Dairy Queen Canada Inc. v. The Queen, 95 DTC 634, [1995] 2 CTC 2543 (TCC)

Bell J.T.C.C.:—This is an appeal by Dairy Queen Canada, Inc. ("DQC") from an assessment by the Minister of National Revenue ("Minister") of its 1987 taxation year wherein tax in the amount of $394,700 was assessed pursuant to subsections 212.1(1), 212(2), 214(1), 215(1) and 215(6) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") and Article X of the Canada-U.S. Income Tax Convention (1980) ("Convention").

Section 212.1 of the Act provides that where a non-resident person disposes of shares of a Canadian corporation to another Canadian corporation and the transferor and transferee do not deal at arm’s length, the amount by which the fair market value of any non-share consideration received by the non-resident person from the purchasing corporation exceeds the paid up capital of the company whose shares are sold, shall be deemed to be a dividend paid by the purchaser at the time of the disposition and to be received by the non-resident person at that time. Subsection 212(2) requires every non-resident person to pay a tax of 25 per cent on such deemed dividend. Subsection 215(1) requires the person who is deemed to have paid the dividend to withhold therefrom the amount of the tax and remit it forthwith to the Receiver General. Subsection 215(6) makes the person failing to do so liable to pay an equivalent amount on behalf of the non-resident person. Article X of the Convention reduces the amount of tax from 25 per cent to ten per cent where the recipient corporate shareholder owns ten per cent or more of the voting stock of the paying corporation.

The assessment was made in respect of the sale by a U.S. corporation, International Dairy Queen, Inc. ("IDQ"), parent of DQC, of shares of a Canadian corporation, Orange Julius Canada Limited ("OJC") to another Canadian corporation, DQC. The tax assessed in the amount of $394,700 was ten per cent of $3,947,000, being the difference between the sale price of the shares of OJC and its paid up capital.

The respondent took the position that IDQ purchased both OJA and OJC and then sold OJC to DQC thereby triggering the deemed dividend aforesaid. The appellant says that IDQ acquired OJC as agent for DQC and that, therefore, no dividend would be deemed under subsection 212.1(1).

The respondent’s alternative argument was that if subsection 212.1(1) did not apply, then the appellant would be deemed, by subsection 214(3) to have paid a dividend to IDQ equal to the difference between the amount paid by DQC to IDQ as payment for the shares of OJC, namely $4,340,000, and the fair market value thereof, namely $1,354,000, the difference being $2,986,000.

On May 21, 1987, IDQ entered into an agreement ("agreement") with Orange Julius International, Inc. ("OJI") pursuant to which IDQ agreed to purchase all the issued and outstanding shares of a U.S. corporation, Orange Julius of America ("OJA") and of OJC, each being a wholly owned subsidiary of OJT.

Mr. John William Mooty, Chairman of the Board of IDQ, testified that his company had purchased a number of Dairy Queen operations and had approached the valuation of same by valuing the "royalty stream" they produced. This was achieved by applying its current multiple to the annual royalty stream. He stated that "Dairy Queen" first endeavoured to acquire the Orange Julius business in 1979 when it obtained options from individuals holding about 30 per cent of the Orange Julius stock. Their attempt to acquire control was resisted but talks with the officials of OJI continued. In 1985, the Orange Julius operations were sold to OJI. Mr. Mooty, observing in financial publications that Orange Julius stock had, by early 1987, dropped from a high of $40 per share to $3 per share, instituted acquisition conversations with officials of IDQ. Mr. Mooty stated that a Wall Street Journal article on February 13, 1987 indicated that Orange Julius had received an offer for 90 per cent of its two subsidiaries, OJA and OJC. He instituted talks with OJI personnel after his board decided that the Orange Julius operation was the best acquisition, outside the Dairy Queen family, that could be made. The proposed purchase price for 90 per cent of the shares as aforesaid was $20.8 million.

Mr. Mooty said that the discussions leading up to the execution of the agreement dealt only with the acquisitions of OJA and OJC together and that there was no discussion about the separate acquisition of the two companies. He stated that the reason for this was deep concern that if they tried to split the transaction, the other potential purchasers, being insiders, may have been influenced to take the American company or the Canadian company separately thereby forcing a higher bid from the Dairy Queen interests for either or both of those operations. He also stated that because the Orange Julius operations were a perfect fit for Dairy Queen they did not want to do anything that might permit the American and Canadian operations to be offered for sale separately. He said that the concept of Orange Julius Canada being part of Dairy Queen Canada was inherent in their thinking from 1979. He stated that it was contemplated that OJA’s operations would be put together with the American Dairy Queen operations and OJC’s operations would be put together with DQC’s operations.

Mr. Mooty referred to a memorandum written by David Bond, secretary-assistant treasurer and comptroller of IDQ dated June 23, 1987, the conclusion in which was stated as,

OJC should be a wholly owned subsidiary of DQC. This can be accomplished by an addendum to the IDQ/OJI purchase agreement stating that IDQ or one of its subsidiaries has the right to buy all of the stock of OJC for

dollars.

DQC would pay for the OJC stock by paying dollars down and borrowing the remainder from IDQ under a long-term, U.S. dollar note, with an annual principal payment, right to early payment(s) at no penalty and interest rate.

The memorandum goes on to discuss the reasons why such structure should be effected. Mr. Mooty stated that they had begun pursuing this acquisition in 1979 and they had considered nothing other than combining the OJC and DQC operations because it made no sense whatever to have the American company running a separate operation in Canada. He explained that DQC had a field staff in Canada, that it could check the Orange Julius operations as easily as it could the Dairy Queen stores, that they had knowledge of the various regulatory requirements and of the Canadian operations and that there was a tremendous synergy in one entity administering both operations.

Mr. Mooty then referred to a memorandum from P. Merkle, an attorney, to Mr. Sullivan, president of OJC, in which the first item on an agenda for a July 13, 1987 meeting was "Dairy Queen Canada Acquisition of OJC".

It referred to the purchase price which would be paid by DQC for OJC. He then stated that the purchase price in the agreement was $23,402,500.

With respect to the allocation of the purchase price between OJA and OJC, Mr. Mooty said that they notionally removed the miscellaneous assets and miscellaneous liabilities to determine what was being paid for the royalty stream. He said that they then determined how much of the royalty stream came from Canada and how much came from the United States and then allocated the total purchase price in those proportions. He then stated that Orange Julius staff members were brought to a convention in Minneapolis from August 9 through August 11, three days prior to the closing of the agreement, part of the purpose of which was to have the Canadian Orange Julius franchisees meet the DQC personnel so that they would be familiar with the people with whom they would subsequently be dealing. He also referred to a memorandum from Mr. Sullivan dated July 16, 1987, the first agenda item of which was described as "Dairy Queen Canada Acquisition of OJC".

He then referred to a letter dated July 30, 1987 signed by Harris Cooper representing OJC and by Joseph Dewar Newton representing Dairy Queen Canada, to Marga Vandernakker, an employee of OJC, commencing as follows,

Further to our meeting on July 9, 1987, I wish to confirm that Dairy Queen Canada Inc. ("Dairy Queen") will be acquiring all of the shares of Orange Julius Canada Limited ("Orange Julius") on August 14, 1987 and the offices of Orange Julius located at 231-7181 Woodbine Avenue, Markham, Ontario will be closing on or about November 30, 1987 and will be consolidated with the office of Dairy Queen located at....

In our meeting, we offered you continued employment with Orange Julius under existing terms and conditions at Dairy Queen’s Burlington office.

There follows a portion of the transcript of the hearing being questions by the appellant’s counsel and answers by Mr. Mooty, namely,

Q. Now, these documents, on their face at least, all suggest that in fact Dairy Queen Canada was purchasing Orange Julius Canada shares. Was that indeed the case so far as Dairy Queen was concerned?

A. Oh, most certainly.

Q. And we’ve talked about the reasons in terms of the efficiencies, I guess, why that would necessarily be the case but, given that it was so evident that was the case, why is it that the stock purchase agreement did not have a specific addendum or a specific provision to that effect?

A. Well, I think I’ve kind of covered part of that, which was basically we had been on this acquisition for eight years and we knew that we were bidding against insiders, and we wanted to make it as unlikely that we would get knocked out this time as we could possibly do. We felt very strongly that if we separated the considerations in the purchase agreement that would be an open door for competitive bids on one or the other of the two entities and we....

You saw in that earlier memo the question was raised between the accountants and the attorneys about "Should we do something with the agreement?" and the obvious answer was, no, we could not afford to do anything with that agreement because we would become vulnerable. There was a kick-out clause in the agreement and, yes, there’s a penalty that they have to pay if they kick out but by the time you get through with the due diligence on a thing like this, that kick-out penalty would be a very small consolation in terms of where you end up.

So, we did not want to increase our vulnerability on an acquisition that we had been working on for eight years and we felt was the best thing that we could make in terms of any available acquisition for the company.

Mr. Mooty testified that the closing of the agreement took place on August 14, 1987 and that the purchase price under a second agreement that closed on that day under which IDQ transferred the shares of OJC to DQC, was $4,340,000, this being a reimbursement to IDQ for purchasing OJC shares for DQC. Mr. Mooty reiterated that this purchase price was determined by the apportionment formula that he had described earlier.

Mr. Mooty referred to a copy of the shareholder’s register of OJI which showed that shares of OJC were registered on August 14, 1987 firstly in the name of IDQ and then, on the same day, in the name of DQC. He referred to two agreements which effected the conveyance of all rights and licences from OJA to OJC that were necessary for the operations to be conducted in Canada for a period of 45 years from the date of the agreement. He then gave evidence respecting the acquisition of Dairy Queen operations with multiples of five and six that had been applied to the royalty streams of several operations acquired by it in various jurisdictions.

Mr. Joseph Dewar Newton, vice-president administration and comptroller, DQC, testified with respect to the foregoing letter to Marga Vandernakker that he had signed same together with Harris Cooper. He said that it was always the intention to incorporate the operations of OJC into DQC’s Burlington office and that it made no sense whatsoever to maintain separate leased facilities. He spoke about the Minneapolis meeting referred to above and said that they had

... Separate break-out" meeting specifically for the franchisees of Orange Julius in Canada, at which myself and other members of Dairy Queen Canada’s management met separately with the Canadian franchisees of Orange Julius, essentially to introduce ourselves to them and them to us, and to effectively tell them that it was our desire and our intent to work together with them to continue their success, and to essentially put faces to names.

He then confirmed the resolution of directors of DQC to execute the second agreement referred to above under which DQC acquired the shares of OJC and also confirmed the execution thereof.

Mr. James Scott Simpson, director of corporate planning for IDQ, referred to a letter he had written to Mr. J.T. Hawthorne, a valuator for the Department of National Revenue ("Department") in which he tried to convey to Mr. Hawthorne the valuation methodology used by IDQ and DQC in the acquisition. Basically he outlined that it was the royalty stream that was of significance in determining the amount. He stated that Mr. Hawthorne seemed to be weighting the net incomes and using a multiplier of five and six and averaging those multipliers to determine the valuation. He understood these multipliers to be capitalization rates, explaining that a five multiplier would, in essence, assume a 19.4 per cent after tax return and a six multiplier would assume a 15.8 per cent after tax return, all assuming that no residual value remained after a 20 year valuation. Mr. Simpson stated that in his experience that would not be a realistic after tax rate of return. He stated that the perpetual income stream would be the no. 1 indicator of value. He commented on a letter to him from Mr. Hawthorne using $370,000 as weighted average income and multipliers of five and six producing a valuation of $1,269,750. Following some discussion of Mr. Hawthorne’s methodology reference was made to a letter addressed to the Department from McCarthy Tétrault, solicitors for the appellant, dated October 30, 1990 outlining that, using Mr. Hawthorne’s method of valuation, the total combined value of OJA and OJC would be $5,310,415, this being some $18,000,000 less than the actual purchase price for the shares of those two companies. He stated that the effect of this was that the purchase price was overpaid by that amount of $18,000,000. He stated that, beyond any doubt, the purchase of OJC was the best acquisition that Dairy Queen had ever made. He then referred to a document entitled,

Orange Julius Canada

(Computation Based on the Present Value of the Projected Cash Flows)

which he had prepared for a ten year period stating that he had used conservative computations in that he selected net service fees from OJC’s 1986 audited financial statements and made computations which resulted in a value of $6,291,653 as compared to the actual purchase price of $4,340,000. He then stated that using the worst of assumptions, the computation indicated that the value allocated to the OJC stock was much less than what the real value of future cash flows indicated. After referring to Mr. Hawthorne’s net income approach, he said that Dairy Queen had never used that approach in valuing a potential acquisition because

..by valuing it on a net income approach we would need to look at selling general and administrative expenses which have nothing to do with the acquisition we would look at. We look at the cornerstones of our business and that’s service fees and to base our value on net income, it’s not applicable.

In response to a question advanced to him on cross-examination Mr. Simpson, on re-examination, said,

I think she’s missing the whole point as to why we would focus on service fees. She’s looking at net income and I think what happens here is the most compelling argument we have. If you look at Mr. Hawthorne’s valuation method, he values the total of the Orange Julius Canada and Orange Julius of America shares at $5.3 million. Using his method, $5.3 million where we paid $24 million for the shares of stock, having a difference of $18 million to me tells me that this methodology used is ridiculous and has no valuation basis.

Mr. David Marvin Bond, assistant treasurer and comptroller of IDQ testified that the decision as to who was to purchase OJC did not take a lot of thought. He stated that it was not feasible to run OJC from the United States and it was the logical decision that those operations would become part of DQC. He reiterated that they did not want to do anything that was going to make it possible or easier for the other group to gain control of the corporation and they were not willing to jeopardize the total transaction to insert in the agreement any reference to OJC becoming a wholly owned subsidiary of DQC. He also stated that the purchase price of DQC was arrived at by the simple procedure of applying the same multiple to the Canadian revenue stream or service fee stream that was applied to the U.S. numbers. In explaining the agreement under which DQC purchased the shares of OJC from IDQ he stated that they knew that IDQ would be buying those shares under the main agreement and that they had to make sure that those shares were transferred into DQC’s name and that the agreement achieving that result was prepared in advance of the closing.

The respondent produced one witness, namely Alan Raymond Jones, business valuator for the Department. He stated that in his opinion the value of the OJC shares was approximately $1,360,000 at August 14, 1987. He stated that a greater risk attached to intangible assets such as goodwill and royalty stream, because there was nothing to sell. He spoke of a special purchaser being a person who had synergism and economies of scale and stated that if there was just one special purchaser he would pay $1 above normal price. He said that Dairy Queen was a classic example of a special purchaser. He stated that if there was a special purchaser market, where there would be more than one special interest buyer, they could be assumed to bid against each other and bid the price up well above what a normal buyer would pay because they expect to receive synergies and to realize synergies. He then said,

But if there’s only one special purchaser in that market, there’s nobody to bid against them to bid the price up, they’ll offer what they refer to as one tick above market; there’s no reason to bid higher.

He then said that the existence of a special purchaser market did not enter into his thinking because he saw no evidence of same.

He referred to the return that investors could obtain on mortgages and guaranteed investment certificates and intimated that an investor would not ignore those investments in favour of something as risky as an OJC operation unless the return was substantially higher. He described the capitalization rate that he would use on earnings and said that this would be affected by tangible asset backing. He thought it should take into account the fact that OJC did not own the intangibles such as the licence for its operation. He said that he valued the shares of OJC but that the appellant valued the royalty stream. He stated,

I am certainly not trying to tell Dairy Queen how to value places they buy. If they buy it on royalties then that’s how they buy it. But the shares of Orange Julius Canada, the value is determined by looking at all the income, all the expenses, and what’s left over is what they’re buying; and you’re buying $250,000 a year.

He said that he did not look at the American operation at all and that he was not questioning the sum of approximately $23,500,000 paid for the shares of OJA and OJC.

On cross-examination Mr. Jones said that a total valuation of $5.3 million for the whole transaction, being the purchase of the shares of OJA and OJC, appeared ridiculous when it was known that the purchase price was $23,000,000. He stated that he did not take into account or do any work on the value of the OJA shares. He stated, in cross-examination that he had never valued a business for the purpose of an acquisition. He stated, without compromise, that he was valuing the shares of the company and that his approach was "how you value company shares". He admitted that ownership of the shares of OJC gave rise to the right to enjoy the royalty stream. When he was asked whether he had some concern about the overall price of $23.5 million that had been paid for the OJC shares. He stated,

Well, I don’t have any concern about it, no, because I wasn’t asked to value that.

Then followed this exchange between appellant’s counsel and Mr. Jones on cross- examination,

Q. And my friend didn’t want you o focus on page 5 of your report but I do, sir, because at page 5 of the report, you say:

The main assets of Orange Julius Canada Limited are the service fee contracts with the Orange Julius franchisees.

Right?

A. Yes.

Q. And I take it you’ll agree with me, sir, that, therefore, the main assets are the ones that you focus upon in undertaking a valuation?

A. That’s where most of the value is, yes.

Q. And, therefore, sir, it’s reasonable for Dairy Queen to have done that; correct?

A. Well, it’s certainly...! don’t doubt for a second when they say that that’s what they were looking at, that they were, sure.

Q. That sounds like a reasonable approach to you, doesn’t it, sir?

A. Yes.

Q. And you know that they’ve always done it that way; you’ve heard that evidence?

A. Well, I heard they buy Dairy Queens like that, yes.

Q. And I take it you’ll agree, sir, that they know the business better than you?

A.Ah...the Dairy Queen business, sure they do.

Q. Now, jumping back to page 3 of your report, where you’re talking about intangible assets-and on my copy it’s down at the bottom of the page under paragraph (b)-you say, with respect to valuing intangible assets:

Although the value of an intangible asset cannot be determined exactly, its value must relate to the expected cash flow or earnings to be generated from the intangible asset.

Right?

A. Yes.

Q. And do I take it from that, sir, that a company’s earnings should reflect already to some extent the value of the intangible assets such as goodwill? It’s built in, isn’t it, sir?

Q. Yes, I understand, sir, that that’s where you part company with Dairy Queen; you prefer an NOI, a net operating income-

A. Yes.

Q. -approach to simply looking at the gross revenues; is that right?

A. Well, no, it’s looking at the net income after tax.

Q. I understand it. And what that approach assumes is that Dairy Queen will itself in fact be faced with the same expenses as the target; is that fair?

A. In an open market, that’s what the company’s earning. No, I don’t-they’re a special purchaser; certainly they are. We’ve already been over that about Dairy Queen-

Q. And you agree that they’re a classic example of that; right?

A. Well, where you eliminate duplication of management and stuff like that, yes, that’s synergies, that’s-

Q. And yet-

A. -a good example.

Q. I’m sorry, I didn’t mean to cut you off, sir. And yet the approach that you propose doesn’t reflect that all, does it? It gives full credit to operating expenses and treats those as appropriately being deducted for the purpose of your valuation?

A. As the company was operating at the point in time that I valued it, that’s what I look at.

Q. So, you haven’t taken into account-I guess we’re agreeing about this-any of the potential advantages or synergies enjoyed by Dairy Queen?

A. I didn’t.

Q. Notwithstanding that, in your view, it’s a classic example of a special purchaser?

A. Of a special purchase but not a special purchaser market, that’s like there’s a big difference between the two.

Q. Okay. Well, another example of a special purchaser, sir, would an insider group; isn’t that fair?

A. Could be.

Q. And if you’ve got an insider group and a particular kind of special purchaser like Dairy Queen competing for the same asset, you’ve got a special purchaser market, don’t you, sir?

A. Not... Yes, if you’ve got more than one special purchaser, you’ve got a special purchaser market but I’m not-like I’m not certain that the insiders were. I didn’t see where they’d put in an offer or anything and I’m not sure that they could realize synergies.

Q. Well, sir, you will agree with me that an insider group does-

A. They’ve got knowledge of the business.

Q. That’s right. So, it’s a special purchaser; right?

A. Not necessarily.

Q. But it’s likely, sir, that an insider group, because of it’s additional knowledge of the business, the special inside information, constitutes a special purchaser; right?

A. Well-

Q. Surely, we can agree on that?

A.-not quite. A special purchaser is defined as someone who can realize synergies, whatever the other wording of it was, that’s really what it means. And I’m not sure that they could, no.

Q. You’ll agree with me though that an insider group would have certain advantages, based on its knowledge of the business?

A. Well, it should know more about the business, certainly.

Q. Now, you know, because you’ve heard this evidence, sir, that Dairy Queen did in fact have an existing infrastructure and existing personnel and wouldn’t have to take on all those expenses from Orange Julius; right?

A. Yes, I heard that.

Q. And your report doesn’t reflect any of that; right?

A. That’s right.

Q. And then you applied to the net operating income in your report, sir, a capitalization rate ranging from 16.6 per cent to 20 per cent; is that right?

A. Yes, it is.

Q. Meaning that you believe that a purchaser would require, on an after-tax basis, a return of that 16.6 to 20 per cent; is that right?

A. Yes, at that point in time, because the interest rates today aren’t the same as they were back then.

Q. And just to use the numbers that you do-so, I’m looking at your Schedule 1, sir-if you use a ten times multiple as opposed to five times or six times, then the bottom line for you goes up to something more like $2-1\2 million; right?

A. Yes.

Q. Just on that basis alone?

A. Yes, it would.

Q. And still without taking into account any of the special purchaser advantages that Dairy Queen might have?

A. ...

Q. Right?

A. That’s right.

Q. And so if you take some of those advantages into account and you knock some money out of the expense side of things, the bottom line goes up even further, doesn’t it?

A. Yes, certainly, if the net income goes up.

Q. Okay. So, you’re not interested in knowing how your valuation compares to actual results; is that what you’re saying, sir?

A. Well, no, there are synergies that came into effect after the valuation date; I don’t doubt that.

Q. And none of those are taken into account at all in your valuation?

A. There was no reason for them to pay for that.

Q. I see. So, what you’re saying then, sir, where that takes us is that there’s no

point in paying any attention to how they did after the fact; is that right?

A. That’s right.

Q. Okay. Just so we understand each other, sir. You’ll agree with me that those are some pretty nice returns....

A Certificate with Respect to the Proposed Disposition of Property by a Non- resident of Canada, required under section 116 of the Act, was issued in the amount of $4,340,000, dated August 4, 1987, indicating that the Department had accepted that amount as the valuation of the shares of OJC.

Appellant’s counsel argued that it was clear from the evidence that IDQ was an agent for DQC in the acquisition of the shares of OJC and that it was acquiring the beneficial ownership thereof for DQC. I accept that argument. "Agency" as defined in Black's Law Dictionary is

A relationship between two persons, by agreement or otherwise, where one (the agent) may act on behalf of the other (the principal) and bind the principal by words and actions;

and

The relationship where one person confides the management of some affair, to be transacted on his account, to other party.

Counsel admitted that there was no express agency agreement between IDQ and DQC but that there was an "implied agency" in regard to the facts and circumstances. I have no difficulty accepting that proposition. The evidence of the appellant’s witnesses in this regard was forthright and uncontradicted and I accept same. I have no doubt from analyzing this evidence that IDQ was acting on behalf of its subsidiary, DQC, which was to carry on business in a country other than that in which IDQ resided and that it executed the agreement with this in mind. The explanation as to why this matter was not raised with the vendors was both logical and consistent with the circumstances surrounding the negotiations leading to the purchase of the shares of OJC. The memoranda and letters to which I have referred above support this conclusion. The fact that one of the closing documents was an agreement to ensure that the shares were put in the name of DQC together with a share register completed at that time is not only corroborative of this conclusion but is inconsistent with any other conclusion.

Having made this finding, it follows that section 212.1 cannot apply in this case.

The respondent’s alternative position is that the amount paid by DQC for the OJC shares exceeded the fair market value thereof by $2,986,000 ($4,340,000 minus $1,354,000) and that this constituted a benefit under paragraph 214(3)(a) of the Act with a liability in respect thereof under subsections 215(1) and (6) of the Act. Those provisions read as follows,

214(3) For the purpose of this Part,

(a) where section 15 or subsection 56(2) would, if Part I were applicable, require an amount to be included in computing a taxpayer’s income, that amount shall be deemed to have been paid to the taxpayer as a dividend from a corporation resident in Canada.

and

215(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 on behalf of the non-resident person on account of the tax and shall submit therewith a statement in prescribed form.

and

215(6) Where a person has failed to deduct or withhold any amount as required by this section from an amount paid or credited or deemed to have been paid or credited to a non-resident person, that person is liable to pay as tax under this Part on behalf of the non-resident person the whole of the amount that should have been deducted or withheld....

Counsel for the appellant argued that there was no mention of this alternate position in the notice of assessment or the notice of confirmation of assessment. He said it was raised in correspondence and it was raised in the Minister’s reply. He submitted that the burden to prove the matters in question shifted to the Minister, that the onus of proving that value was less than the purchase price contained in the acquisition document was on the respondent and that it was not the appellant’s task to disprove the appellant’s valuation. He then referred to a number of cases in support of this thesis. One such case was McLeod, C. v. M.N.R., [1990] 1 C.T.C. 433, 90 D.T.C. 6281 in which the Federal Court, Trial Division, found that amendments to a statement of claim to make new assumptions and raise new issues was an attempt to circumvent the limitation period by asking the Court to permit the amendments and was refused. In Brewster, N.C. v. The Queen, [1976] C.T.C. 1027, 76 D.T.C. 6046 (F.C.T.D.), Gibson, J. said that

In law the onus is on the taxpayer to destroy some or all of the assumptions. But it is open to the defendant to plead other facts not relied in making the assessments or reassessments, but in that event, the onus is on the Minister of National Revenue to prove such other facts.

He then referred to Gross, A. v. M.N.R., [1990] 1 C.T.C. 2005, 89 D.T.C. 660 (T.C.C.), del Valle, D. v. M.N.R., [1986] 1 C.T.C. 2288, 86 D.T.C. 1235 (T.C.C.) and M.N.R. v. Pillsbury Holdings Ltd., [1964] C.T.C. 294, 64 D.T.C. 5184 (Ex. Ct.). The distillation of counsel’s submissions was that because the valuation matter was not raised in either the assessment or confirmation, the respondent should bear the onus in respect thereof. I agree. The effect of this shift of burden may not be substantial but it does oblige the respondent to prove, on the balance of probabilities, that the valuation advanced by it is correct.

Counsel then referred to a number of factors that he submitted would persuade the Court to prefer the valuation used by the appellant.

In my view, the total price for the OJA and OJC shares of some $23.5 million was clearly an arm’s length price, there having been another potential purchaser which had made a bid in the approximate amount of $20.8 million for 90 per cent of those shares. The respondent’s valuator seemed unimpressed with any suggestion that he should have taken that number into account. In my view, he was wrong in not doing so. To insist that the value of the DQC shares was $1,360,000 while ignoring the fact that the total purchase price of the shares of the two companies was approximately $23.5 million is surprising. His methodology, if applied to OJA and OJC, would place a value on the two companies in the approximate amount of only $5,300,000. His statement that he was asked to value the shares of the Canadian company and was not commissioned to inquire into the price paid for the two companies seems to indicate failure on the part of those who instructed him or on his part to consider a matter that, in my opinion, is relevant. Dairy Queen always valued its acquisitions based upon royalty streams and applying multiples thereto. Although Mr. Jones did not state that this approach was unreasonable, he clung to net operating income as a basis for determining value. Further, I find the valuation done by the Department when it accepted the figure of $4,340,000 on the section 116 certificate not unimportant. The fact that the application for same was signed by the vendor, a party completely at arm’s length with the Dairy Queen companies, and the issue of same by the very person now challenging the value of the OJC shares underlines the merits of the appellant’s position.

Although Mr. Jones said that hindsight is not to be used in valuation, the evidence that DQC enjoyed excellent returns on its investment of $4.34 million cannot, in my view, be ignored. There was evidence to the effect that it could have paid up to a six times multiple and still would have been satisfied with the investment. Although quite some theory was advanced by Mr. Jones respecting a "special purchaser market", and his assertion that it did not exist in this case, the fact is that the transaction was negotiated at arm’s length and resulted in a total purchase price of some $23.5 million. It is also fact that an insider group was prepared to pay $20.8 million for 90 per cent of the shares and it is logical to assume that this insider group had the information necessary to make well founded prognostications about and plans for enhanced success of the operations of both OJA and OJC.

I am not influenced by Mr. Jones’ attribution of relatively high risk to the operation of OJC. Indeed, there appeared to be little risk, and this was confirmed by Mr. Jones, of the potential cancellation of licences necessary for the continued conduct of the business. Mr. Jones’ evidence impressed me as being more protective than supportive of the valuation that he had reached, being remarkably close to that prepared by Mr. Hawthorne earlier. Valuation must work in practice, not just in theory. A practical view of the facts in this case leaves me unable to accept the valuation made by Mr. Jones.

In these circumstances the question of onus discussed above has no import.

Because I have concluded that section 212.1 does not apply in this case and because I accept the purchase price of $4,340,000 for the shares of DQC as reflecting the value thereof I allow the appeal herein with costs to the appellant.

Appeal allowed.