National System of Baking of Alberta Ltd. v. The Queen, 80 DTC 6178, [1980] CTC 237 (FCA)

Urie, J:—This is an appeal from a judgment of the Trial Division whereby, on an appeal from a decision of the Tax Review Board, the fair market value of a common share of the capital stock of Canadian Wallpaper Manufacturers Limited was found to have been $92.55 on Valuation Day, December 22, 1971. The appellant’s counterclaim was dismissed. The appeal was heard together with appeals brought by R Hampson Gillean under Court No A-23-78 and by lan Gillean under Court No A-24-78. The actions from which those appeals were taken were tried on common evidence with this action.

Canadian Wallpaper Manufacturers Limited (hereinafter referred to as “Wallpaper”) is a Canadian company which, at all material times, enjoyed about 80% of the Canadian Wallpaper market. On December 22, 1971 (Valuation Day for the purpose of ascertaining the adjusted cost base of capital assets) some 87,000 of the Company’s 129,246 outstanding common shares were owned by Arthur Sanderson and Sons (Canada) Limited (hereinafter referred to as “Sanderson”). Of the remaining shares, some 30,000 had been acquired by clients of Spicer Investments Counsel Limited (hereinafter referred to as “Spicer”) during the 1960’s. The three appellants in these appeals were among those clients. The appellant herein held 2,001 shares; lan Gillean held 1,690 shares and R Hampson Gillean held 1,000 shares. The balance of the outstanding shares of Wallpaper, (somewhat more than 12,000), to all intents and purposes represented the only shares which were available for trade on the Toronto Stock Exchange, where Wallpaper’s shares were listed, during the several years prior to Valuation Day.

The sole issue in the appeal is whether, on the evidence, the learned trial judge correctly valued the shares of Wallpaper, owned by the appellant as of Valuation Day, December 22, 1971.

The shares in issue, as noted above, were publicly traded shares at the relevant date and the value of each was prescribed to be $85.50 pursuant to subsection 26(11) of the Income Tax Application Rules, 1971, SC 1970-71, c 63, which reads as follows:

For the purposes of this section, the fair market value on Valuation Day of any property prescribed to be a publicly-traded share or security shall be deemed to be the greater of the amount, if any, prescribed in respect of that property and the fair market value of that property, otherwise determined, on Valuation Day.

Under the relevant Income Tax Regulations, Part XLIV, PC 1972-1797, SOR/72-338, reg 4400, for the purposes of subsection 26(11), inter alia, a security named in Schedule F is prescribed to be a publicly-traded share or security and the amount shown opposite that share or security in the Schedule is the amount prescribed in respect of that property. Wallpaper’s common share amount was prescribed as $85.50.

To determine the capital gain on shares disposed of after Valuation Day, regard, thus, must be had to subsection 26(11) for the determination of “fair market value” on that day. As just pointed out, the prescribed value of each share of Wallpaper was $85.50. The appellant argues that in the circumstances of this case, that is not the proper value to be ascribed to the shares. In its view the actual fair market value at Valuation Day should be $200 per share. In order to appreciate this submission a further examination of the facts, as elicited from the evidence, is necessary.

The 30,000 odd shares of Wallpaper acquired during the 1960’s by clients of Spicer, on its recommendation, were not subject to any binding agree- ment nor, the learned trial judge found, did they constitute a “block” in their entirety. Moreover, the trial judge found as a fact, that the appellant’s shares did not constitute

such a block as to call for a departure from the ordinary functioning of the open market in order to determine their fair market value.

It is common ground, as I understand it, that the Spicer clients all received and acted upon its advice with respect to their Wallpaper shares. The shares were held by them for valid business reasons as long term investments and only a handful were sold when liquidity problems had to be faced by some investors. The market, therefore, for Wallpaper’s shares was thin involving as it did only the 12,000 odd shares not included in either the Sanderson or Spicer clients’ portfolios. The thin market resulted in light trading in the late 60’s and early 70’s. As a result, the Toronto Stock Exchange it was found, actively and publicly considered prescribing conditions upon which the continued listing of the shares would depend. This fact, together with some other indicators, led Spicer to conclude in or about July, 1970, that a take-over bid or a “work-out” proposal from the majority shareholder would be forthcoming. It was of the opinion that the price in either event would be in excess of $300 per share and perhaps as high as $500. No public announcement of the possibility of the take-over was made on or before Valuation Day, nor, in the circumstances, ought one to have been made. However, the majority of the Spicer clients holding Wallpaper shares were advised to continue to hold them because their underlying value far exceeded the book value. In the event, the offer received was for $200 per share but it was not made until November 10, 1972.

The learned trial judge was, in my view, quite justified in finding, on the evidence, that the proposal was “bona fide anticipated early in 1970”.

He also made the following findings which form the base for one branch of the appellant’s submissions:

On the other hand, I do not accept that Spicer did anticipate a proposal from Sanderson to the other shareholders, that the anticipation was reasonably founded and that it was communicated to its clients, including the defendant. I further accept that, with that information, no shareholder would willingly have sold his shares for anything like $85.50 on Valuation Day. He would have demanded considerably more and a prospective purchaser, armed with same information, would have expected to pay considerably more. However, it remains that what is to be determined is the fair market value on Valuation Day. (emphasis is mine)

In appellant counsel’s submission, having so found, it was not possible for the trial judge to say that the fair market value of the shares was less than the figure eventually paid, namely, $200 per share. The learned trial judge did not accept this view at trial and referred to the House of Lords decision in Crabtree v Hinchliffe, [1971] 3 All ER 967 as providing the kind of reasoning which should be employed in the factual situtation in this case. Counsel for appellant argued that it cannot be so employed because the applicable legislation in the United Kingdom is, he said, quite different from subsection 26(11) of the Income Tax Application Rules, supra. In that jurisdiction, the legislation provided that, on the introduction of the capital gains tax, the market value of shares or securities quoted on the London Stock Exchange shall:

except where in consequence of special circumstances prices so quoted are by themselves not a proper measure of market value, be as follows . . . The Finance Act, 1965 (UK) 1965 c 25 s 44.

It is unnecessary to review the facts in the Crabtree case other than to say that they are not dissimilar to those in the case at bar. The price quoted on Valuation Day on the Exchange for the shares in issue was 47s 6d per share. Five months later a price for the purchase of the outstanding shares was negotiated at 55s per share. No intimation of the takeover was in the hands of the public prior to Valuation Day. In unanimously dismissing the taxpayer’s appeal, Lord Reid had this to say:

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 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.

Counsel contended that the distinction between the United Kingdom legislation where the stock exchange price will be the market value except where special circumstances are shown to exist and the Canadian legislation in which the fair market value is the greater of the prescribed amount (in this case by ascertaining the Stock Exchange prices on Valuation Day) and the fair market value, on that day otherwise determined, renders the reasoning of Lord Reid inapplicable. Thus, in his submission, the learned trial judge erred in applying the ratio of the Crabtree case to the facts of this case. I do not agree with him. As I read his reasons, the learned trial judge did not base his judgment on the Crabtree case. True, he reviewed the facts briefly and set out in his reasons the excerpt from Lord Reid’s speech which is quoted above, but only for the purpose of showing, as I understand it, that knowledge of relevant facts by some investors which are not known by the public at large, ought not to affect the basic principle that what subsection 26(11) requires to be determined is fair market value, not value by some other standard. In this case a substantial number of shareholders held the view that the majority shareholder would seek to acquire the minority shares of Wallpaper at a price substantially in excess of the quoted price on Exchange. But that view was not one to which the public at large, including the holders of 12,000 odd shares, was privy. Lord Reid’s words in that context are apposite. Clearly the learned trial judge had this in mind and was conscious of the wording of the Canadian legislation when he said:

It would require affirmative proof of some situation rendering prices quoted on the open market something other than reflective of market value to justify adopting another approach to its determination. I do not think that the presence of the word “fair” in subsection 26(11) and its absence from the British statute distinguishes the Crabtree case from this one. Spicer’s accurate insight is no more a reason that the insider information available to the taxpayer in the Crabtree case to depart from the open market’s verdict as to market value. Be it market value or fair market value, it is the value in the marketplace, not the value to a particularly situated or motivated investor, that is to be determined, (emphasis is mine)

I agree with those words and I also agree with him when he relied on Untermyer Estate v A G of British Columbia, [1929] SCR 84 at 91 as support for his opinion that market price is the best test of market value. Therefore, I do not believe he made an error by his reference to the Crabtree case and in his interpretation of subsection 26(11).

There was, in addition, support for the trial judge’s position provided by the evidence of the experts who appeared on behalf of each party. The respondent’s valuator considered and tested four methods of valuation and concluded that the quoted market price was the most appropriate basis upon which to value the shares in issue, although he recognized that, in other circumstances, the market price might not represent fair market value. He, therefore, concluded that the prescribed value of $85.50 per share was the proper fair market value for each of the appellant’s shares.

On the other hand, the appellant’s expert, Philip M Spicer was of the opinion that the fair market value of each share of Wallpaper on Valuation Day was $200. The conclusive factor in his mind in so concluding was the sale of Wallpaper shares by the majority of the minority shareholders, by acceptance of the November 10, 1972 of $200 per share.

Having the benefit of those witnesses before him, tested by cross examination, the learned trial judge was quite entitled to accept the view of one of the witnesses in preference to the other. That was part of his function. Thus, having evidence to support his conclusion and since he did not err in his interpretation of the relevant legislation, the appellant must fail on the first branch of its argument.

The second branch of appellant’s argument rests on the submission that the market for the shares of Wallpaper, prior to Valuation Day, had been “ephemeral” or “spasmodic”. These words appear in a passage from the judgment of Migneault, J in the Untermyer case, supra. The passage reads as follows:

We were favoured by counsel with several suggested definitions of the words ‘‘fair market value”. The dominant word here is evidently “value”, in determining which the price that can be secured on the market—if there be a market for the property (and there is a market for shares listed on the stock exchange)—is the best guide. It may, perhaps, be open to question whether the expression “fair” adds anything to the meaning of the words “market value”, except possibly to this extent that the market price must have some consistency and not be the effect of a transient boom or a sudden panic on the market. The value with which we are concerned here is the value at Untermyer’s death, that is to say, the then value of every advantage which his property possessed, for these advantages, as they stood would naturally have an effect on the market price. Many factors undoubtedly influence the market price of shares in financial or commercial companies, not the least potent of which is what may be called the investment value created by the fact—or the prospect as it then exists—of large returns by way of dividends, and the likelihood of their continuance or increase, or again by the feeling of security induced by the financial strength or the prudent management of a company. 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. I do not lose sight of the fact that mining operations are often of a speculative character, that there is always a danger of depletion, and that a time will sooner or later arrive when no more minerals will be available, unless other properties are secured to keep up the supply. But all these elements have an effect on the price of the shares on the stock exchange, and no doubt they were fully considered by the purchasers of the stock at the then prevaililng price. (emphasis mine)

The definitions of “ephemeral” and “spasmodic” as they appear in The Shorter Oxford Dictionary, Third Edition, follow:

Ephemeral: Beginning and ending in a day; existing only for a day or a few days; shortlived; transitory.

Spasmodic: Occuring or proceeding by fits and starts; irregular, intermittent; not sustained.

It will be seen from these definitions that the determination of whether the market for a particular stock is ephemeral or spasmodic is essentially one of fact. It requires an analysis of quotations and trading volume of Wallpaper’s shares on the Toronto Stock Exchange for a reasonable period of time, which information was adduced in evidence. The trial judge made the appropriate analysis and concluded that:

the evidence does not establish that the market price of the Company’s [Wallpaper’s] shares quoted for the week ended October 29, 1971, nor the bid-ask- quotations for December 21 and 23 were either spasmodic or ephemeral. On the contrary they were quite consistent with the prices prevailing in the market during the preceding 18 months . . . (emphasis is mine)

Not only did his own analysis support the view of consistency but so did the view of respondent’s expert. There is, therefore, no justification for this Court to hold that he erred in his assessment of the evidence before him. Clearly the evidence can and does support his conclusion that the market price for the shares was consistent and, therefore, neither ephemeral or spasmodic.

As to the market itself, the learned trial judge had this to say:—

Neither, as I apprehend its meaning, was the market for the shares ephemeral. There was a real, continuing market. The market may be fairly characterized as spasmodic; however, there is no evidence that its intermittence was a function of any inconsistency in the market. It is obvious that it was intermittent because it was an extremely thin market. To paraphrase Lord Reid: it must happen every day that the market quotes prices for thinly traded securities either as a result of actual trading in a few shares, be it odd lot or board lot, or by bid-ask quotations in the absence of trading. The fact that the market in a given security is extremely thin is one of the myriad factors taken into account by those participating in the market in establishing what they are willing to pay or accept for that security at a given time; it is not a reason for rejecting the market’s verdict as to market value.

In reaching this conclusion he expressly rejected part of the testimony of the apppellant’s expert. In my view, he was quite entitled to do so particularly when he found, as the evidence entitled him to do, that Mr Spicer’s testimony did not meet the judge’s test for evaluating an expert’s evidence:

The Court is not justified in jumping with an expert to a conclusion that is sustained only by the evidence of his expertise; it simply must have evidence as to facts so that it can both understand and evaluate the process leading to the conclusion and the validity of the conclusion itself.

In concluding that the appellant must also fail on this branch of its argument, it is not without significance to observe that on Valuation Day no purchases of Wallpaper shares were made at the “ask” price of $88 by Spicer’s clients or anyone else notwithstanding Spicer’s confidence at the time that a take-over or work-out proposal would be forthcoming at a price substantially in excess of that figure. That, in my view, adds some weight to the view that the $200 per share figure did not reflect a price that the market considered to be fair market value at that date.

Since the appellant took the position that the value per share at Valuation Day should not be less than $200 and since the respondent did not cross appeal the value per share of $92.55 found by the trial judge, there is no necessity for considering whether he correctly or incorrectly arrived at that value.

Accordingly, for all of the above reasons, the appeal should be dismissed with costs.