Winter v. The Queen, 89 DTC 5304, [1989] 2 CTC 55 (FCTD)

Joyal, J.:—The plaintiffs are the executors of the estate of the late Sir Leonard C. Outerbridge and are appealing the reassessment by the Minister of National Revenue in respect of the tax return of the deceased for the 1979 taxation year.

Background

In 1979, Sir Leonard C. Outerbridge held directly or indirectly certain shares in an operating company called A. Harvey & Company Limited (the Harvey company). He held directly some 254 common shares and indirectly another 661 common shares through his investment or holding company called Littlefield Investments Limited (Littlefield).

On September 19, 1979, advancing in years and desiring to put his affairs in order, Sir Leonard caused two transactions to take place which divested him of all his holdings in the Harvey Company. First, the directors of Littlefield voted to approve the sale of Littlefield’s 661 shares in the Harvey company to Sir Leonard's son-in-law, Herbert H. Winter, at $100 per share for a total of $66,100. On the same day, Sir Leonard made an outright gift of his personally-held 254 Harvey company shares to his daughter Nancy Winter. The value of this gift was declared for tax purposes to be $100 a share.

Revenue Canada studied Sir Leonard's tax return and concluded that the declared value of the Harvey Company shares were much less than their fair market value. There followed any number of discussions and correspondence between Revenue Canada and the taxpayer's advisers until October 21, 1985 when Revenue Canada issued its notice of reassessment, calculated the fair market value of the shares at $1,089 per share and assessed Sir Leonard accordingly. In so doing, Revenue Canada relied upon subsections 56(2) and 15(1) of the Income Tax Act with respect to the sale of the Harvey company to Mr. Winter and on section 69 of the Act with respect to the gift of the Harvey company shares to the taxpayer's daughter.

The Harvey Company

The circumstances which led to this issue between the Crown and the plaintiffs require some elaboration. The circumstances are material in the question of determining the fair market value of the shares in dispute.

The Harvey company at all material times had been engaged in any number of business activities. Although some eight or nine people held shares in the company, they substantially fell into two distinct groups, one representative of the Harvey family and the other of the Outerbridge family.

Although the shareholdings of each family were substantially in balance, the Outerbridge family had effective control of the Harvey company through voting proxies provided to Sir Leonard by the Royal Trust Company of Canada which, in its London office, was trustee for a block of shares which represented some 12.04 per cent of the Harvey company stock. This percentage of stock, added to the 41.12 per cent held by the members of the Outerbridge family provided them with a majority.

In the years preceding the year 1979, share transactions in the Harvey company had not been very frequent and they consisted mostly of nonarm's length purchases and sales within each family group. As examples, P. Outerbridge, a nephew of Sir Leonard, had purchased 110 common shares in the Harvey company in 1965 at a price of $79 per share. In 1971, on the Harvey family side, certain Harvey company shares in the Powys-Keck estate had been valued at $157.95. In 1975, Herbert Winter purchased some 90 of these shares at $165 per share. In 1976, following the death of Margaret Harvey, it was rumoured that Revenue Canada had agreed to a $100 a share value for her holdings.

As of 1979, therefore, the agreed upon value of $100 per share as between Sir Leonard and his daughter and son-in-law would not have appeared to be out of line. Other events, however, took place in 1979 which throw a somewhat different light over the whole situation.

As mentioned earlier, the Royal Trust with 12.04 per cent of the Harvey company stock, constituted a swing block of shares. In 1978, unknown to Sir Leonard, Harvela Investments Limited, which owned a majority of the Harvey family stock, offered to buy the Royal Trust shares and thereby gain control of the Harvey company. The offer was at $500 a share. When, in 1979, Sir Leonard got wind of this, he countered with an offer of $600 per share. Concurrently, he offered the same price for another block of shares held personally by his sister, Mrs. Campbell, then residing in Scotland.

These offers of $600 made by Sir Leonard came at about the same time that either directly or through Littlefield, he was disposing of his shares at a price of $100 per share.

The offer made to Mrs. Campbell for her shares at $600 was acceptable to her and in fact, she indicated to the Royal Trust that such an offer should equally be acceptable to the trustees. The latter, however, out of a sense of duty to the beneficiaries of the trust, decided to attempt to get a better price. This set off a bidding war which eventually resulted in the Harvey group bidding $2,175,000 or approximately $2,000 per share and the Outerbridge group offering a reference bid of $101,000 over and above any offer submitted by the Harvey group.

When the Royal Trust Company accepted the Outerbridge bid at $2,276,000, the Harvey group objected on the grounds the Outerbridge bid was invalid. The issue was finally settled by the House of Lords in 1985 in favour of the Harvey group. The decision of the House of Lords, for those who may be interested, is reported at [1985] 2 All E.R. 966.

The Issues

Revenue Canada's reassessment was on the basis of a value of $1,089 per share in the capital stock of the Harvey company. Revenue Canada taxed Sir Leonard for an additional capital gain on the gift of shares to his daughter Nancy Winter and also taxed Littlefield on the capital gain portion of the proceeds of the sale of its shares to Herbert H. Winter. Revenue Canada also used the authority granted by subsection 56(2) of the Income Tax Act to tax Sir Leonard on the proceeds received by Littlefield for the sale of its shares to Herbert H. Winter on the basis that it was Sir Leonard's desire to have Littlefield confer a benefit on his son-in-law by selling the shares at less than fair market value.

The issues to be resolved are therefore to determine if the value of the shares set by Revenue Canada is acceptable and if in all the circumstances of the case, Revenue Canada properly applied subsection 56(2) of the Income Tax Act.

The Fair Market Value

The evidence with respect to the value of the Harvey company shares covers a whole spectrum of both objective facts and subjective elements.

As recited earlier, certain share transactions over the years prior to September 19, 1979, indicate a value somewhat higher than the $100 per share fixed at that time, yet considerably below the $1089 per share ultimately fixed by the Crown.

A Revenue Canada letter dated December 4, 1973 with respect to shares in the estate of Edith Powys-Keck and another Revenue Canada document dated March 6, 1974, estimate the value at $157.95 per share. On June 24, 1975, these estate shares, in what was an arm's length transaction, were purchased by Herbert H. Winter for $165.

In 1976, with respect to the value of shares in the estate of Margaret Harvey, Revenue Canada appears to have agreed to a Valuation Day value at the end of 1971 of $260 and to a current value of $310 per share.

On October 21, 1981, in a letter addressed to Sir Leonard's auditors, Revenue Canada estimated the Valuation Day value of the shares in the range of $175-$210 and their September 19, 1979 value in the range of $340-$410.

On February 2, 1982, Revenue Canada revised the foregoing estimates at $260 and $510 per share respectively.

On May 23, 1983, Revenue Canada again revised its calculations and estimated the value of the shares on Valuation Day at $900 per share and on September 19,1979 at $2,325.

In 1984, the Campbell Valuation Group of Toronto, having been retained by the taxpayer to prepare a valuation report on the Harvey company shares, fixed their value at Valuation Day at $854 and their value on the transaction date at $1,089. In a letter addressed to Revenue Canada on October 5, 1984, the Campbell Valuation Group informed Revenue Canada that their clients were prepared to accept this valuation with respect to both the shares gifted by Sir Leonard to his daughter Nancy and with respect to the sale of shares out of the Littlefield portfolio to Herbert H. Winter.

There is other evidence as to the valuation of these shares. On or about September 19,1986, Herbert H. Winter bought from Miss Helen Campbell 67 shares in the Harvey company for $100 each. On March 10, 1987, in a Certificate required by reason of Miss Campbell’s non-resident status, Revenue Canada accepted this value.

It is apparent that the process of valuating company shares, except in the case of publicly-traded companies, is more of an art than a science. Different evaluators may adopt different yet orthodox techniques, go through a numbers-crunching game and arrive at different results. There are moreover other elements in the process, some of which are objective, others less so. As in the Harvey company, certain articles of incorporation contain some particularly harsh share restrictions. Different blocks of shares, as to size and timing, will command different prices. The price of voting and nonvoting stock will also vary even though they both participate equally in company profits. A swing block of shares, as in the block of the Harvey company shares held by the Royal Trust Company in England, is particularly attractive and, as we have seen, may command a price far beyond the breakup value or any reasonable cost/earnings ratio.

There are other elements as well. A non-arm's length transaction, even though subject to scrutiny under the Income Tax Act, is not necessarily negotiated at less than fair market value. Shares held by the dead hand of an estate whose beneficiaries have no interest in the business and who favour a quick liquidation would command a lower price than the same amount of shares held by a person who has taken an active managerial interest in it.

The "special value" or “special purchaser" approach will also create substantial differences in what a willing buyer will pay to a willing seller. Synergies or economies of scale, integration, supply sources or other considerations will make a purchase more attractive to one person than to another.

There is no doubt that based on the history of the several transactions to which I have referred, there have been some fairly widespread prices paid for the Harvey company common shares. This phenomenon needs to be stressed because the best evidence of what constitutes the fair market value of any asset is what people, within a longer or shorter period of time have paid for it.

The problem before me is compounded by the fact that some of the transactions involving the Harvey company shares were non-arm's length, others would appear to be normal buyer-seller transactions and others possibly in between. Further variables might also follow from transactions involving smaller as against larger blocks of shares and whether or not there were special values attributable to particular sales.

Added to this, in the light of the competing values advanced by the parties, are the several estimates placed on the Harvey company shares by Revenue Canada itself and to which I have already referred. These range from $310 to $2,325 a share as of the transaction date and after providing for a discount because of share restrictions and limited market.

The highest value of $2,325 attributed by Revenue Canada was issued May 3, 1983. The Campbell Valuation Group report is dated a year later and fixes a value of $1,089 as at the transaction date, a value which Revenue Canada was prepared to accept.

I should have no hesitation in subscribing to this figure of $1,089. The valuation analyses prepared by the Campbell Valuation Group are extremely detailed and reflect considerable data on the Harvey company's underlying assets. It will be recalled also that the report was prepared on behalf of the Harvey Company itself and was voluntarily filed with Revenue Canada. Without suggesting that the report might not be beyond reproach, it achieves a degree of credibility which might not be of its own making but which is nevertheless there. I must therefore accept that valuation.

Statute Interpretation:

Revenue Canada decided to tax the Outerbridge Estate under section 56(2) of the Income Tax Act as it read in 1979. It reads:

56. (2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer's income to the extent that it would be if the payment or transfer had been made to him.

Counsel for the plaintiffs advances some stimulating arguments with respect to the applicability of this statutory provision to the facts of the case. He looks upon it as an anti-avoidance provision which should only be applied on proof that a taxpayer desired to confer a benefit. In Counsel's view, the provision is meant to cover situations where a sale is a fraud, or a sham, or a desire to thwart the normal operation of the statute.

Counsel stresses the obvious purpose of the transaction as between seller and buyer. Both desired to limit the risk of the Outerbridge group against any initiatives which might be taken by the Harvey group. No doubt, he says, the parties wanted to be fair with each other and, within the limited knowledge of what constituted a fair price at that time, the price agreed to was one which would stand the test of scrutiny if ever it was alleged that either the taxpayer or his son-in-law had deceived the other.

As to the circumstances surrounding the meeting of the parties and the conclusion of the deal on September 19, 1979, counsel for the plaintiffs argues that there is no explicit evidence of a desire to confer a benefit. Counsel admits that $100 a share is ostensibly low compared to the $600 a share that the taxpayer was concurrently bidding for other shares. He contends, however, that these latter shares represented a swing group of shares which would assure effective control of the Harvey company. The premium which the taxpayer was prepared to pay for them was quite justified.

Counsel also referred to various share restrictions which altogether create a downside pressure on share values. These restrictions, together with the obvious intendment in each of the two transactions, explain away the spread in the two prices.

The other approach by plaintiffs’ counsel is that subsection 56(2) should be interpreted in a manner which would limit its application to the actual benefit the taxpayer desired to confer. Unless there was objective evidence or strong inferences that, to the knowledge of the parties at the date of the transaction, the shares were worth ten times as much, the Court should conclude that the desired benefit was something much less than the spread. If I interpret counsel's argument correctly in this respect, I should conclude that if indeed there was a desire to confer a benefit, that benefit should be limited to what the taxpayer subjectively and objectively should have valued the shares at that time, i.e., a book value of some $784 a share with an appropriate discount for share restrictions and limited market. On no account, however, counsel concludes, should the desired benefit be fixed at a figure of some $1089, an amount which only reflects ex post facto wisdom but is not respectful of the parties' perceptions of share value at transaction time.

Counsel for the taxpayer relies in part on Murphy v. The Queen, [1980] C.T.C. 386; 80 D.T.C. 6314, when Cattanach, J. of the Trial Division of this Court, sets out the essential ingredients which must be present before subsection 56(2) of the Act can apply. He lists these ingredients at page 389 (D.T.C. 6317) as follows:

(1) that there must be a payment or transfer of property to a person other than the taxpayer;

(2) that the payment or transfer is pursuant to the direction of or with the concurrence of the taxpayer;

(3) that the payment or transfer be for the taxpayer's own benefit or for the benefit of some other person on whom the taxpayer wished to have the benefit conferred, and

(4) that the payment or transfer would have been included in computing the taxpayer's income if it had been received by him instead of the other person.

The key words are of course "on whom the taxpayer wished to have the benefit conferred”. In that regard, plaintiffs' counsel draws comfort from comments by J.F. Avery Jones in a 1983 British Tax Review article on "The Mental Element in Anti-Avoidance Legislation - I’, p. 9, where he says at p. 11 that ”. . . it is clear that ‘intention’ is clearly to be distinguished from 'desire'." Indeed, says the author, an intention can include the opposite of what is desired. It may therefore be a proper interpretation of subsection 56(2) to ascribe to the word "desire" something which is not an intention nor a purpose, nor an object, as such words are found in several other provisions of the Income Tax Act. As a consequence, these various terms should not be confused and, as a further consequence, judicial interpretation and doctrine, whenever any of these terms appear in the statute, should not be generalized or are otherwise not applicable under subsection 56(2) of the Act.

In reply, counsel for the Crown relies on the prime requirement that the plaintiffs have the burden to show that there was no desire on the part of the taxpayer to confer a benefit. According to the Crown, all the surrounding circumstances, collectively if not individually, are indicative of that desire. The requirements of subsection 56(2) are evidently present in the case. Whether one is dealing with subsection 15(1) where a benefit is conferred on a shareholder by a corporation, or with subsection 69(1) where fair market value applies to non-arm's length transactions or to gifts inter vivos, or with a subsection 56(2) case, the same objective tests apply.

Counsel for the Crown refers to the case of Miller v. M.N.R., [1962] C.T.C. 199; 62 D.T.C. 1139 where Thurlow, J. then of the Exchequer Court, said of subsection 56(2), formerly subsection 16(1), that the section ” . . . is intended to cover cases where a taxpayer seeks to avoid receipt of what in his hands would be income by arranging to have the amount received by some other person whom he wishes to benefit or by some other person for his own benefit. The scope of the subsection is not obscure for one does not speak of benefitting a person in the sense of the subsection by making a business contract with him for adequate consideration".

Counsel for the Crown also relies on the case of Boardman and Saskan Investments Ltd. v. The Queen, [1986] 1 C.T.C. 103; 85 D.T.C. 5628 where Strayer, J. of this Court, subscribes to the Crown's view that in a situation akin to the case at bar, the benefit to the taxpayer might be income to him under any one or all of the provisions contained in subsections 15(1), 56(2) or 245(2) of the Income Tax Act. It would follow therefore that in any case, the same tests apply and that there should be no reason to ascribe to subsection 56(2), the narrower and more limited meaning urged upon me by plaintiffs’ counsel.

In reviewing the evidence, counsel for the Crown concludes that all the necessary ingredients under the subsection 56(2) rule are present, namely:

(1) That the payment or transfer was to a person who is not a taxpayer.

(2) That the transfer was made with the direction or concurrence of the taxpayer and in a situation analogous to that found in both the Boardman case, supra, and in the case of M.N.R. v. Bronfman, [1965] C.T.C. 378; 65 D.T.C. 5235. The taxpayer, as owner of close to 100 per cent of the shares of Littlefield, was in a position to cause that company to act as it did for the benefit of the taxpayer's son-in-law.

(3) That the surrounding circumstances, objectively viewed, can only lead to the conclusion that the taxpayer desired to have this benefit conferred. Admittedly, there is then a question of fact which includes a mental element, but as was said by Thorson, P. in the case of John Cragg v. M.N.R., [1952] Ex. C.R. 40; 52 D.T.C. 1004, at p. 1007, "The question in each case is what is the proper deduction to be drawn from the taxpayer's whole course of conduct viewed in the light of all the circumstances. The conclusion in each case must be one of fact.”

Conclusions

The facts adduced at trial contain sufficient particularities that the whole constitutes something close to a sui generis case. In that regard, much may be said of plaintiffs’ counsel's approach with respect to the inferences to be drawn from the facts as well as to the restricted application proposed for subsection 56(2) of the Income Tax Act. The subjective element as to “desire to benefit” raises a question. So too the narrow price range within which the Harvey company shares had traded prior to the transaction of September 19, 1979. Even if one should assume, however, that as of that date the share value was, in the minds of the plaintiffs, in the neighbourhood of $100, the more objective evidence of his concurrent $600 offer for other shares, as well as the 1979 book value of Harvey company shares of some $784, attenuates considerably the weight to be given to that side of the argument. I should conclude, on the basis of the relationship between the taxpayer and his son- in-law, as well as on the more objective circumstances surrounding the specific transaction as well as those transactions ancillary to it, that in causing the Littlefield shares to be transferred, the taxpayer desired to confer a benefit to his son-in-law.

Furthermore, I must find that the interpretation of subsection 56(2) advanced by plaintiffs’ counsel and which would limit the income to the taxpayer to an amount the taxpayer desired to confer as a benefit, puts the kind of strain on the language of the section that it cannot reasonably bear. It is my view that once there is a finding that the taxpayer desired to confer a benefit, there is no longer room to quantify that desire subjectively or to restrict the section's application to less than fair market value. This is to say that once subsection 56(2) is called into play, the usual objective and factual considerations apply.

I should finally conclude that the plaintiffs have failed to rebut the assumptions of fact outlined in the Crown's statement of defence with respect to the sale of shares and to the gift of shares to the plaintiffs’ son-in- law and daughter respectively. I should confirm the reassessment of 1986 and dismiss the plaintiffs’ action.

The defendant is entitled to costs.

Appeal dismissed.