Freedman – Federal Court of Appeal confirms neglect or carelessness where shares transferred 3 weeks prior to filing the IPO preliminary were valued at 5% of the IPO price

On April 1, 2006, some executives of Gluskin Sheff+Associates Inc. sold a portion of their shares to family trusts at a price that was approximately 4.8% of that at which company shares were sold under an initial public offering that closed on May 26, 2006, following the filing of the preliminary prospectus on April 18, 2006. The pricing for the sale to the trusts applied a valuation formula that had been used in agreements under which they (and other executives) had purchased their shares from the founders a few years previously. The Board had the right to require them at any time to sell their shares back to other executives at an amount determined under the same formula.

Pizzitelli J in the Tax Court (in sub nomine Lauria) had accepted the opinion of the Crown’s expert that it was appropriate to value the shares sold to the trusts at an amount that worked out to the equivalent of a 40% discount to the IPO price, and in this regard Pizzitelli J noted that on the valuation date (April 1, 2006), the prospects for a successful IPO were high (and of the founders requiring the taxpayers to sell their shares back at the formula price, quite fanciful). Thus, their reporting gain based on the lower value was a misrepresentation. Turning to the neglect or carelessness branch of s. 152(4)(a)(i), he stated:

[T]he Appellants did not seek an independent valuation and cannot be said to have thoughtfully, deliberately and carefully considered whether the proposed IPO would affect the share price. In fact, the Appellants just seemed to ignore it, when in my opinion, having regard to their skills in and knowledge of the securities industry from working as executives for a wealth management firm and the multiple other circumstances or red flags that went up … they were clearly aware of the impact of the IPO’s value on their holdings.

In affirming these findings that the CRA assessments were not statute-barred, Boivin JA stated that “[w]e all agree with his conclusions for essentially the same reasons.”

Neal Armstrong. Summary of Freedman v. Canada, 2023 FCA 81 under s. 152(4)(a)(i).