Roland St-Onge:
1 This appeal is from a reassessment against the Estate of the late Honourable Jean Raymond who died on February 7, 1970 and concerns the evaluation of common and preferred shares of Candiac Development Corp as of February 7, 1970 the date of the death of the late Honourable Jean Raymond.
2 The notice of assessment as varied by the notice of reassessment attributed a value of $28.50 per share for the 596 common shares and of $40 for the preferred shares of the said company whereas the appellant contended that the fair market value of the shares without making any distinction between the common and preferred shares was $10 each.
3 Counsel for the appellant submitted that the valuation of $10 a share placed on the securities by the appellant is proper in accordance with subsection 27(1) of the Estate Tax Act which provides as follows:
27. (1) For the purposes of this Part, except as hereinafter otherwise provided, the value of any security that is listed on a stock exchange, or, in the case of any security not so listed, on which a price or quotation is obtainable from a recognized financial journal or financial report or from a registered broker, shall be deemed to be the closing price or quotation of that security on the day as of which such value is required to be computed, or, if there was no closing price or quotation on that day, on the last preceding day on which there was a closing price or quotation.
4 On the other hand, counsel for the respondent submitted that subsection 27(1) does not apply because of the evidence adduced in the present appeal and consequently the Board must resort to subsection 27(2) in order to appraise the value of the shares at the date of the death.
5 On behalf of the appellant the evidence reveals that for some years preceding the death of the late Honourable Jean Raymond there was a general market decline, the company Candiac Development Corporation (hereinafter referred to as CDC) had encountered economic difficulties and that many real estate development companies in the Province of Quebec were also in financial difficulties. Mr Oswald Stanley, an officer of CDC, stated that the financial position of the company around February 1970 had been like a yoyo and that the market had been plunging in February 1970, the bleakest point in the history of the company. According to him, there was no buyer at that time because of a slump in the market and the first half of 1969 represented the worst 6 months of the company during which period it was unable to sell any of its land. The semi-annual report of the board of directors to the shareholders, in June 1970, stated in part:
Sales of residential lots due to economic conditions and high interest rates have been very slow and only one industrial sale has been achieved during the period under review. Controllable expenses have been curtailed due to reduced operations.
6 Also, the company had high fixed costs to the extent that it was unable to generate satisfactory revenues. Furthermore, Mr Stanley testified that the company had never paid a dividend in its 15 years of existence, had no intention of paying dividends on its common or preferred shares and that the company did not have the strength to reimburse the preferred shares. At that particular time the company had 60,000,000 square feet of land in its inventory, vacancies in its shopping centre and its cash flow was negative.
7 On the other hand, Mr Stanley testified that there was no activity or trading of CDC shares; that transfers in shares were rather an inter-family affair and that the original 100 shareholders of 1954 are still the same ones today.
8 Mr Levenstone, a stockbroker with one of the world's largest firms, Merrill Lynch et al, corroborated the testimony of Mr Stanley by saying that CDC shares were not listed in any recognized exchange either in Canada or the United States but were traded over the counter. He explained that “over the counter” is a market where brokers are willing to bid and offer the stock on their own account instead of on behalf of their clients, that such direct transactions between the purchaser and the vendor render impossible by definition to have a close quotation for the CDC shares. The evidence also disclosed that there were no records or blotters of over- the-counter transactions; that it was impossible to give a quotation and that the quotation given by Mr Lemoine was not from his own knowledge but from third-party information, being the fruit of their memory because there were no records kept.
9 Counsel for the respondent stated that the only evidence adduced to substantiate the value of $10 a share was a letter sent to the appellant's counsel and written by Nicholas Lemoine who spoke to a dealer of Wood Gundy Limited, who had spoken to a dealer at Kippen & Company Inc. It shows that 17 months before the death of Mr Raymond the shares closed at $10. He submitted that the best evidence of value was established in an arm's length purchase of CDC shares in the month following the death of the deceased, namely on March 20, 1970, in a fairly steady market.
10 As a matter of record, General Trust of Canada purchased for the Wilson Estate 474 shares (299 common, 175 preferred) for $20,000 or approximately $42.20 per share. He also stated that 11 days after the purchase for the Wilson Estate, General Trust filed on March 31, 1970 an estate tax return as executor of the deceased, ascribing a $1 value to the deceased's 596 common shares and a $1 value to his 302 preferred shares, or $2 as the valuation of the entire 898 shares. According to him, the appellant's argument to the effect that the Wilson purchase is consistent with the law and jurisprudence and is not indi cative of any increase or decrease should not be considered seriously because General Trust paid $42.20 for each share of a company whose fortune was at its lowest ebb. He referred the Board to subsection 27(2) which states as follows:
27. (2) This section does not apply in determining the value of any security on which no closing price or quotation is obtainable as provided in subsection (1), or determining the value of(a) any share in, or in the capital stock of, or
(b) any other security in the nature of an interest in or right to any of the proceeds, profits, capital assets or other assets of,
11 In that connection he also referred the Board to Tabco Timber Ltd v The Queen, [1971] S.C.R. 361, in which case Martland, J states:
The rule should allow the Court to admit evidence of such sales as it finds, in place, time and circumstances, to be logically probative of the fact to be found.
12 Written submissions were also made as to the value of the shares being based upon book value per share basis rather than on a cash flow per share or earning per share basis.
13 The evidence has revealed that at the time of Mr Raymond's death, CDC possessed 60,000,000 square feet of land and consequently, being in the business of selling land, this tract of land was a very valuable stock-in- trade.
14 Counsel for appellant contended that to appraise the shares' value, one should look at the cash flow value which has been established at $1.53 per common share by Mr Caty.
15 In answer to this contention, counsel for the respondent submitted that the appellant's cash flow analysis reveals many errors enumerated as follows:1. The cash flow basis was prepared with respect to the valuation of shares whose assets consist of “income-producing properties” and forgetting that CDC was also in the land-selling business.
2. The 10-times cash flow valuation is based on actively traded companies like Trizec which hold rental properties while CDC was not actively traded.
3. Mr Caty's analysis of CDC is grossly incorrect because he was not aware that the preferred and common shares were held in the same proportion by the same 100 shareholders since the company's inception; that the company began its operations in 1954; that almost 80% of the preferred shares were redeemed at $100 by CDC prior to his report; that a golf club and a nursery were sold by CDC for $850,000 instead of $550,000.
16 He also stated that CDC kept its land at .03c per square foot although it was selling land at 25c residential, 30c industrial and 50c to $1 commercial. He found it strange that Mr Caty should give a break-up value to the common shares of $8.20 with $10 to the preferred shares when the secretary- treasurer, Mr Stanley, gave a break-up value of $23 for the common shares with $100 to the preferred shares.
17 With respect to the suggestion that a share would sell for $10 based on a 1969 cash flow, counsel for the respondent stated that attention should be drawn to the 1970 cash flow since the market would, if anything, respond to the current cash flow. He further stated:
One notes as well that far from placing a symbolic value of $10 on the preferred shares, CDC itself in a letter to National Revenue (Exhibit R-5) declares “it is evident that the value of the preferred shares as at (December 31, 1971) was $100 per share”. One notes that income of CDC in 1971 was $626,030 and in 1970 it was $625,231. Surely then in 1970 the preferred shares were also worth $100.
Additionally in response to Appellant's suggestion that the Minister's valuation is without relevance to the underlying assets of CDC, we refer the Board to Exhibit R-7 in toto. Can anyone deny that it is totally relevant to the underlying assets of CDC? One cannot fail to observe in the 1970 CDC Financial Statements that the underlying structure of the company reveals minimal liabilities, about $400,000, against assets of about $5,200,000 and after tax retained earnings of about $750,000. Surely Appellant's argument, that the valuation of the Minister is not relevant to the underlying assets, is unfounded.
The fair market value at the material time has been established by the Appellant itself at $42.20 per share, common and preferred. Respondent has valued these shares at $28.50 (common) and $40.00 (preferred) in the manner described in the following examination-in-chief of Mr. Keroack (pp. 130–131): ...
18 According to the evidence adduced, there is no reason to change the respondent's valuation of the CDC shares at $28.50 for common shares and $40 for preferred shares.
19 Mr Caty's analysis of the said shares contains too many important errors to permit the Board to rely on it.
20 Furthermore, the evidence has revealed that there was no closing price or quotation which could be used to value the CDC shares at the time of Mr Raymond's death. The only evidence to substantiate a value of $10 a share was a letter written by Mr Nicholas Lemoine, who gathered the information from other stock market firms which did not even have written records of the CDC transactions.
21 According to the evidence, the last sales of CDC shares which were over the market transactions took place 17 months prior to Mr Raymond's death. Such evidence is too weak to refute the fact that General Trust of Canada purchased for the Wilson Estate an important number of common and preferred CDC shares at $20 and $42.20 respectively and this in the month following Mr Raymond's death.
22 According to subsection 27(2), subsection 27(1) does not apply “in determining the value of any security in which no closing price or quotation is obtainable” and the evidence has revealed that there was no such closing price to determine the value of the CDC shares at the time of Mr Raymond's death. Consequently, in order to determine the true value of the shares at the time of Mr Raymond's death, the Board must rely on sales which are logically probative of the value of the said shares. In the present appeal, this would be the sale of shares which occurred in the month following his death.
23 Furthermore, the underlying assets of CDC are substantial enough to justify the value that the respondent ascribed to the shares under discussion. The appellant, which had the onus to challenge the respondent's valuation of the CDC shares, failed to do so successfully.
24 For the above mentioned reasons the appeal is dismissed.
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