 for the sales made during the balance of the month of August. It must be remembered, however, that these were for sales by shareholders who had the right to exchange their shares for unrestricted shares of Control Data which was selling at 1483/4US on August 7. There was never at any time any restriction on anyone with respect to the sale of CDC shares, the only restriction being that on Bendix with respect to some of the Control Data shares which it received in exchange for them. Realistically it is, of course, unlikely that a huge block of 517,313 shares could have been sold at $31 a share on August 7, 1969 by any owner if they were all placed on the market on that date. On the other hand, as Mr Haythe pointed out, sometimes a controlling block of shares will command a premium price, and he believes this may have been the case with respect to the CDC shares in view of their gradual rise in value to approximately one-fifth of the value of the Control Data shares after the terms of the exchange offer became known. While these speculations are of some interest, such an approach to valuation is too indefinite to enable any firm conclusion to be reached.8 In support of its contention, defendant relies, among others, on the leading case of Executors of Estate of Isaac Untermyer, Deceased v Attorney-General for the Province of British Columbia, [1929] S.C.R. 84. In that decision, after analyzing various factors which went into the determination of “fair market value” Mignault, J concluded at page 91:
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.
Again at pages 91–2:I would not deduct anything from the market value of these shares on the assumption that the whole of them would be placed on the market at one and the same time, for I do not think that any prudent stockholder would pursue a like course.
9 In the case of Wilfred Joseph Lawson v Minister of National Revenue, [1964] C.T.C. 245, 64 D.T.C. 5147, Cattanach, J rejected the argument that if shares have an intrinsic value less than the price at which they are bought on the market it is this figure which should be used in evaluating them rather than the market value, being the amount paid by those who buy and sell at arm's length on the open market.
10 In the British case of Crabtree v. Hinchcliffe (Inspector of Taxes), [1971] 3 All E.R. 967at 977, Lord Reid dealt with the argument that even if directors have confidential information in their possession which the public is not aware of, this is a special circumstance justifying failure to accept the market value of shares as being correct, stating:
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.
In the present case there is no suggestion that there was any confidential information of which the public was not aware.11 In the case of Dobieco Limited v Minister of National Revenue, [1963] Ex. C.R. 348, [1963] C.T.C. 143, 63 D.T.C. 1063, Cattanach, J, referring to the Untermyer case, again relies on market value as prima facie evidence, although not necessarily conclusive if rebutted by satisfactory evidence to the contrary. The [Ex CR] headnote reads in part:
3. That market price is the best evidence of fair market value, the price at which shares sell on the market might be regarded as prima facie evidence of their fair market value although not necessarily conclusive if rebutted by satisfactory evidence to the contrary and the only evidence offered was that of an interested expert whose figures used to arrive at the amount of the deduction contained several errors.
In the present case no evidence with respect to the value of CDC shares themselves, other than the market value, was submitted by any witnesses.12 In the case of Estate of A M Collings Henderson v. MNR; The Bank of New York v Minister of National Revenue, [1973] C.T.C. 636, 73 D.T.C. 5471(now on appeal) Cattanach, J, again referring to the Untermyer case, accepted for estate tax purposes the market value of the shares.
13 Plaintiff, relying on the definition of the word “amount” in paragraph 139(1)(a) of the Act (supra) states that the amount of the dividend is the value in terms of money of what was received which can only be measured by what the CDC shares were able to bring in an arm's length transaction. It states that had the shares been transferred directly by plaintiff to Control Data in exchange for Control Data's shares, these latter shares would have had the same restriction on the immediate disposition of them and the value which plaintiff would have received in return for its CDC shares would have had to be calculated on the same basis, making them worth $26 a share. In this case, of course, there would have been no declaration of a dividend nor question of withholding of tax on same but this method of proceeding was decided against for taxation reasons on advice of Bendix's US tax counsel in favour of the procedure by way of declaration of a dividend by plaintiff to Bendix and immediate exchange of the shares by Bendix for Control Data shares with transfer restrictions on a five for one basis. It insists that once the terms of the exchange offer were known, the market on the Toronto Stock Exchange for CDC shares was merely a reflection of the market price for unrestricted Control Data shares and was only available to the very small number of CDC shareholders who had not committed their shares to be exchanged for Control Data stock. It relies on the case of Beament Estate v Minister of National Revenue, [1970] S.C.R. 680, [1970] C.T.C. 193, 70 D.T.C. 6130, which dealt with establishing the fair market value of shares of stock for estate tax purposes. In that case a private investment holding company had been formed with Class A and Class B shares. The deceased subscribed for the Class B shares and his children for the Class A shares. The letters patent provided that on the dissolution of the company, holders of the Class B shares were limited to receiving the par value of their shares while the remaining distributable assets would go to the holders of the Class A shares. By an agreement the deceased covenanted with his children to provide in his will for the dissolution of the company and distribution of its assets in accordance with the provisions of its letters patent. The issue was whether the property of Class B shares passed from the deceased to his estate free from the obligations assumed by him under this contract in which case their value would be substantially greater. In rendering judgment, Cartwright, CJ stated on page 687 [198, 6133]:
Once it is established (and it has been conceded) that the contract binding the deceased and his executors to have the company wound up was valid, the real value of the shares cannot be more than the amount which their holder would receive in the winding-up. To suggest that they have in fact any other value would be altogether unrealistic. When the true value of the shares in the circumstances which exist is readily ascertainable, I can find nothing in the Act that requires the computation of the value they would have had under completely different circumstances followed by an inquiry as to whether any deductions should be made from that value.
Plaintiff contends that this is a realistic way of looking at the present case since there was a binding agreement between Bendix and Control Data relating to the disposition of the CDC shares. I believe this judgment can clearly be distinguished however. It concerned the valuation of property consisting of shares of the deceased and found that this valuation was affected by an agreement which he had made with beneficiaries under his will as to the winding-up of the company at his death and the consequent freezing of the value of these shares at their par value. In the present case plaintiff has a separate corporation entity from Bendix and itself made no agreement with Control Data as to the disposition of the shares which it was declaring and paying as a dividend to Bendix.14 Plaintiff argues that the tax imposed by paragraph 106(1a)(a) (supra) is imposed on the non-resident person, that is Bendix, but it must be pointed out that by virtue of subsection 109(1) which reads as follows:
109. (1) When a person pays or credits or is deemed to have paid or credited an amount on which an income tax is payable under this Part, he shall, notwithstanding any agreement or any law to the contrary, deduct or withhold therefrom the amount of the tax and forthwith remit that amount to the Receiver General of Canada on behalf of the non-resident person on account of the tax and shall submit therewith a statement in prescribed form.
the obligation to withhold and remit same rests with the plaintiff which declared and paid the dividend. It would not, in my view, be a proper interpretation of the Act to hold that because the recipient has entered into an agreement with a third party with whom it is dealing at arm's length which affects the value to it in money in the dividend so received, the Canadian company paying the dividend should accept the value of same to the recipient as the basis on which the 15% withholding tax is to be calculated, rather than make its own independent determination on the basis of evidence available to it of the value in money of the stock dividend, without regard to whatever the recipient of the dividend may have agreed to do by way of disposal of same after receipt whether for a greater or lesser value.15 Whether or not Bendix regarded itself as the beneficial owner at all times of the CDC shares through its control of plaintiff and could therefore enforce the payment of the dividend is entirely irrelevant as is the fact that the financial statements of Bendix incorporated the assets, liabilities and operations of plaintiff.
16 For the above reasons, plaintiff's appeal must fail and is dismissed with costs.
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