[ENGLISH TRANSLATION]
Citation:
2016 TCC 110
Date:
20160503
Docket: 2012-2142(IT)G
BETWEEN:
MARIO
MONTMINY,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2012-2144(IT)G
BETWEEN:
ALBERTO
GALEGO,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2012-2145(IT)G
BETWEEN:
SERGE
LATULIPPE,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket: 2012-2146(IT)G
BETWEEN:
RÉMI DUTIL,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket:
2012-2147(IT)G
BETWEEN:
ÉRIC
HACHÉ,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2012-2148(IT)G
BETWEEN:
PHILIPPE
BEAUCHAMP,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent,
Docket:
2012-2150(IT)G
BETWEEN:
JACQUES
BENOIT,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D’Auray
J.
I. Background
[1]
These appeals relate to the 2007 taxation year and
were heard on common evidence.
[2]
The appellants were all management employees of
9178‑4488 Québec inc., formerly known as Cybectec inc. (“Cybectec”).
[3]
Cybectec is a company offering customers
consulting and custom design services in relation to industrial IT systems.
[4]
In 2001, Cybectec established a stock option
plan (the “stock option plan”) in favour of the appellants.
[5]
Pursuant to paragraph 110(1)(d) of
the Income Tax Act (the “Act”), a taxpayer may deduct half of the value
of the taxable benefit under a stock option plan subsequent to the disposition
of the taxpayer’s shares. Certain conditions must be met in this regard.
[6]
The appellants submit that they have fulfilled
all the conditions imposed by paragraph 110(1)(d) of the Act and
section 6204 of the Income Tax Regulations (the “Regulations”).
Each of the appellants consequently deducted, under paragraph 110(1)(d)
of the Act, half of the value of the taxable benefit he received subsequent to
the disposition of his shares.
[7]
The respondent argues that the appellants did
not fulfil the conditions of paragraph 110(1)(d) of the Act and
section 6204 of the Regulations and that, as a result, the appellants may
not deduct half of the taxable benefit received under the stock option plan.
[8]
In this case, the issue to be determined is
whether the appellants fulfilled the conditions set out in
paragraph 110(1)(d) of the Act, that is, whether the shares of
Cybectec were prescribed shares under section 6204 of the Regulations. The
appellants must further establish, as prescribed in paragraph 110(1)(d)
of the Act, that the price paid for the security, $0.20 per share, was no less
than the fair market value of the securities on the date the stock options were
granted.
II. The facts
[9]
At the hearing, the parties filed a partial agreed
statement of facts, which is reproduced below in full:
A. [translation] Partial
agreed statement of facts
1 The appellants were employees of 9178‑4488 Québec inc.
(formerly Cybectec inc.) (the Company).
2 [Paragraph struck by the parties.]
3 Until December 1, 2003, the Company was controlled by Yves
Racine and Jean-Louis Pâquet by way of the companies 2755‑5945 Québec
inc. and 2755‑5952 Québec inc.
4 Effective December 1, 2003, all shares of the capital
stock of the Company were held by 9135‑8184 Québec inc.
5 On May 1, 2001, the Company established a stock option
plan (the “Plan”) for its officers and management employees.
6 Under section 7.2 of the Plan, the options granted could
be exercised only upon the occurrence of one of the following events: (1) a
public offering by the Company followed immediately by listing of Class A
shares of the capital stock of the Company on a recognized stock exchange or
(2) the sale of all shares of the capital stock of the Company issued in all
classes and in circulation.
7 On December 16, 2001, the number of shares set aside for
the purposes of the Plan was increased from 1,740,000 to 2,500,000 Class A
shares of the Company.
8 On December 17, 2001, and January 18, 2002, the
Company distributed stock options among eleven (11) employees as follows:
|
Date
|
Employee
|
Options
|
|
December 17,
2001
|
Rémi Dutil
|
130,500
|
|
December 17,
2001
|
Serge Latulippe
|
348,000
|
|
December 17, 2001
|
Jacques Benoît
|
261,000
|
|
December 17, 2001
|
Mario Montminy
|
261,000
|
|
December 17, 2001
|
Alberto Galego
|
261,000
|
|
December 17, 2001
|
Éric Haché
|
261,000
|
|
December 17, 2001
|
Philippe Beauchamp
|
43,500
|
|
December 17, 2001
|
Denis Corriveau
|
43,500
|
|
December 17, 2001
|
Paul Dionne
|
174,000
|
|
December 17, 2001
|
Claude St-Pierre
|
174,000
|
|
January 18, 2002
|
Manon Lessard
|
17,400
|
|
Total:
|
|
1,974,900
|
9 On
January 10, 2007, the Plan was modified so that the sale of substantially
all of the Company’s assets to a third party, Cooper Industries (Electrical)
Inc., be considered an event allowing the exercise of stock options granted
under the Plan.
10 The Company set the fair market value of the share at the date
of granting the stock options at $0.20 per share.
11 On January 28, 2007, some of the employees holding stock
options exercised their right under the Plan.
12 On January 28, 2007, the Company distributed shares among
nine (9) employees at $0.20 per share as follows:
|
Employee
|
Shares
|
Price/Share
|
Total
|
|
Manon
Lessard
|
17,400
|
$0.20
|
$3,480
|
|
Denis
Corriveau
|
43,500
|
|
$8,700
|
|
Philippe Beauchamp
|
43,500
|
|
$8,700
|
|
Rémi Dutil
|
130,500
|
|
$26,100
|
|
Mario Montminy
|
261,000
|
|
$52,200
|
|
Alberto Galego
|
261,000
|
|
$52,200
|
|
Jacques Benoît
|
261,000
|
|
$52,200
|
|
Éric Haché
|
261,000
|
|
$52,200
|
|
Serge Latulippe
|
348,000
|
|
$69,600
|
|
|
1,626,900
|
|
$325,380
|
13 On
January 28, 2007, these employees sold the Class A shares of the capital
stock of the Company, which they held to 9135‑8184 Québec inc. at a price
of $1.2583 per share for a total of:
|
Employee
|
Shares
|
Price/Share
|
Total
|
|
Manon Lessard
|
17,400
|
$1.2583
|
$21,894
|
|
Denis Corriveau
|
43,500
|
|
$54,736
|
|
Philippe Beauchamp
|
43,500
|
|
$54,736
|
|
Rémi Dutil
|
130,500
|
|
$164,208
|
|
Mario Montminy
|
261,000
|
|
$328,416
|
|
Alberto Galego
|
261,000
|
|
$328,416
|
|
Jacques Benoît
|
261,000
|
|
$328,416
|
|
Éric Haché
|
261,000
|
|
$328,416
|
|
Serge Latulippe
|
348,000
|
|
$437,888
|
|
|
1,626,900
|
|
$2,047,128
|
14 The Company
sold all of its assets on January 26, 2007.
15 For the 2007 taxation year, the appellants received and reported
a taxable benefit from employment computed based on proceeds of disposition of
$1.2583 and an adjusted cost base of $0.20.
16 For the 2007 taxation year, the appellants claimed deductions
corresponding to 50% of the taxable benefits in accordance with the provisions
of paragraph 110(1)(d) of the Act, the taxable benefit and
deduction claimed by each appellant being as follows:
|
Employee
|
Shares
|
Taxable benefit
|
110(1)(d) deduction
|
|
Philippe Beauchamp
|
43,500
|
$46,036
|
$23,018
|
|
Rémi Dutil
|
130,500
|
$138,108
|
$69,054
|
|
Mario Montminy
|
261,000
|
$276,216
|
$138,108
|
|
Alberto Galego
|
261,000
|
$276,216
|
$138,108
|
|
Jacques Benoît
|
261,000
|
$276,216
|
$138,108
|
|
Éric Haché
|
261,000
|
$276,216
|
$138,108
|
|
Serge Latulippe
|
348,000
|
$368,288
|
$184,144
|
17 During the
audit phase, the Agency set the fair market value of the share at the date of
granting the stock options at $0.415 per share.
18 On or about November 16, 2010, the Minister of National
Revenue (the Minister) issued a reassessment for the 2007 year against the
appellants, disallowing the deduction claimed under paragraph 110(1)(d)
of the Act.
19 On or about December 10, 2010, the appellants filed notice
of objection with the Minister concerning the reassessments issued for the 2007
taxation year.
20 During the objection phase, the Agency set the fair market value
of the share at the date of granting the stock options at $0.3246 per share.
21 On February 27, 2012, the Minister upheld the reassessments.
B. Corporate status and
capital stock of Cybectec
[10]
Cybectec was created in 1980 by four
individuals, including Jean‑Louis Pâquet and Yves Racine. The two other
founding shareholders of Cybectec left the Company shortly after its creation.
[11]
Up to the time of the Company’s sale in 2007,
Mr. Pâquet and Mr. Racine held equal shares of Cybectec.
Mr. Pâquet was the president of Cybectec. He was an engineer and
contributed actively to the technical aspects of projects. Mr. Racine was
the vice-president of Cybectec and was responsible for business development and
company operations.
[12]
On May 2, 1998, Cybectec entered into a
crystallization transaction so that Mr. Pâquet and Mr. Racine could
use their capital gains exemptions. In 1998, prior to the crystallization transaction,
Cybectec had issued 200 Class A common shares and 12 Class D shares. As part of the transaction,
Mr. Pâquet and Mr. Racine each disposed of 13 Class A shares in
consideration of 13 Class C shares redeemable for $32,000 at the option of the
holder.
[13]
Following at transaction, 174 Class A shares
remained issued and in circulation. These 174 Class A shares were then split,
resulting in 17,400,000 Class A shares. Taking into account the number of
shares resulting from the split, each Class A share was valued at $0.32 at the
time of the crystallization transaction.
It is important to note that at the time of the crystallization transaction, no
official valuation of the fair market value of the shares had been carried out.
The value of the shares had been determined internally by Cybectec’s longtime
accountant, Mr. Legros.
[14]
Prior to December 1, 2003, Cybectec was
controlled by Mr. Pâquet and Mr. Racine through portfolio companies.
Mr. Pâquet’s portfolio company, 2755‑5952 Québec inc., held 50% of
the shares of Cybectec, and Mr. Racine’s company, 2755‑5945 Québec
inc., held the other 50%.
[15]
Following this transaction and the creation of
9135‑8184 Québec inc., the latter became holder of the shares of Cybectec
effective December 1, 2003.
The corporate structure of Cybectec was as follows:
C. The evolution of the Activities
and the customer base of Cybectec
[16]
The breakdown of Cybectec’s activities between
the provision of custom software development services and semi-standardized
product design has evolved over the years. Until 1999, Cybectec allocated 100%
of its efforts to custom software development.
This ratio then began to decrease, falling to 80% by mid-2001.
[17]
Cybectec billed its customers on a flat-fee
basis for its custom software development services and on an hourly basis for
software maintenance tasks.
For larger projects extending over multiple years, Cybectec billed as it
reached designated milestones as arranged in advance with each customer.
[18]
Mr. Pâquet testified that between 1993 and
2000, Cybectec’s contracts typically ranged in value between $10,000 and
$100,000. The Company also won a smaller number of large-scale (more than
$1,000,000) contracts, including contracts with its main customer, Hydro‑Québec. The majority of contracts
were won through a bidding process.
[19]
Around 1994, Hydro‑Québec commissioned
Cybectec to modernize the IT systems at several hundred control centres
throughout its electricity network. Cybectec proposed an innovative system
called a multiprotocol system (MPS) to modernize Hydro‑Québec’s IT
infrastructure.
It is important to note that Hydro‑Québec held the intellectual property
rights to this MPS, while Cybectec was responsible for designing the system.
[20]
Sometime during 1998, the supplier of the data
processing hardware used to operate the MPS stopped manufacturing said
hardware.
That was a devastating turn of events for Cybectec, as that data processing
hardware was a critical component for running the software Cybectec had
developed. As a result of that setback, Cybectec had to develop new software
for Hydro‑Québec at its own cost.
In this context, Cybectec assumed ownership, for the first time, of the
intellectual property rights to data processing hardware operating with a system
referred to henceforth as MPS2.
[21]
In late 1999, Hydro One in Ontario
expressed its interest to Cybectec in acquiring software similar to the MPS
developed for Hydro‑Québec. Subsequent to an international tender
process, Hydro One awarded the contract to Cybectec. In 2000, Cybectec
started working on this project for Hydro One.
[22]
The primary difference between the contract
signed with Hydro‑Québec and that signed with Hydro One is that
Hydro One was not willing to cover the entire cost of software
development. Cybectec consequently agreed to deliver the software. This was in
keeping with Cybectec’s business plan in terms of growing sales and services
relating to generic products in order to reduce its dependence on negotiating
specific development contracts with its customers.
[23]
Around the same time, that is, in late 1999 or
early 2000, Hydro‑Québec awarded Cybectec a large-scale contract to
supply load control devices.
The role of a load control device in an electrical transmission system is to
take stress off the system during peak demand periods to help prevent power
outages. This type of system requires use of a specific hardware component
along with software to link the component to the transmission system.
[24]
In the light of the complexity of the
integration software for the load control device, Hydro‑Québec wanted
Cybectec to also supply the hardware. Cybectec initially bought the hardware
from GenTech, a load control device manufacturer, and resold it at a profit to
Hydro‑Québec for a fixed price including the development costs of the
integration software.
[25]
The load control device supply contracts were
signed for a renewable two-year period and involved the provision of 25 to 30
devices per year.
[26]
During his testimony, Mr. Pâquet stated
that in 2001, Cybectec was not expecting to get any new large-scale contracts
for custom software development.
D. Stock
option plan for Class A shares
[27]
On May 1, 2001, Cybectec’s board of
directors, made up of Mr. Pâquet and Mr. Racine, adopted a resolution
authorizing the establishment of a stock option plan for the Company’s officers
and management employees (“employees”). Fierce competition for workers
specializing in industrial IT and issues with staff turnover led Cybectec to
put this stock option plan in place to improve retention of key employees.
Under this plan, Cybectec would issue Class A shares to its employees at
the fair market value of the shares as determined by the board of directors at
the time of granting the options.
[28]
On December 17, 2001, Cybectec granted
stock options to the appellants under the stock option plan.
[29]
All of the appellants, with the exception of
Philippe Beauchamp, held technical positions and had been working for the
Company for at least 10 years at the time of the granting of the stock options. Mr. Beauchamp worked in
the sales department and had been with the Company for only a few years. This
explains the fact that he was granted a lesser number of stock options.
[30]
The agreement adopted on May 1, 2001,
governing the stock option plan stipulated that the stock options could not be
exercised until the occurrence of either of the events described in
sections 7.2 and 7.3, which provided as follows:
7.2 [translation]
Any options granted under the Plan may not be exercised until the occurrence of
one of the following events:
7.2.1 A public offering
by the Company followed immediately by listing of Class A shares of the capital
stock of the Company on a recognized stock exchange;
7.2.2 The sale of
all shares of the capital stock of the Company issued in all classes and in
circulation.
7.3 Any options granted under the Plan may
also be exercised on the tenth anniversary of the date of their granting if
neither of the events set out in articles 7.2.1 or 7.2.2 has occurred
before the tenth anniversary. . . .
[31]
Based on Mr. Pâquet’s testimony, in the light
of the absence of any plans for an initial public offering or to sell all
shares of the capital stock, exercising the options after 10 years appeared the
most likely route.
[32]
In 2007, Cybectec received an unsolicited offer
from Cooper Industrial Electrical Inc. (“Cooper”) to purchase all shares it had
issued. For taxation reasons, however, Cooper sought to buy substantially all
of Cybectec’s assets. In the light of this situation, Cybectec’s board of
directors had to clarify the conditions governing the exercise of options. That
clarification was necessary because article 7.2.2 of the Plan covered the
sale of shares of Cybectec but not the sale of substantially all of its assets.
[33]
Mr. Pâquet and Mr. Racine found it
unfair not to allow management employees—the appellants—to exercise their stock
options on technical grounds.
[34]
On January 10, 2007, Cybectec’s board of
directors passed a written resolution authorizing employees with options under
the stock option plan to exercise their options. Pursuant to this resolution,
the sale of substantially all of Cybectec’s assets to Cooper constituted an
event enabling the exercise of options under article 7.2.2 of the Plan.
[35]
Also on January 10, 2007, Mr. Pâquet
and Mr. Racine, the officers of Cybectec, forwarded a letter to each of
the appellants stating, in particular:
[translation]
CYBECTEC INC.
730 Commerciale Street
Suite 200
St-Jean-Chrysostome,
Quebec G6Z 2C5
January 10, 2007
Employee
c/o CYBECTEC INC.
730 Commerciale Street
Suite 200
St-Jea[sic]-Chrysostome, Quebec G6Z 2C5
Subject: Stock
option plan for officers and management employees (the “Plan”)
Dear Sir,
In accordance with
the provisions of a resolution passed by the company’s board of directors on
January 10, 2007, the Company has deemed that subsequent to settlement of
the transaction involving the sale of substantially all of the company’s assets
to Cooper Industries (Electrical) Inc. scheduled to take place on or about
January 30, 2007, you will have the right to exercise the stock options
granted to you under the Plan on December 17, 2001.
Subject to successful completion of the
transaction, you will consequently be able to exercise these options at the
price and under the terms and conditions prescribed in the Plan.
Upon issue of the shares underlying the
options you have exercised, you undertake to sell these shares immediately
pursuant to your commitments regard under the terms of the “Beneficiary
Declarations and Commitments” document you signed on December 17, 2001, at
the time of the granting of your options.
The sale will be transacted with 9135‑8184
Québec inc., which on that date will acquire all [number of shares] issued to
you at the price of $1.2583 per share for a total of [amount].
. . .
Lastly, you hereby authorize 9135‑8184
Québec inc. to withhold, from the sale price of the shares issued to you upon
exercising your stock options, an amount corresponding to the strike price of
your options and to forward it on your behalf to the company as payment of the
share issue price.
CYBECTEC INC.
By: Jean-Louis Pâquet
By: Yves Racine
[36]
All of the appellants approved and signed this
letter, thereby agreeing to sell their shares to 9135‑8184 Québec inc., a
company related to Cybectec inc.
[37]
On January 28, 2007, Cybectec’s board of
directors passed a written resolution confirming that the employees had
exercised their stock options on January 28, 2007, and that the shares had
been issued to the appellants at a price of $0.20 per share in accordance with
the terms and conditions of the Plan.
[38]
On January 28, 2007, the board of directors
of 9135‑8184 Québec inc. passed a written resolution authorizing the
company to purchase the Class A shares held by designated Cybectec
employees—the appellants—at a price of $1.2583 per share for a grand total of
$1,626,900.
III. Issues
[39]
In computing their income for the 2007 taxation
year, were the appellants entitled to deduct, under paragraph 110(1)(d)
of the Act, half of the benefit received under the stock option plan?
[40]
To address this question, we must examine the
following two questions:
-
Were the shares of Cybectec prescribed shares
under section 6204 of the Regulations?
-
Was the price paid by the appellants, or $0.20
per share, no less than the fair market value of the shares on the date the
stock options were granted (December 17, 2001)?
IV. Applicable law and legal analysis
[41]
The provisions applicable to the present case
are subsections 7(1) and 7(1.1) and paragraphs 110(1)(d) and
110(1)(d.1) of the Act, and section 6204 of the Regulations.
[42]
Subject to subsections 7(1.1) and 7(8) of
the Act, subsection 7(1) is applicable to taxpayers where a corporation
agrees to sell shares of its capital stock to its employees. Employees
acquiring shares of their employer under a stock option plan in this manner are
generally required to report, as employment income for the taxation year in
which they received the shares, an amount corresponding to the benefit
received.
[43]
However, subsection 7(1.1) of the Act
defers taxation for employees of a Canadian-controlled private corporation
(CCPC), making the reference the taxation year in which they dispose of their
shares. Therefore, taxpayers may defer taxation of the amount of the benefit
received under the stock option plan to the time of disposition of the shares.
[44]
The counterpart of section 7 is the
deduction of half of the taxable benefit, which simulates the effect of
a capital gain. Deductions relating to stock option plans are set out in
paragraphs 110(1)(d) and 110(1)(d.1) of the Act. These
deductions significantly reduce the tax burden on employees, but employees are
not automatically eligible.
[45]
In the light of the facts of this case,
paragraph 110(1)(d.1) of the Act is of no assistance to the
appellants, since one of the conditions for application of this paragraph is
that the appellants must have held their shares for at least two years
subsequent to their acquisition. In this appeal, the shares of Cybectec were
acquired by the appellants on January 28, 2010, and sold that same day.
Insofar as the requirement concerning the holding period was not fulfilled,
paragraph 110(1)(d.1) of the Act is of no use to the appellants.
[46]
To be able to deduct half of the benefit, the appellants
must consequently invoke paragraph 110(1)(d) of the Act.
[47]
The conditions provided for under
paragraph 110(1)(d) of the Act are as follows:
1. The
securities must be prescribed shares under section 6204 of the Regulations
at the time of their sale or issue;
2. The
amount paid by the taxpayer to acquire the shares must be no less than the fair
market value of the shares at the time of their granting;
3. Immediately
following conclusion of the agreement, the taxpayer must be dealing at arm’s
length with the employer or other corporation issuing the shares.
[48]
In this case, the third condition under
paragraph 110(1)(d) of the Act is satisfied. The appellants are
dealing at arm’s length with Cybectec.
[49]
With respect to the first condition, the
appellants must show that the shares of Cybectec are prescribed shares under
subsection 6204(1) of the Regulations.
[50]
Regarding the second condition, the appellants
must establish that the price paid to acquire the shares of Cybectec, or $0.20
per share, is no less than the fair market value at the time of granting the
options (on December 17, 2001).
1)
Are the shares of Cybectec prescribed shares
under subsection 6204(1) of the Regulations?
A. Position of the parties
[51]
The respondent argues that the shares in
question are not prescribed shares because the appellants have not met the
conditions set out in paragraph 6204(1)(b) of the Regulations, which
provides that “the corporation or a specified person in relation to the
corporation cannot reasonably be expected to, within two years after the time
the share is sold or issued, as the case may be, redeem, acquire or cancel the
share in whole or in part.” I will refer to the requirement in
paragraph 6204(1)(b) as the “two-year reasonable expectation.”
[52]
The appellants acknowledge that the two-year
reasonable expectation is not met because when Cybectec issued the shares, the
corporation related to Cybectec, 9135‑8184 Québec inc., had already
agreed to purchase the appellants’ shares. When the shares were issued, the
related corporation consequently expected that the shares would be purchased.
[53]
However, the appellants argue that in the light
of the exception set out in paragraph 6204(2)(c) of the
Regulations, the shares of Cybectec are prescribed shares. The appellants
submit that they did not have to hold their shares for two years.
[54]
The appellants submit in this regard that
subsection 6204(2) of the Regulations allows exceptions and that these
exceptions are applicable to all of subsection 6204(1), including
paragraph 6204(1)(b), not only to certain paragraphs of
subsection 6204(1) as argued by the respondent. The appellants argue that
their interpretation of subsection 6204(2) is confirmed in the opening
provisions, which read as follows in English and French:
6204(2) Pour l’application du paragraphe (1)
:
6204(2) For the purposes of subsection (1),
[55]
According to the appellants,
paragraph 6204(2)(c) of the Regulations disregards the two-year
reasonable expectation prescribed in paragraph 6204(1)(b) of the
Regulations. According to the appellants, if Parliament had wanted to limit
application of subsection 6204(2) to certain paragraphs of
subsection 6204(1), then the introductory paragraph in
subsection 6204(2) would have specified, “for the purposes of
paragraph 6204(1)(a).”
[56]
Therefore, the appellants argue that if
taxpayers meet the conditions set out in paragraph 6204(2)(c) of
the Regulations, they do not have to meet the condition set out in
paragraph 6204(1)(b) with respect to the two-year reasonable
expectation.
[57]
In this regard, the appellants submit that they
meet all conditions listed in subparagraphs 6204(2)(c)(i), (ii) and
(iii) and clause 6204(2)(c)(ii)(B) of the Regulations.
Consequently, the appellants assert that the shares of Cybectec are prescribed
shares under section 6204 of the Regulations and that the first condition
in paragraph 110(1)(d) of the Act is therefore met.
[58]
The appellants argue further that the stock
option plan was implemented to assist in retaining the officers and management
employees of Cybectec; hence, there is no compensation in disguise. Thus,
according to the appellants, the stock option plan does not infringe upon
taxation policy governing stock option plans. In this regard, the appellants
cite Janette Pantry
concerning the purpose of section 6204 of the Regulations:
[translation] Section 6204 of the Regulations sets out the applicable
requirements concerning prescribed shares. Essentially, the shares must be “plain
vanilla common” shares. The purpose of section 6204 is to ensure that the
employees granted stock options and qualifying for a tax rate corresponding to
that applicable to capital gains acquire their stock options in circumstances
where the value of the shares in question is not guaranteed to increase. For
example, employees should not be eligible for the deduction for stock options
where the salary or other compensation they would normally receive is replaced by
options to acquire shares designed to increase in value . . .
[59]
As for, the respondent, it is argued that the
interpretation of subsections 6204(1) and 6204(2) of the Regulations
offered by the appellants is incorrect.
[60]
The respondent submits that subsection 6204(2)
of the Regulations applies only to certain paragraphs of
subsection 6204(1). According to the respondent, reading
subsections 6204(1) and 6204(2) of the Regulations as a whole confirms
that interpretation.
[61]
For example, the respondent notes that
paragraph 6204(2)(a) of the Regulations applies only to
subparagraph 6204(1)(a)(i). Paragraph 6204(2)(b),
meanwhile, applies only to subparagraph 6204(1)(a)(ii). The
respondent notes further that none of the paragraphs in subsection 6204(2)
apply to subparagraphs 6204(1)(a)(iii) or (v).
[62]
With respect to paragraph 6204(2)(c)
of the Regulations, the respondent argues that this paragraph applies only to
subparagraphs 6204(1)(a)(iv) and 6204(1)(a)(vi).
Paragraph 6204(2)(c) can be used to disregard the rights and duties
provided for in subparagraphs 6204(1)(a)(iv) and 6204(1)(a)(vi).
For example, if a corporation has the right to redeem shares under,
paragraph 6204(2)(c) this redemption right can be disregarded if
all of the conditions prescribed in that paragraph are met.
[63]
The respondent also notes that the relevant
provisions, i.e., paragraphs 6204(1)(a) and 6204(1)(c) and
subparagraphs 6204(1)(a)(iv) and 6204(1)(a)(vi) of the
Regulations, all use the same wording. They all refer to rights or duties
arising from the terms or conditions of the share or any agreement in respect
of the share or its issue.
[64]
According to the respondent,
paragraph 6204(1)(b) of the Regulations makes no reference to
rights or duties arising from the terms or conditions of the share or any
agreement in respect of the share or its issue. The respondent submits that
paragraph 6204(1)(b) raises a factual question: could it be
reasonably expected that the shares would be acquired or redeemed within two
years following their issue? As a result, paragraph 6204(2)(c)
cannot be used to disregard the two-year reasonable expectation.
[65]
The respondent argues that if the facts had
established that Cybectec or 9135‑8184 Québec inc. could not, at the
date of issue of the shares, reasonably expect that the related corporation
would purchase the appellants’ shares within two years following the issue of
the shares, then the criterion in paragraph 6204(1)(b) would be
met.
[66]
However, the respondent submits that in the
circumstances at hand, neither Cybectec nor 9135‑8184 Québec inc. could
reasonably expect the shares not to be redeemed within two years following
their issue by Cybectec. In this regard, the appellants had signed an agreement
prior to the issue of the shares under which 9135‑8184 Québec inc.
committed to buying the appellants’ shares on the same date as the issue of the
shares, January 28, 2007.
[67]
The respondent submits that in the present case,
the appellants do not meet the criterion in paragraph 6204(1)(b) of
the Regulations. The respondent argues that insofar as the shares of Cybectec
were not prescribed shares within the meaning of subsection 6204(1) of the
Regulations, the appellants are not eligible for the deduction provided for in
paragraph 110(1)(d) of the Act.
B.
Analysis
[68]
The parties stated at the hearing that there was
no case law concerning the interaction of paragraphs 6204(1)(b) and
6204(2)(c) of the Regulations as to whether paragraph 6204(2)(c)
can be used to eliminate from consideration the two-year reasonable expectation
in paragraph 6204(1)(b). To determine this question, I will turn to
the doctrine of the Supreme Court of Canada as to the interpretation of tax laws. In Canada Trustco Mortgage
Co. v. Canada, [2005] 2 S.C.R. 601, 2005 SCC 54 (CanLII), at
paragraph 10, the Supreme Court of Canada sets out how the tax laws are to
be interpreted:
. . . The interpretation of a statutory
provision must be made according to a textual, contextual and purposive
analysis to find a meaning that is harmonious with the Act as a whole. When the
words of a provision are precise and unequivocal, the ordinary meaning of the
words play a dominant role in the interpretive process. On the other hand,
where the words can support more than one reasonable meaning, the ordinary
meaning of the words plays a lesser role. The relative effects of ordinary
meaning, context and purpose on the interpretive process may vary, but in all
cases the court must seek to read the provisions of an Act as a harmonious
whole.
[69]
At paragraph 13, the Supreme Court states that “the
Income Tax Act remains an instrument dominated by explicit provisions
dictating specific consequences, inviting a largely textual interpretation.” On
the other hand, “where the words of a statute give rise to more than one
reasonable interpretation, the ordinary meaning of words will play a lesser
role, and greater recourse to the context and purpose of the Act may be
necessary.”
[70]
I will first analyze subsections 6204(1)
and 6204(2) of the Regulations and thereby use a textual approach and then use
an approach placing greater emphasis on the context and purpose of the Act.
[71]
On reading subsections 6204(1) and 6204(2)
of the Regulations, it is noted that subsection 6204(2) is a rule of
application. As such, subsection 6204(2) may be used to disregard certain
rights, conditions and obligations set out in certain paragraphs of
subsection 6204(1).
[72]
Subsection 6204(1) of the Regulations
defines what constitutes a prescribed share. It provides as follows:
6204 (1) For
the purposes of subparagraph 110(1)(d)(i) of the Act, a share is a
prescribed share of the capital stock of a corporation at the time of
its sale or issue, as the case may be, if, at that time,
(a) under the terms or conditions of the share or any agreement in
respect of the share or its issue,
(i) the amount of the dividends (in this section referred to as the “dividend
entitlement”) that the corporation may declare or pay on the share is not
limited to a maximum amount or fixed at a minimum amount at that time or at any
time thereafter by way of a formula or otherwise,
(ii) the amount (in this section referred to as the “liquidation
entitlement”) that the holder of the share is entitled to receive on the share
on the dissolution, liquidation or winding-up of the corporation is not limited
to a maximum amount or fixed at a minimum amount by way of a formula or
otherwise,
(iii) the share cannot be converted into any other security, other
than into another security of the corporation or of another corporation
with which it does not deal at arm’s length that is, or would be at the date of
conversion, a prescribed share,
(iv) the holder of the share cannot at that time or at any time
thereafter cause the share to be redeemed, acquired or cancelled by the
corporation or any specified person in relation to the corporation, except
where the redemption, acquisition or cancellation is required pursuant to a
conversion that is not prohibited by subparagraph (iii),
(v) no person or partnership has, either absolutely or contingently, an
obligation to reduce, or to cause the corporation to reduce, at that time or at
any time thereafter, the paid-up capital in respect of the share, except
where the reduction is required pursuant to a conversion that is not prohibited
by subparagraph (iii), and
(vi) neither the corporation nor any specified person in relation to
the corporation has, either absolutely or contingently, the right or
obligation to redeem, acquire or cancel, at that time or any later time,
the share in whole or in part other than for an amount that approximates
the fair market value of the share (determined without reference to any such
right or obligation) or a lesser amount;
(b) the
corporation or a specified person in relation to the corporation cannot
reasonably be expected to, within two years after the time the share is sold or
issued, as the case may be, redeem, acquire or cancel the share in whole or in
part, or reduce the paid-up capital of the corporation in respect of the share,
otherwise than as a consequence of
(i) an amalgamation of a subsidiary wholly-owned corporation,
(ii) a winding-up to which subsection 88(1) of the Act applies, or
(iii) a
distribution or appropriation to which subsection 84(2) of the Act applies; and
(c) it cannot reasonably be expected that any of the terms or
conditions of the share or any existing agreement in respect of the share or
its sale or issue will be modified or amended, or that any new agreement in
respect of the share, its sale or issue will be entered into, within two years
after the time the share is sold or issued, in such a manner that the share
would not be a prescribed share if it had been sold or issued at the time of
such modification or amendment or at the time the new agreement is entered
into.
[My emphasis.]
[73]
For the purposes of the deduction described in
paragraph 110(1)(d) of the Act, the opening words of
subsection 6204(1) of the Regulations are what determine the relevant time
at which a share is considered a prescribed share, that is, on the date of its
sale or issue, as applicable. In that subsection, the sale of the share means
the sale of the share by the corporation to its employee. In this case, the
date of the sale and issue of the shares in favour of the appellants was
January 28, 2007. The relevant date under subsection 6204(1) is
consequently January 28, 2007.
[74]
A share is a prescribed share under
subsection 6204(1) of the Regulations if the conditions in
paragraphs 6204(1)(a), 6204(1)(b) and 6204(1)(c) are
met.
[75]
Under paragraph 6204(1)(a), the
shares are prescribed shares if, under the terms or conditions of the shares or
any agreement in respect of the shares or their issue, the shares do not have
any conditions or restrictions attached thereto. One expression frequently used
in defining prescribed shares is “plain vanilla common shares.”
[76]
The shares must also meet the criteria in
paragraph 6204(1)(b) of the Regulations with respect to the
two-year reasonable expectation. If, on the date of issue of the shares, it
could not reasonably be expected, in the light of the facts found, that the
shares would be redeemed by the corporation or a related corporation within two
years following their issue, then the requirement in paragraph 6204(1)(b)
is met.
[77]
The requirement in paragraph 6204(1)(b)
is also met if the corporation undertook an amalgamation of a subsidiary
wholly-owned corporation, a winding-up under section 88 of the Act or a
distribution subject to subsection 84(2) of the Act.
[78]
As for Paragraph 6204(1)(c), it
seeks to prevent circumvention of paragraph 6204(1)(a) by way of
amendment of the terms and conditions of the share subsequent to its sale or
issue. In other words, if, during the two years following the sale or issue of
the shares, it can be reasonably expected that the terms or conditions of the
share will be amended or that a new agreement will be negotiated such that the
share would not have been a prescribed share had it been sold or issued on the
date of amendment or of the new agreement, then the share is not a prescribed
share. In the case at hand, the conditions of this paragraph are met in that
the agreement governing the shares of Cybectec was not amended after the shares
were issued.
[79]
As stated previously, the appellants have
acknowledged, and rightly so in my opinion, that they did not meet the two-year
reasonable expectation under paragraph 6204(1)(b) of the
Regulations. The evidence has shown that when the appellants’ shares were
issued by Cybectec, the related corporation, 9135‑8184 Québec inc.,
knew that it would be buying the shares. The agreements between the appellants,
Cybectec and 9135‑8184 Québec inc. do not leave any doubt. Despite this,
the appellants argue that their shares are prescribed shares under
paragraph 6204(2)(c), which the respondent contests.
[80]
Before addressing the issue of whether
paragraph 6204(2)(c) disregards paragraph 6204(1)(b),
it is important to understand the interaction between subsections 6204(1)
and 6204(2).
[81]
For example, under subparagraph 6204(1)(a)(i)
of the Regulations, a share is prescribed if “the amount of the dividends (in
this section referred to as the ‘dividend entitlement’) that the corporation
may declare or pay on the share is not limited to a maximum amount or fixed at
a minimum amount.” Paragraph 6204(2)(a) clarifies that condition by
providing that the dividend entitlement of a share of the capital stock of a
corporation shall be deemed not to be limited to a maximum amount or fixed at a
minimum amount where it may reasonably be considered that all or substantially
all of the dividend entitlement is determinable by reference to the dividend entitlement
of another share of the capital stock of the corporation that meets the
requirements of subparagraph 6204(1)(a)(i). Clearly, then,
paragraph 6204(2)(a) serves to clarify the application of
subparagraph 6204(1)(a)(i).
[82]
As for, subparagraph 6204(1)(a)(ii)
of the Regulations, it provides that a share is prescribed if the holder’s
liquidation entitlement on the dissolution, liquidation or winding-up of the
corporation is not limited to a maximum amount or fixed at a minimum amount.
Paragraph 6204(2)(b) clarifies that condition by providing that the
liquidation entitlement of a share of the capital stock of a corporation shall
be deemed not to be limited to a maximum amount or fixed at a minimum amount
where it may reasonably be considered that all or substantially all of the
liquidation entitlement is determinable by reference to the liquidation
entitlement of another share of the capital stock of the corporation that meets
the requirements of subparagraph 6204(1)(a)(ii). Clearly, then, paragraph 6204(2)(b)
serves to clarify the application of subparagraph 6204(1)(a)(ii).
[83]
As for subparagraph 6204(1)(a)(iv)
of the Regulations, it provides that a share is prescribed if the holder cannot
cause the share to be redeemed, acquired or cancelled by the corporation or any
specified person in relation to the corporation. Paragraph 6204(2)(c)
may be used to disregard these rights or obligations by providing that “the
determination of whether a share of the capital stock of a particular
corporation is a prescribed share shall be made without reference to a right or
obligation to redeem, acquire or cancel the share, or to cause the share to be
redeemed, acquired or cancelled.”
For example, even if a share has an attached term or condition whereby a holder
may force the corporation to redeem the share, paragraph 6204(2)(c)
may be used to disregard this redemption right if the conditions set out in
paragraph 6204(2)(c) are met.
[84]
As for subparagraph 6204(1)(a)(vi), it
provides that a share is prescribed if neither the corporation nor any
specified person in relation to the corporation has, either absolutely or
contingently, the right or obligation to redeem, acquire or cancel the share.
Paragraph 6204(2)(c), which provides that “the determination of
whether a share of the capital stock of a particular corporation is a
prescribed share shall be made without reference to a right or obligation to
redeem, acquire or cancel the share, or to cause the share to be redeemed,
acquired or cancelled,” disregards these rights and obligations. For example,
in the present case, despite the fact that the related corporation may acquire
the appellants’ shares under an agreement to that effect,
paragraph 6204(2)(c) disregards that acquisition right. In other
words, paragraph 6204(2)(c) may be used to esclude from
consideration the corporation’s right or obligation to redeem, acquire or
cancel the share if the conditions set out in paragraph 6204(2)(c)
are met.
[85]
In the light of the foregoing, there is a
logical connection, a central thread, between the paragraphs of
subsection 6204(2) of the Regulations, which apply to the subparagraphs of
subsection 6204(1).
[86]
Contrary to the appellants’ assertions, I am of
the view that subsection 6204(2) of the Regulations does not apply to
subsection 6204(1) as a whole. Here is my explanation.
[87]
It is clear that paragraphs 6204(2)(a)
and 6204(2)(b) do not apply to subparagraphs 6204(1)(a)(iii)
and 6204(1)(a)(v). There is no logical connection between these
provisions. It is also evident that paragraph 6204(2)(c) of the
Regulations may not be used to disregard the conditions in
subparagraphs 6204(1)(a)(iii) and 6204(1)(a)(v).
Paragraph 6204(2)(c) may be used to disregard the right or
obligation to redeem, acquire or cancel a share or to cause the share to be
redeemed, acquired or cancelled, whereas subparagraph 6204(1)(a)(iii)
refers to conversion rights and subparagraph 6204(1)(a)(v) refers
to the reduction of paid-up capital. No logical connection exists between
paragraph 6204(2)(c) and subparagraphs 6204(1)(a)(iii)
and 6204(1)(a)(v).
[88]
In the light of the foregoing, the paragraphs of
subsection 6204(2) accordingly apply to the paragraphs of subsection
6204(1) through the existence of a logical connection.
[89]
It is now to be determined whether
paragraph 6204(2)(c) applies to paragraph 6204(1)(b),
that is, whether it disregards the two-year reasonable expectation.
[90]
The respondent has not disputed the appellants’
fulfilment of the conditions set out in paragraph 6204(2)(c),
specifically in subparagraphs 6204(2)(c)(i), (ii) and (iii), of the
Regulations. In any case, I am of the view of that the evidence has shown that
the conditions set out in subparagraphs 6204(2)(c)(i) and 6204(2)(c)(iii)
and clause 6204(2)(c)(ii)(B) of the Regulations are met.
[91]
As I have determined previously in
paragraphs 83 and 84 herein, paragraph 6204(2)(c) may be used
to disregard the conditions in subparagraphs 6204(1)(a)(iv) and
6204(1)(a)(vi), that is, the right or obligation to redeem, acquire or
cancel the share or cause the share to be redeemed, acquired or cancelled.
[92]
However, I am of the view of that
paragraph 6204(2)(c) of the Regulations does not apply to
paragraph 6204(1)(b). In other words, paragraph 6204(2)(c)
cannot be used to disregard the two-year reasonable expectation. My reasons are
as follows.
[93]
In my opinion, although the French version of
paragraph 6204(1)(b) is consistent with the English text of the
Regulations, the English version is more explicit. In English,
paragraph 6204(1)(b) provides as follows:
(b) the corporation or a specified person
in relation to the corporation cannot reasonably be expected to, within
two years after the time the share is sold or issued, as the case may be, redeem,
acquire or cancel the share in whole or in part, or reduce the paid-up capital
of the corporation in respect of the share, otherwise than as a consequence of
(i) an amalgamation of a subsidiary wholly-owned corporation, (ii) a
winding-up to which subsection 88(1) of the Act applies, or (iii) a
distribution or appropriation to which subsection 84(2) of the Act applies;
[My emphasis.]
[94]
I note upon reading paragraph 6204(1)(b)
of the Regulations that it is not the rights or obligations to redeem, acquire
or cancel the shares that trigger the application of this paragraph but rather
the reasonable expectation that the shares will be redeemed, acquired or
cancelled within two years following their sale or issue.
[95]
Paragraph 6204(1)(b) of the
Regulations raises a factual question: in the present case, did the related
corporation, 9138‑5184 Québec inc., expect, when the shares
were issued to the appellants, to purchase the shares within two years
following this issue? In this case, the agreements between Cybectec, 9135‑8184 Québec inc.
and the appellants leave no doubt.
[96]
In view of its wording, the sole object of
paragraph 6204(2)(c) of the Regulations is to disregard certain
rights and obligations, notably to redeem, acquire or cancel the share, if all
conditions of paragraph 6204(2)(c) are met. The wording in
paragraph 6204(2)(c) therefore cannot be used to disregard a
factual issue, this being the two-year reasonable expectation in
paragraph 6204(1)(b).
[97]
My conclusion that paragraph 6204(2)(c)
of the Regulations does not disregard paragraph 6204(1)(b) is
confirmed by the fact that paragraph 6204(1)(b) is applicable in
cases where there is no right or obligation to redeem, acquire or cancel the
shares at the time of their issue. For example, if, at the time of issue, a
share is a common share without conditions, then the share is a prescribed
share. However, if the facts show that the corporation knew that it would be
redeeming its employees’ shares within two years following the issue of the
shares, then the share is not a prescribed share, since the expectation that
the share will be redeemed is what triggers paragraph 6204(1)(b)
regardless of whether the share has rights or obligations attached thereto.
This shows that paragraph 6204(2)(c), used to eliminate from
consideration certain rights or obligations, is not relevant to
paragraph 6204(1)(b).
[98]
Moreover, contrary to situations in which there
is a logical connection between the application of subsection 6204(2) of
the Regulations and certain subparagraphs of paragraph 6204(1)(a),
it is difficult to find a logical connection between the factual issue in
paragraph 6204(1)(b), the two-year reasonable expectation, and
paragraph 6204(2)(c), the purpose of which is to disregard the
right or obligation to redeem, acquire or cancel the share or to cause the
share to be redeemed, acquired or cancelled.
[99]
As indicated by Mr. Nickerson on
November 26, 1984, during debate in the House of Commons, the purpose of stock option
plans is to encourage a corporation’s employees to purchase shares so that they
will have a vested interest in that business. In achieving this goal, I am of
the view that employees who agree to participate in this type of plan must also
agree to be exposed to a certain amount of risk, that is, the risk of
fluctuation in the value of their shares.
[100] Parliament opted to extend the same treatment to employees who have
purchased shares from their employer under a stock option plan as to taxpayers
who purchase shares without recourse to a stock option plan and who, at the
time of disposition, pay tax on 50% of the gain. However, the conditions of
section 6204 of the Regulations must be fulfilled.
[101] The tax policy underlying paragraphs 110(1)(d) of the
Act and 6204(2)(b) of the Regulations is to prevent the turning of stock
option plans into forms of additional remuneration and to ensure that the
employees subscribing for these shares are exposed to a certain level of risk.
In my opinion, I would have arrived at the same outcome following a contextual
approach, since it is clear from the legislative context that the two-year
holding period is associated with risk. Indeed, under a stock option plan,
employees do not incur any risk until they exercise their stock options.
Moreover, pursuant to paragraph 110(1)(d), the two-year reasonable
expectation is not applicable if the evidence shows that at the time of issuing
the share, the corporation or related corporation had no expectation to redeem,
acquire or cancel the share as prescribed in paragraph 6204(1)(b).
[102] The appellants argue that some doctrinal authors have criticized the
two-year reasonable expectation requirement in paragraph 6204(1)(b)
of the Regulations. According to these authors, employees of public
corporations do not have to retain their shares for the two-year period. I
understand this criticism. That being said, the two-year period remains part of
current legislation.
[103] The appellants have also shown that subsequent to the sale of the
assets of Cybectec, if the latter had used a different strategy, the shares of
Cybectec would have been prescribed shares. I agree. However, I must analyze
the transaction conducted by Cybectec and brought before me.
[104] In the light of the wording of paragraphs 6204(1)(b) and
6204(2)(c) of the Regulations and the tax policy concerning stock option
plans, I cannot conclude that paragraph 6204(2)(c) disregards the
two-year reasonable expectation provided for in paragraph 6204(1)(b).
[105] Before moving on to the second question, I want to point out that
subsections 6204(1) and 6204(2) are complex technical provisions. I find
it difficult to imagine how anyone running a business would be able to decipher
the mechanism defined in these two subsections. With the growing popularity of
stock option plans, surely the time has come for a reform of these subsections.
2)
Fair market value of shares of Cybectec on
December 17, 2001
[106] Despite my conclusion that the appellants’ shares are not prescribed
shares, I will nonetheless examine the second condition in
paragraph 110(1)(d) of the Act as to whether, in this case, the
price of $0.20 per share paid by the appellants was no less than the fair market
value of the share on the date on which the stock options were granted, or
December 17, 2001.
[107] In this regard, the appellants submitted an expert report prepared
by Mr. Brisson and Mr. Fortin of Fortin Gaignard Groupe Conseil inc.
(FGGC) dated March 24, 2011, hereinafter the “original report.”
Mr. Brisson provided expert testimony concerning the original report. The
respondent, meanwhile, produced an expert report prepared by Ms. Demers of
the CRA dated June 23, 2014. Ms. Demers testified as an expert for
the respondent. In response to the respondent’s report, the appellants produced
a critical report prepared by Mr. Brisson and Mr. Fortin in
August 2014, hereinafter the “critical report.” Mr. Fortin provided
expert testimony concerning the critical report.
[108] I note that the critical report addresses a number of key elements
of the respondent’s expert report. However, the critical report overlooks
entirely certain adjustments made by the respondent. In this regard, the
appellants emphasized that with the exception of the facts expressly
acknowledged,[32]
the critical report’s lack of comments concerning any given fact does not
constitute an admission. As a result, each point of divergence between the
original report and the respondent’s report must be analyzed to determine
whether $0.20 per share corresponded to the fair market value of the Class A
shares on December 17, 2001.
[109] In assessing shares of a corporation, the objective is to determine
the fair market value of the share on a specific date. The phrase “fair market
value” refers to the highest price, expressed in a cash equivalent, that could
be obtained in an unrestricted, free-market transaction between a hypothetical
buyer and seller who were consenting, capable of entering into an agreement,
dealing at arm’s length with each other, free from constraint and reasonably
informed of the relevant facts.
[110] The parties agree to use the representative cash flow capitalization
approach. This valuation method involves determining:
-
the corporation’s representative cash flow
-
an appropriate capitalization rate
-
the discounted value of the undepreciated
capital costs (UCC) of fixed assets and cumulative eligible capital amounts for
intangible assets at the valuation date
-
total surplus assets.
[111]
To facilitate reading, Schedule 2 hereto sets
out the details of each expert’s valuation.
[112] The items on which the experts disagree are as follows:
1) rental income and rental costs
2) professional fees
3) the provision for future billing and the
bill to Hydro One
4) additional scientific
research and experimental development (SR&ED) expenses
5) SR&ED costs
6) payroll increases
7) representative cash flows used
8) interest on additional borrowing capacity
9) multiple used
10) present value of tax savings
11) surplus assets
12) value of development projects
[113]
Schedule 3 sets out my findings concerning the
disputed items. I also took the following facts into my analysis of the fair
market value of shares of Cybectec on December 17, 2001:
-
the sound financial health of Cybectec despite a
decrease in its profit margin since 1998. It is noted that earnings before tax
dropped from $1,245,358 in 1998 to $750,000 in 2001. A decrease in income from
consulting services is consequently also noted;
-
Cybectec’s expertise and sound reputation in the
market;
-
Mr. Pâquet’s and Mr. Racine’s
experience and expertise, although there is also risk associated with Cybectec’s
dependence on its two officers to run all aspects of Cybectec’s operations;
-
economic dependence on one client accounting for
60% to 70% of Cybectec’s sales;
-
the staff turnover rate, and resulting challenge
in fulfilling certain commitments, and the pressure on certain employees’
salaries;
-
the size of the SR&ED tax credits and the
foreseeable loss of these credits for potential buyers;
-
the lack of a major contract in the Company’s
order book in 2001.
A. Analysis
1)
Rental income and rental costs
[114] On testifying, Mr. Racine indicated that Cybectec was renting
approximately 4,000 sq. ft. of space in Montréal. The corporation had
a five-year lease. During the years 1999, 2000 and 2001, Cybectec leased a
space approximately 150 sq. ft. in size to a French IT company.
Cybectec had rental income of $4,000, $5,000 and $6,000 for the years 1999,
2000 and 2001 respectively.
[115] As for the rent Cybectec paid for its offices in Montréal and Québec,
it increased over the same time frame: Cybectec paid $91,229, $121,258 and
$148,415 for the years 1999, 2000 and 2001 respectively.
[116] In the original report, Mr. Brisson reduced earnings before
interest, tax, depreciation and amortization (EBITDA) by $4,000, $5,000 and
$6,000 for 1999, 2000 and 2001 respectively, these amounts corresponding to
Cybectec’s rental income. According to Mr. Brisson, rental income should
be deducted from EBITDA since this is not a recurring item. According to
Mr. Brisson, this income should be disregarded as it cannot be assumed
that a potential buyer would also lease out surplus space to third parties.
[117] Mr. Brisson also adjusted EBITDA for the years 1999 and 2000 by
adding $60,000 and $30,000 respectively to account for an increase in the rent
paid by Cybectec. Mr. Brisson reduced EBITDA for the years 1999 and 2000 as, in
his opinion, the rent paid by Cybectec did not reflect market rates; in other
words, the rent paid by Cybectec in 1999 and 2000 was too low.
[118] I disagree with these adjustments. As Mr. Fortin stated during
his testimony concerning a different matter, when assigning a value to shares
of a corporation, prior years should be adjusted only if the adjustment is
structural, which, in my opinion, does not apply in the present case.
[119] Moreover, the respondent’s expert explained that in general, when a
corporation rents an excessively large space, rent expenses should be decreased
to reflect the amount of space actually used.[33]
This adjustment increases EBITDA. In this case, however, Cybectec rented out
the surplus space.[34]
The sublet income consequently offsets a portion of this excess rent expense.
Rent would logically also have increased from 1999 to 2000 to 2001 since the
number of employees increased: Cybectec grew from 38 employees in 1998 to 52
employees in 2001. As a result, no adjustments need to be made to rental income
or rent costs.
2)
Professional fees
[120] The respondent’s expert, Ms. Demers, added $45,070 and $37,515
to EBITDA for professional fees in relation to the amendment of the shareholder
agreement and establishment of a stock option plan. According to
Ms. Demers, EBITDA should be increased since these expenses are not recurring
and consequently lead to underestimation of earnings.
[121] At the hearing, Ms. Demers stated that she had relied on the
conclusions of the audit report prepared by a colleague, Jean-François Paradis,
in arriving at these adjustments for 2000 and 2001. It is to be noted that
Mr. Paradis did not testify at the hearing. The expert report prepared by
Ms. Demers also contains no reference to the fact that she relied on a
colleague in establishing this adjustment. According to the appellants, the
general ledger contained no record of these professional fees.[35] In Drouin v. The
Queen, 2012 TCC 94, Bédard J. referred to Taylor Estate v. Minister of
National Revenue, 90 DTC 1768 (TCC), in which Judge Couture stated as
follows, at page 1775, concerning the reliability of expert testimony:
[translation] An appraiser may not, in preparing an appraisal to serve as
evidence before a court, accept figures that he or she has not checked or
assume the truth of facts whose accuracy he or she has not verified. An expert
report should be the product of the expert’s personal opinion based on
established facts whose existence has been proved, not on conjecture or
information received from third parties. . . .
[122] An expert may not, in preparing a complete report, rely on a third
party without carrying out the necessary research to justify any adjustments.
Moreover, Ms. Demers should have mentioned this fact in her report. During
her testimony, Ms. Demers did not indicate whether the professional fees
were confirmed subsequent to the audit.
[123] I am of the view that this adjustment concerning professional fees
should be struck. It is impossible for me to determine whether the amounts that
Ms. Demers added are valid. I further accept the appellants’ assertion
that these amounts were not recorded under expenses in the general ledger.
3)
The provision for future billing and the bill to
Hydro One
[124] In her report, Ms. Demers eliminated an adjusting entry
reversing a provision of $22,052 recorded by Cybectec for billing to be
generated on April 30, 2011.[36]
Ms. Demers also added a bill to Hydro One dated June 20, 2001, for
$64,252 for services rendered up to April 20, 2001.[37]
[125] Comments on these adjustments are provided by Ms. Demers in
notes F and G in schedule IV to her expert report. On pages 28 and 29 of her
report, Ms. Demers explained why she made these adjustments:
[translation] The financial statements reviewed were produced by chartered
accountants at Ouellet & Legros as part of a review engagement. A
reservation is noted concerning compliance with generally accepted accounting
principles:
[translation]
Generally accepted accounting principles recommend the preparation of financial
statements on a financial year basis. The corporation records revenue based on
billing, and in this regard the financial statements depart from generally
accepted principles. It is impossible to evaluate the effect of this departure.
Impact on sales, corporate income tax, net earnings or work in progress
consequently cannot be determined.
Although it may be difficult to assess the
financial effect of this departure at this time, it is important to determine
any impact on the income statement and balance sheet.
In this case, outlays relating to contracts
are expenses immediately as they are incurred, whereas sales of services are
recorded only at the time of billing, meaning that the matching principle for
recognizing revenue and expenses is not being respected. The result is
understatement of income during the financial period, a reduced profit margin,
understatement of earnings before tax and the lack of a short-term asset item
for work in progress.
We consequently need to take these aspects
into account when following a valuation method with respect to determining
earnings representative of the Company’s operations.
[126] At the hearing, Mr. Fortin disagreed with these adjustments totalling
approximately $86,000 ($22,052 and $64,252).[38]
On page 13 of the critical report, he notes the following:
[translation]
The CRA cannot arrive at such a conclusion, clearly suggesting that profits and
assets are understated, when the accountant’s report states that the impact
cannot be measured.
As a result of its reasoning, the CRA makes
adjustments in Schedule 5, Table A, increasing earnings for 2001 by
approximately $86,000. This adjustment is inappropriate. To proceed with an
adjustment of this nature, complex calculations applied retroactively to the
start and end of each financial year would have been required. In fact, a
detailed analysis extending over multiple years would have been necessary in
order to determine the impact of the departure.[39]
[127] Ms. Demers relied on the note to the financial statements to
the effect that Cybectec was not following generally accepted accounting
principles (GAAPs) and the fact that Cybectec had been notified previously by
the CRA that it needed to begin complying with GAAPs. However, Ms. Demers
never questioned Mr. Legros, Cybectec’s accountant, Mr. Pâquet or
Mr. Racine about this.[40]
Ms. Demers did not take into account the fact that under the agreement
with Hydro One, Cybectec could submit invoices to Hydro One only after the
latter had approved them. Ms. Demers also did not take into account the
fact that Cybectec had always used cash-based accounting.
[128] Moreover, as Mr. Fortin testified, in order to proceed with
this adjustment, the respondent’s expert should have reviewed the corporation’s
previous financial years to gauge the net effect of the departure at
April 30, 2001.[41]
It is indeed possible and even probable that similar departures occurred in
relation to the year ended April 30, 2000. This would have affected the
value of the adjustment to be made. The net effect of the entries is what
should be considered in computing the proper adjustment.
[129] In the light of my comments, I am of the view that the adjustments
made by Ms. Demers are not justified.
4)
Additional SR&ED expenses
[130] In her expert report, Ms. Demers made adjustments to the
additional scientific research expenses which, in her opinion, would have been
incurred for new product development. These adjustments amounted to $402,665 in
2001 and $84,148 in 2000. These adjustments reduce Cybectec’s operating
expenses, which in turn increases EBITDA. According to Ms. Demers, all of
these SR&ED expenses should have been capitalized.
[131] In her opinion, the facts are clear. Cybectec’s earnings before tax
fell from $1,581,000 in 1999 to $705,000 in 2001, despite the fact that the
Company hired 10 new employees in 2001. According to Ms. Demers, the
decrease in earnings is attributable to the hiring of 10 employees in the area
of new product development.
[132] Also according to Ms. Demers, under paragraph 3450.21 of
the Canadian Institute of Chartered Accountants (CICA) handbook in force in
2001, new product development costs are supposed to be capitalized. To
determine the amounts of the adjustments to be made to the additional SR&ED
expenses for new product development, Ms. Demers used the ratio of
consulting income to direct labour costs. Using data from 1998, Ms. Demers
concluded that direct labour costs represented 28% of consulting income.
Ms. Demers used this value of 28% to arrive at the wage adjustments of
$84,148[42]
for the year 2000 and $402,665 for 2001.
[133] According to Ms. Demers, these adjustments follow the guideline
in paragraph 3450.21 of the CICA handbook. On page 29 of her expert
report, Ms. Demers states as follows:
[translation] Another important aspect relates to development costs due to the
change of direction undertaken by the Company in early 2000; significant costs
were incurred during the year ended April 30, 2001, that were also likely
to generate earnings the following year.
In our opinion, the conditions concerning
the application of paragraph 3450.21 of the CICA handbook were fulfilled
and would have required the carryforward of certain expenses.
Development costs must be carried forward to
future periods if all of the following conditions are met:
The product or process is clearly defined
and the costs attributable thereto can be identified.
The technical feasibility of the product or
process has been established.
The management of the enterprise has stated
its intention to produce and market, or use, the product or process.
The future market for the product or process
is clearly defined or, if it is to be used internally rather than sold, its
usefulness to the enterprise has been established.
Adequate resources exist, or are expected to
be available, to complete the project.
[134] In my opinion, even if I accepted the basis of the adjustments, in
other words, that paragraph 3450.21 of the CICA handbook were applicable
and the method chosen for making these adjustments was justified,
Ms. Demers should have considered the tax credits arising from an
SR&ED application. This would have decreased the amounts of the adjustments
made in 2000 and 2001 by 50% to 60%.
[135] Additionally, with respect to the method chosen for computing the
amounts of these adjustments, Ms. Demers used the ratio of income from
consulting services to direct labour costs for the year 1998. It is to be noted
that 1998 was the most profitable year in Cybectec’s history.[43] Therefore, the use
of this single year as a reference year skews the valuation and the resulting
adjustments. This is all the more true when one observes that the results for
the year 1997 yield a ratio of consulting services to wages of 38% in
comparison to 28% for 1998.
[136] Moreover, in arriving at the ratio of 28%, Ms. Demers assumes
that Cybectec retains the intellectual property rights to all SR&ED
projects it undertakes. Ms. Demers did not take into account the fact that
Cybectec did not hold the intellectual property rights to most of the projects
for which it had applied for SR&ED credits. The development projects were
undertaken by Cybectec under the auspices of its consulting service activities,
with its clients paying for the SR&ED carried out by Cybectec. In addition,
the SR&ED credits were included in the amounts billed to clients.
[137] What is more, contrary to the claims of the respondent’s expert,
Mr. Racine stated that there was no team dedicated to new product
development. All Cybectec employees worked simultaneously on multiple projects.
In this regard, Mr. Racine stated that in 2001, 80% of the work performed
by Cybectec employees was in product development for specific clients through
consulting service activities. These clients retained the intellectual property
rights to the products developed by Cybectec since the clients were covering
the cost of product research and development.
[138] Mr. Racine testified further that although the SR&ED tax
credit applications stated that 10 employees were assigned to a project, these
10 employees were not working full time on that project. The respondent’s
expert concluded based on the SR&ED tax credit applications that Cybectec
had a team of 10 employees working full time on new product development
projects.
[139] In the light of Mr. Racine’s testimony, Ms. Demers’s
premise that Cybectec owned the intellectual property rights to all SR&ED
projects is wrong. Ms. Demers’s premise that 10 employees were working
exclusively on new products is also wrong.
[140] Ms. Demers also focused on the Hydro One contract concerning
new product development under which Cybectec apparently retained certain
intellectual property rights. Mr. Pâquet testified that subsequent to a
bidding process, Hydro One awarded a contract to Cybectec in late 1999.
Mr. Pâquet noted that Cybectec spent a little more than a year on
developing the prototype for Hydro One.
However, contrary to Ms. Demers’s submission that Cybectec could lay off
10 employees if the focus on new product development were unsuccessful,
Mr. Pâquet indicated that Cybectec did not have the option to lay off the
10 employees, as they were working on the Hydro One project and on other
projects for specific clients.
[141] That being the case, it is important to note that in 2001, it was
impossible to know whether Hydro One would confirm final approval of
implementation of the project. The success of the project was not assured;
Cybectec was taking a risk. The first deliveries of the prototype took place in
April 2001, and some installations were performed in 2002.
[142] Moreover, although Cybectec retained ownership of certain components
of the product developed for Hydro One, in 2001, it was difficult to foresee
what would come of the development undertaken under the Hydro One contract.
Mr. Pâquet testified as follows:
[translation] . . . when we started talking with Hydro One, we didn’t really know
how things were going to go, but we couldn’t pass up this contract because it
was in our specialty at the time.
[143] With respect to paragraph 3450.23 of the CICA handbook, in
reviewing the application conditions of paragraph 3450.21 of the handbook,
the appellants submit that [translation]
“the CRA is not recognizing the reality of Cybectec or demonstrating as
required that all conditions are met.”
[144] I agree with the appellants for the following reasons. First, to
capitalize the costs of research and development projects, a company must hold
the intellectual property rights; otherwise, no perceived value is generated in
relation to the Company’s assets. Second, the guidelines in
subparagraph 3450.21 (b) and paragraph 3450.23 of the CICA
handbook specify as follows:
[translation]
3450.21 Product or process development costs must be capitalized if all of the
following conditions are met:
. . .
(b) The technical feasibility of the product
or process has been established.
. . .
3450.23 Where a development project meets
the conditions justifying capitalization as set out in paragraph 3450.21,
the development costs must be capitalized up to the amount deemed with
reasonable certainty to be recoverable.
[145] I have no evidence showing what amounts are recoverable for Cybectec
if these expenses are capitalized. The evidence shows that also in 2001, the
projects did not fulfil subparagraph 3450.21 (b) of the CICA
handbook. Apart from the SR&ED tax credit applications, I have no evidence
showing the feasibility of the development projects in 2001.
[146] In addition, Cybectec’s accountant, Mr. Legros, opted not to
recognize these amounts. Cybectec never capitalized these expenses. Moreover,
if these expenses needed to be capitalized, amortization would have had to be
taken into account.
[147] In the light of the evidence, I cannot accept the adjustments made
by Ms. Demers. The method followed by Ms. Demers to arrive at
adjustments of $402,665 in 2001 and $84,148 in 2000 is not justified in
addition, I am of the view that if the CICA guideline were applicable, and that
is not in the case here in, every SR&ED project undertaken would have to
have been analyzed, which Ms. Demers did not do. Furthermore, the work in
progress in the form of projects Cybectec was developing for specific clients
could not be capitalized because Cybectec did not hold the intellectual
property rights to these projects.
5)
SR&ED costs incurred
[148] Ms. Demers also made adjustments to the SR&ED costs
incurred in relation to new products amounting to $158,808 in 2001, $182,323 in
2000 and $187,695 in 1999.
The ratio of SR&ED costs to consulting service sales increased from 6.4% in
1998 to 13.5% in 2001. According to Ms. Demers, a portion of this increase
is attributable to new product development.
[149] In this regard, she consulted Mr. Racine and Mr. Pâquet to
assess the costs attributable to new product development. They apparently
advised that 5% seemed like a reasonable amount.[47] Ms. Demers
made adjustments accordingly of $158,808 in 2001, $182,323 in 2000 and $187,695
in 1999 in relation to SR&ED costs incurred on the assumption that these
costs accounted for 5% of SR&ED costs.
[150] As in the case of additional SR&ED development expenses, I am of
the view that a method founded on the ratio of consulting service sales to
research costs tends to result in a random adjustment that is not
representative. The SR&ED component may vary significantly from one project
to the next. These costs were correctly deducted as expenses in computing gross
earnings. What is more, these costs should not be capitalized, since as I
determined previously with respect to additional SR&ED expenses, the
guidelines in the CICA handbook are not applicable.
[151] Moreover, the method chosen yields a result that does not reflect
reality. Indeed, Ms. Demers’s reasoning suggests that the SR&ED costs
for new product development were higher in 1999 ($182,323) than in 2001 ($158,808).
In context, these costs should be higher in 2001 due to the Company’s
reorientation in 1999 and the fact that this reorientation accounts for an
increasing portion of the company’s operations over time.
[152] I consequently do not accept the adjustment made by Ms. Demers
to this item.
6)
Payroll increase
[153] The expert, Mr. Brisson, explained at the hearing why, in his
original report, he had made an adjustment for the years 1999 and 2000 to
increase the payroll of Cybectec. According to Mr. Brisson, the purpose of
this adjustment was to ensure that the Company’s employee wages were
representative, given that they were unusually low in 1999 and 2000 in
comparison with the market.
[154] In this regard, the wages item in the financial statements does not
show that payroll increased significantly in relation to the number of persons
working at Cybectec in the years 1999, 2000 and 2001.
[155] I find that the adjustment proposed by the appellants should not be
accepted. Although it is clear that the wages of certain employees increased
very significantly between 1999 and 2001, the evidence is insufficient to
convince me that the overall payroll should be increased for previous years.
7)
Representative cash flows used
[156] The representative cash flow is the operating cash flow that a
company will be able to generate in the future. The representative cash flow is
generally determined in terms of results based on recent financial statements
and forecast results for one or more future years.
[157] In the original report from the appellants’ expert, the use of a
weighted average is proposed to determine cash flow. As for respondent’s expert,
she proposes using EBITDA for 2001 to establish the bottom of the range and the
average EBITDA for 1999 to 2001 to establish the top.
[158] I am of the view that the method used by the respondent’s expert is
reasonable. I consequently accept EBITDA of no less than $900,000 and no more
than $1,321,667.
8)
Interest on additional borrowing capacity
[159] The appellants’ expert calculated additional borrowing capacity by
comparing Cybectec’s debt ratio (debt/equity) to that of the IT system design
industry.[48]
He arrived at an industry debt/equity ratio of 0.8 to 12.0 with a median value
of 2.1.[49]
The respondent’s expert, meanwhile, assessed the same ratio over an
unidentified period and arrived at a ratio of 1.0 to 1.9.[50]
[160] On the basis of the ratios identified previously, the appellants
considered minimum and maximum adjustments to short-term borrowing capacity of
$335,000 and $435,000 respectively. Ms. Demers, meanwhile, considered a
single adjustment amount of $400,000. Insofar as the method used is based on an
industry ratio and the parties have not explained the significant variances
among their ratios, I find it appropriate to take a conservative approach.
[161] I will accept minimum and maximum values for short-term borrowing
capacity of $335,000 and $435,000. Not only does this range include the
$400,000 figure used by the respondent, but the post-adjustment debt/equity
ratio also falls within the industry debt/equity ratio range proposed by the
respondent. As for long-term borrowing capacity, I will set this item at $50,000.
[162] With respect to interest, note 6 to Cybectec’s financial statements
at April 30, 2001 states that Cybectec has an unused line of credit at the
prime rate + 0.5%. In her valuation, Ms. Demers uses a commercial
interest rate of 4.0% plus a premium of 0.5% for short-term borrowing or 1.0%
for long-term borrowing. Upon review of this information, I find these rates to
be reasonable and will use them to calculate interest on additional borrowing
capacity.
[163] In the light of the foregoing, it is appropriate to use minimum and
maximum amounts of $15,075 and $19,575 respectively for interest on short-term
borrowing capacity. As for interest on long-term borrowing capacity, I will set
this item at $2,750.
[164] Insofar as the remaining aspects of determination of representative
cash flow are not in dispute, these being income tax and capital reinvestment,
I will use minimum and maximum representative cash flow values of $546,701 and
$809,546.
9)
Capitalization rate (multiple)
[165] The multiple corresponds to the reciprocal or inverse of the rate of
return that an investor finds acceptable for an investment in a company taking
into account forecast growth, profitability and associated risks.
[166] The appellants propose using a capitalization rate calculated at
April 30, 2001. The respondent’s expert, meanwhile, proposes a
capitalization rate calculated using market data dated November 30, 2001.
[167] It is to be noted that the variance between the appellants’ and
respondent’s assumptions is minimal: the appellants propose using multiples of
4.75 and 4.50, while the respondent proposes multiples of 4.80 and 4.60.
[168] In his critical report, Mr. Fortin, for the appellants, finds
fault with the respondent’s expert report in its determination of the premium
applicable to the Company.[51]
Indeed, Mr. Fortin submits that the respondent did not take into account
certain factors specific to the Company including the size of the SR&ED tax
credits, the decrease in consulting income in 2001 and the high employee
turnover rate.
[169] I am of the view that the respondent did not take sufficient account
of some of these factors, while the analysis of others was free of error. For
example, the respondent reduced the Company’s risk level based on its history
of profitability. However, the evidence shows that earnings before tax dropped
significantly between 1999 and 2001. The respondent also does not take into
account the premium in relation to the size of the SR&ED tax credits.
Meanwhile, with regard to staff turnover, the respondent rightly recognizes a
risk; however, this risk was incorporated into the calculation of industry
risk.
[170] That being said, even if I increased the premium for business risk
from 3.75% to 4.00%, as the appellants did in the original expert report,[52]
this would have no effect on the minimum multiple at the valuation date:
increasing the business risk premium in the respondent’s table brings the
multiple to 4.79.[53]
It would therefore be reasonable to recognize a multiple within the range of
4.6 to 4.8.
10) Present value of tax savings
[171] Following the cash flow capitalization approach, it is necessary to
add to the going concern value the present value of future tax savings on tax
balances insofar as income tax is calculated on EBITDA rather than taxable
income. In his original report, Mr. Brisson used a present value of tax
savings of $60,000. However, he did not provide any details to support his
conclusions. In Ms. Demers’s report, a value of $45,000 was calculated. To
support this submission, the respondent supplied a table detailing future tax
savings.[54]
[172] At the hearing, the respondent explained the difference between its
figure and the appellants’.[55]
As for the appellants, they did not provide any explanations concerning these
variations and even considered them to be negligible.[56] Having reviewed the
positions of the parties, I accept that of the respondent concerning the
present value of tax savings.
11)
Surplus assets
[173] A surplus asset is an asset that is not necessary to a company’s
daily operation. Cybectec’s officers could dispose of such assets and withdraw
the money from Cybectec in the form of dividends without significantly
affecting the Company’s level of activity or profitability.
[174] With respect to the calculation of surplus assets, the appellants
and the respondent do not agree on short-term borrowing capacity or on the
addition of $270,000 to cash on hand.
[175] Concerning borrowing capacity, I determined previously that
short-term borrowing capacity fell within a range of $335,000 to $435,000. I
set long-term borrowing capacity at $50,000.
[176] The expert valuations having been carried out at April 30,
2001, the respondent determined that apart from cash on hand, no adjustments
were necessary to calculate fair market value at December 17, 2001. It
consequently added $270,000 to cash on hand.[57]
The respondent used CRA returns at April 30, 2002, to determine this
amount.
[177] The appellants argue that this is contrary to the valuation
principles according to which a retrospective review is not admissible other
than to verify the legitimacy of the assumptions made by the appraisers.[58]
The appellants argue further and in my opinion, correctly, that if the year
2002 were to be considered, it should be considered for all calculations,
including EBITDA, not simply for cash on hand, since Cybectec’s gross earnings
continued to decrease in 2002.
[178] This is not an after-the-fact review for the purpose of validating
an assumption. Indeed, the respondent is squarely using a pro rata of the
surplus cash generated by operations at April 30, 2002, to increase cash
on hand under surplus assets. It does not use these data to validate a trend or
an assumption. Therefore, the proposed adjustment should be dismissed.
[179] The breakdown of surplus assets is as follows:
|
Surplus Assets
|
|
|
Minimum
|
Maximum
|
|
Cash on hand
|
$102,700
|
$102,700
|
|
Term deposit
|
$600,000
|
$600,000
|
|
Investments
|
$212,574
|
$212,574
|
|
Short-term borrowing capacity
|
$335,000
|
$435,000
|
|
Long-term borrowing capacity
|
$50,000
|
$50,000
|
|
|
|
|
12)
Value of development projects
[180] For the value of development projects, the appellants used minimum
and maximum values of $500,000 and $600,000. The respondent, however, increased
the maximum value to $625,000. It is to be noted nevertheless that the avenues
of reasoning followed to arrive at these figures are diametrically opposed.
[181] The appellants based their figures on the value of development
projects according to Schedule C of the Ouellet & Legros report less the
development costs for the load control devices, Pastec 2 and Consparam. As for
the respondent, she considered a range corresponding to 40% to 50% of expenses
incurred for new product development. In this regard, it considered marketing
costs, additional SR&ED expenses and the SR&ED costs calculated for
1999, 2000 and 2001. It then used the total of these expenses to determine the
range of values.
[182] The respondent’s expert also reversed the minimum and maximum values
for development projects. During her testimony, she replied that this was [translation] “of no significant
importance.” She added that the purpose of this was to offset the risk
associated with the provision of consulting services and new product
development.[59]
[183] I find the method used by the appellants to be sounder and less
haphazard than that used by the respondent. I consequently accept the method
used by the appellants.
[184] The respondent also argued that on May 2, 1998, Mr. Pâquet
and Mr. Racine had assigned a value of $0.32 per share to the shares of
Cybectec as part of a share freeze. It is important to note that in 1998,
Cybectec had yet to carry out any comprehensive valuation of its shares. In
addition, earnings before tax decreased considerably after 1998. Earnings were
$1,245,358 in 1998 and $705,489 in 2001. In the light of the decline in profit,
it is reasonable to see a drop in the value of shares of Cybectec.
[185] Consequently, I am of the view that the fair market value of Class A
shares at December 17, 2001, is $0.20 per share.
V. Decision
[186] Insofar as the conditions in paragraph 110(1)(d) of the
Act were not all fulfilled, that is, the shares of Cybectec were not prescribed
shares at the time of issue of the shares, the appellants cannot deduct 50% of
the benefit received arising from the disposition of their shares in computing
their income.
[187] The appeals are dismissed without costs.
Signed at Ottawa, Canada, this 3rd day of May 2016.
“Johanne D’Auray”
Translation certified true
On this 11th day of January 2017
François Brunet, Revisor
SCHEDULE 1
APPLICABLE
LEGISLATION
Agreement
to issue securities to employees
7 (1) Subject to subsection (1.1), where a particular
qualifying person has agreed to sell or issue securities of the particular
qualifying person (or of a qualifying person with which the particular
qualifying person does not deal at arm’s length) to an employee of the
particular qualifying person (or of a qualifying person with which the
particular qualifying person does not deal at arm’s length),
(a) if the employee has acquired securities under the
agreement, a benefit equal to the amount, if any, by which
(i) the value of the securities at the time the employee acquired them exceeds
the total of
(ii) the amount paid or to be paid to the particular qualifying person
by the employee for the securities, and
(iii) the amount, if any, paid by the employee to acquire the right to
acquire the securities
is deemed to have been received, in the taxation year in which the employee
acquired the securities, by the employee because of the employee’s employment;
.
. .
Employee
stock options
(1.1) Where
after March 31, 1977 a Canadian-controlled private corporation (in this
subsection referred to as “the corporation”) has agreed to sell or issue a
share of the capital stock of the corporation or of a Canadian-controlled
private corporation with which it does not deal at arm’s length to an employee
of the corporation or of a Canadian-controlled private corporation with which
it does not deal at arm’s length and at the time immediately after the
agreement was made the employee was dealing at arm’s length with
(a) the corporation,
(b) the Canadian-controlled private corporation, the
share of the capital stock of which has been agreed to be sold by the
corporation, and
(c) the Canadian-controlled private corporation that is
the employer of the employee,
in
applying paragraph (1)(a) in respect of the employee’s acquisition of
the share, the reference in that paragraph to “the taxation year in which the
employee acquired the securities” shall be read as a reference to “the taxation
year in which the employee disposed of or exchanged the securities”.
DIVISION C
Computation of
Taxable Income
Deductions permitted
110 (1) For the
purpose of computing the taxable income of a taxpayer for a taxation year,
there may be deducted such of the following amounts as are applicable
Employee options
(d) an amount
equal to 1/2 of the amount of the benefit deemed by subsection 7(1) to have
been received by the taxpayer in the year in respect of a security that a
particular qualifying person has agreed after February 15, 1984 to sell or
issue under an agreement, or in respect of the transfer or other disposition of
rights under the agreement, if
(i.1)
the security
(A) is
a prescribed share at the time of its sale or issue, as the case may be,
(B)
would have been a prescribed share if it were issued or sold to the taxpayer at
the time the taxpayer disposed of rights under the agreement,
(C)
would have been a unit of a mutual fund trust at the time of its sale or issue
if those units issued by the trust that were not identical to the security had
not been issued, or
(D)
would have been a unit of a mutual fund trust if
(I) it
were issued or sold to the taxpayer at the time the taxpayer disposed of rights
under the agreement, and
(II)
those units issued by the trust that were not identical to the security had not
been issued,
(ii)
where rights under the agreement were not acquired by the taxpayer as a result
of a disposition of rights to which subsection 7(1.4) applied,
(A)
the amount payable by the taxpayer to acquire the security under the agreement
is not less than the amount by which
(I)
the fair market value of the security at the time the agreement was made exceeds
(II)
the amount, if any, paid by the taxpayer to acquire the right to acquire the
security, and
(B) at
the time immediately after the agreement was made, the taxpayer was dealing at
arm’s length with
(I)
the particular qualifying person,
(II)
each other qualifying person that, at the time, was an employer of the taxpayer
and was not dealing at arm’s length with the particular qualifying person, and
(III)
the qualifying person of which the taxpayer had, under the agreement, a right
to acquire a security, and
(iii)
where rights under the agreement were acquired by the taxpayer as a result of
one or more dispositions to which subsection 7(1.4) applied,
(A)
the amount payable by the taxpayer to acquire the security under the agreement
is not less than the amount that was included, in respect of the security, in
the amount determined under subparagraph 7(1.4)(c)(ii) with respect to
the most recent of those dispositions,
(B) at
the time immediately after the agreement the rights under which were the
subject of the first of those dispositions (in this subparagraph referred to as
the “original agreement”) was made, the taxpayer was dealing at arm’s length
with
(I)
the qualifying person that made the original agreement,
(II)
each other qualifying person that, at the time, was an employer of the taxpayer
and was not dealing at arm’s length with the qualifying person that made the
original agreement, and
(III)
the qualifying person of which the taxpayer had, under the original agreement,
a right to acquire a security,
(C)
the amount that was included, in respect of each particular security that the
taxpayer had a right to acquire under the original agreement, in the amount
determined under subparagraph 7(1.4)(c)(iv) with respect to the first of
those dispositions was not less than the amount by which
(I)
the fair market value of the particular security at the time the original
agreement was made exceeded
(II)
the amount, if any, paid by the taxpayer to acquire the right to acquire the
security, and
(D)
for the purpose of determining if the condition in paragraph 7(1.4)(c)
was satisfied with respect to each of the particular dispositions following the
first of those dispositions,
(I)
the amount that was included, in respect of each particular security that could
be acquired under the agreement the rights under which were the subject of the
particular disposition, in the amount determined under subparagraph 7(1.4)(c)(iv)
with respect to the particular disposition was not less than
(II)
the amount that was included, in respect of the particular security, in the
amount determined under subparagraph 7(1.4)(c)(ii) with respect to the
last of those dispositions preceding the particular disposition;
Charitable
donation of employee option securities
(d.01) subject to subsection (2.1), if the
taxpayer disposes of a security acquired in the year by the taxpayer under an
agreement referred to in subsection 7(1) by making a gift of the security to a
qualified donee, an amount in respect of the disposition of the security equal
to 1/2 of the lesser of the benefit deemed by paragraph 7(1)(a) to have
been received by the taxpayer in the year in respect of the acquisition of the
security and the amount that would have been that benefit had the value of the
security at the time of its acquisition by the taxpayer been equal to the value
of the security at the time of the disposition, if
(i)
the security is a security described in subparagraph 38(a.1)(i),
(ii)
[Repealed, 2002, c. 9, s. 33(1)]
(iii)
the gift is made in the year and on or before the day that is 30 days after the
day on which the taxpayer acquired the security, and
(iv)
the taxpayer is entitled to a deduction under paragraph (d) in respect
of the acquisition of the security;
Idem
(d.1) where the taxpayer
(i) is
deemed, under paragraph 7(1)(a) by virtue of subsection 7(1.1), to have
received a benefit in the year in respect of a share acquired by the taxpayer
after May 22, 1985,
(ii)
has not disposed of the share (otherwise than as a consequence of the taxpayer’s
death) or exchanged the share within two years after the date the taxpayer
acquired it, and
(iii)
has not deducted an amount under paragraph 110(1)(d) in respect of the benefit
in computing the taxpayer’s taxable income for the year, an amount equal to 1/2
of the amount of the benefit;
Income Tax Regulations
6204 (1) For the
purposes of subparagraph 110(1)(d)(i) of the Act, a share is a
prescribed share of the capital stock of a corporation at the time of its sale
or issue, as the case may be, if, at that time,
(a) under the terms or conditions of the share or any
agreement in respect of the share or its issue,
(i)
the amount of the dividends (in this section referred to as the “dividend
entitlement”) that the corporation may declare or pay on the share is not
limited to a maximum amount or fixed at a minimum amount at that time or at any
time thereafter by way of a formula or otherwise,
(ii)
the amount (in this section referred to as the “liquidation entitlement”) that
the holder of the share is entitled to receive on the share on the dissolution,
liquidation or winding-up of the corporation is not limited to a maximum amount
or fixed at a minimum amount by way of a formula or otherwise,
(iii)
the share cannot be converted into any other security, other than into another
security of the corporation or of another corporation with which it does not
deal at arm’s length that is, or would be at the date of conversion, a
prescribed share,
(iv)
the holder of the share cannot at that time or at any time thereafter cause the
share to be redeemed, acquired or cancelled by the corporation or any specified
person in relation to the corporation, except where the redemption, acquisition
or cancellation is required pursuant to a conversion that is not prohibited by
subparagraph (iii),
(v) no
person or partnership has, either absolutely or contingently, an obligation to
reduce, or to cause the corporation to reduce, at that time or at any time
thereafter, the paid-up capital in respect of the share, except where the
reduction is required pursuant to a conversion that is not prohibited by
subparagraph (iii), and
(vi)
neither the corporation nor any specified person in relation to the corporation
has, either absolutely or contingently, the right or obligation to redeem,
acquire or cancel, at that time or any later time, the share in whole or in
part other than for an amount that approximates the fair market value of the
share (determined without reference to any such right or obligation) or a
lesser amount;
(b) the corporation or a specified person in relation to
the corporation cannot reasonably be expected to, within two years after the
time the share is sold or issued, as the case may be, redeem, acquire or cancel
the share in whole or in part, or reduce the paid-up capital of the corporation
in respect of the share, otherwise than as a consequence of
(i) an
amalgamation of a subsidiary wholly-owned corporation,
(ii) a
winding-up to which subsection 88(1) of the Act applies, or
(iii)
a distribution or appropriation to which subsection 84(2) of the Act applies;
and
(c) it cannot reasonably be expected that any of the
terms or conditions of the share or any existing agreement in respect of the
share or its sale or issue will be modified or amended, or that any new
agreement in respect of the share, its sale or issue will be entered into,
within two years after the time the share is sold or issued, in such a manner
that the share would not be a prescribed share if it had been sold or issued at
the time of such modification or amendment or at the time the new agreement is
entered into.
(2) For the purposes of subsection (1),
(a) the
dividend entitlement of a share of the capital stock of a corporation shall be
deemed not to be limited to a maximum amount or fixed at a minimum amount where
it may reasonably be considered that all or substantially all of the dividend
entitlement is determinable by reference to the dividend entitlement of another
share of the capital stock of the corporation that meets the requirements of
subparagraph (1)(a)(i);
(b) the liquidation entitlement of a share of the capital
stock of a corporation shall be deemed not to be limited to a maximum amount or
fixed at a minimum amount where it may reasonably be considered that all or
substantially all of the liquidation entitlement is determinable by reference
to the liquidation entitlement of another share of the capital stock of the
corporation that meets the requirements of subparagraph (1)(a)(ii); and
(c) the determination of whether a share of the capital
stock of a particular corporation is a prescribed share shall be made without
reference to a right or obligation to redeem, acquire or cancel the share, or
to cause the share to be redeemed, acquired or cancelled, where
(i)
the person (in this paragraph referred to as the “holder”) to whom the
share is sold or issued is, at the time the share is sold or issued, dealing at
arm’s length with the particular corporation and with each corporation with
which the particular corporation is not dealing at arm’s length,
(ii)
the right or obligation is provided for in the terms or conditions of the share
or in an agreement in respect of the share or its issue and, having regard to
all the circumstances, it can reasonably be considered that
(A)
the principal purpose of providing for the right or obligation is to protect
the holder against any loss in respect of the share, and the amount payable on
the redemption, acquisition or cancellation (in this subparagraph and in
subparagraph (iii) referred to as the “acquisition”) of the share will not
exceed the adjusted cost base of the share to the holder immediately before the
acquisition, or
(B)
the principal purpose of providing for the right or obligation is to provide
the holder with a market for the share, and the amount payable on the
acquisition of the share will not exceed the fair market value of the share
immediately before the acquisition, and
(iii)
having regard to all the circumstances, it can reasonably be considered that no
portion of the amount payable on the acquisition of the share is directly
determinable by reference to the profits of the particular corporation, or of
another corporation with which the particular corporation does not deal at arm’s
length, for all or any part of the period during which the holder owns the
share or has a right to acquire the share, unless the reference to the profits
of the particular corporation or the other corporation is only for the purpose
of determining the fair market value of the share pursuant to a formula set out
in the terms or conditions of the share or the agreement in respect of the
share or its issue, as the case may be.
(3) For the
purposes of subsection (1), specified person, in relation to a
corporation, means
(a) any person or partnership with whom the corporation
does not deal at arm’s length otherwise than because of a right referred to in
paragraph 251(5)(b) of the Act that arises as a result of an offer by
the person or partnership to acquire all or substantially all of the shares of
the capital stock of the corporation, or
(b) any partnership or trust of which the corporation (or
a person or partnership with whom the corporation does not deal at arm’s
length) is a member or beneficiary, respectively.
(4) For the
purposes of subsection (3), the Act shall be read without reference to
subsection 256(9) of the Act.
SCHEDULE 2
CYBERTEC
INC.
Original Evaluation
Report
Fortin
Gaignard Groupe Conseil Inc.
|
|
2001
|
2000
|
1999
|
|
Earnings before tax
|
705,000
|
1,497,000
|
1,581,000
|
|
|
|
|
|
|
Adjustment
|
|
|
|
|
Amortization
|
98,000
|
97,000
|
93,000
|
|
Rental income
|
- 6,000
|
- 5,000
-
|
- 4,000
|
|
Rent
|
-
|
- 30,000
-
|
- 60,000
|
|
Interest income
|
- 74,000
-
|
- 47,000
-
|
- 17,000
|
|
Loss on disposal of
capital assets
|
1,000
|
5,000
|
|
|
Executive life
insurance
|
4,000
|
4,000
|
4,000
|
|
Executive
remuneration
|
- 150,000
|
- 130,000
-
|
- 60,000
|
|
Professional fees
|
|
|
|
|
Adjusted
professional fees
|
|
|
|
|
Provision for future
billing
|
|
|
|
|
Bill to Hydro One
|
|
|
|
|
Sales and marketing
costs
|
225,000
|
|
|
|
Additional SR&ED
expense
|
|
|
|
|
SR&ED costs
incurred
|
|
|
|
|
Payroll increase
|
|
- 200,000
|
- 175,000
|
|
EBITDA
|
803,000
|
1,191,000
|
1,362,000
|
|
|
Low
|
High
|
|
|
Representative cash flows used
|
950,000
|
1,100,000
|
|
|
Int. on additional borrowing capacity
|
- 4,000
|
- 4,000
|
|
|
|
- 20,000
|
- 26,000
|
|
|
Income tax at low rate (22%)
|
- 44,000
|
- 44,000
|
|
|
Income tax at high rate (31%)
|
- 225,060
|
- 269,700
|
|
|
Capital reinvestment
|
- 80,000
|
- 105,000
|
|
|
Representative cash flow
|
575,000
|
650,000
|
|
|
|
|
|
|
|
Capitalization rate (multiple)
|
4.75
|
4.50
|
|
|
Present value of representative cash flows
|
2,731,250
|
2,925,000
|
|
|
Present value of tax savings
|
60,000
|
60,000
|
|
|
Surplus assets
|
1,301,000
|
1,401,000
|
|
|
Value of development projects
|
500,000
|
600,000
|
|
|
|
|
|
|
|
FMV at April 30, 2011
|
4,592,250
|
4,986,000
|
|
|
Rounded median value
|
|
|
|
|
|
|
|
|
|
Less: 26 Class C shares
|
832,000
|
832,000
|
|
|
12 Class D shares
|
244,200
|
244,200
|
|
|
17,400,000 Class A shares
|
3,516,050
|
3,909,800
|
|
|
|
|
|
|
|
FMV of 1 Class A share
|
0.202
|
0.225
|
|
CYBERTEC
INC.
Evaluation
Report
CRA
|
|
2001
|
2000
|
1999
|
|
Earnings before tax
|
705,489
|
1,497,421
|
1,581,208
|
|
|
|
|
|
|
Adjustment
|
|
|
|
|
Amortization
|
98,537
|
97,302
|
93,017
|
|
Rental
income
|
|
|
|
|
Rent
|
|
|
|
|
Interest
income
|
- 74,082
|
- 47,405
|
- 16,532
|
|
Loss
on disposal of capital assets
|
906
|
4,694
|
|
|
Executive
life insurance
|
4,000
|
4,000
|
4,000
|
|
Executive
remuneration
|
- 130,000
|
- 40,000
|
- 42,000
|
|
Professional
fees
|
45,070
|
37,515
|
|
|
Adjusted
professional fees
|
- 27,735
|
- 24,548
|
|
|
Provision
for future billing
|
22,052
|
|
|
|
Bill
to Hydro One
|
64,252
|
|
|
|
Sales
and marketing costs
|
225,000
|
|
|
|
Additional
SR&ED expense
|
402,665
|
84,148
|
|
|
SR&ED
costs incurred
|
158,808
|
182,323
|
187,695
|
|
Payroll
increase
|
|
|
|
|
EBITDA
|
1,494,962
|
1,795,450
|
1,807,388
|
|
|
Low
|
High
|
|
|
Representative cash
flows used
|
1,500,000
|
1,700,000
|
|
|
Int. on additional
borrowing capacity
|
- 2,250
|
- 2,250
|
|
|
|
- 22,000
|
- 22,000
|
|
|
Income tax at low
rate (22%)
|
- 44,000
|
- 44,000
|
|
|
Income tax at high
rate (31%)
|
- 395,483
|
- 457,483
|
|
|
Capital reinvestment
|
- 80,000
|
- 105,000
|
|
|
Representative cash
flow
|
956,268
|
1,069,268
|
|
|
|
|
|
|
|
Capitalization rate
(multiple)
|
4.80
|
4.60
|
|
|
Present value of
representative cash flows
|
4,590,084
|
4,918,631
|
|
|
Present value of tax
savings
|
45,000
|
45,000
|
|
|
Surplus assets
|
1,635,000
|
1,635,000
|
|
|
Value of development
projects
|
625,000
|
500,000
|
|
|
|
|
|
|
|
FMV at April 30,
2011
|
6,895,084
|
7,098,631
|
|
|
Rounded median value
|
7,000,000
|
|
|
|
|
|
|
|
|
Less: 26 Class C
shares
|
832,000
|
|
|
|
12
Class D shares
|
244,200
|
|
|
|
17,400,000 Class A
shares
|
5,923,800
|
|
|
|
|
|
|
|
|
FMV of 1 Class A
share
|
0.340
|
|
|
CYBERTEC
INC.
Critical Evaluation
Report
Fortin
Gaignard Groupe Conseil Inc.
|
|
2001
|
2000
|
1999
|
|
Earnings before tax
|
705,000
|
1,497,000
|
1,581,000
|
|
|
|
|
|
|
Adjustment
|
|
|
|
|
Amortization
|
99,000
|
97,000
|
93,000
|
|
Rental income
|
|
|
|
|
Rent
|
|
|
|
|
Interest income
|
- 74,000
|
- 47,000
|
- 17,000
|
|
Loss on disposal of
capital assets
|
1,000
|
5,000
|
|
|
Executive life
insurance
|
4,000
|
4,000
|
4,000
|
|
Executive
remuneration
|
- 130,000
|
- 40,000
|
- 42,000
|
|
Professional fees
|
45,000
|
38,000
|
|
|
Adjusted
professional fees
|
- 28,000
|
- 25,000
|
|
|
Provision for future
billing
|
|
|
|
|
|
|
|
|
|
Bill to Hydro One
|
|
|
|
|
Sales and marketing
costs
|
225,000
|
|
|
|
Additional SR&ED
expense
|
|
|
|
|
SR&ED costs
incurred
|
70,000
|
67,000
|
63,000
|
|
Payroll increase
|
|
|
|
|
EBITDA
|
917,000
|
1,596,000
|
1,682,000
|
|
|
Low
|
High
|
|
|
Representative cash flows used
|
770,000
|
1,100,000
|
|
|
Int. on additional borrowing capacity
|
- 2,250
|
-
2,250
|
|
|
|
- 22,000
|
-
22,000
|
|
|
Income tax at low rate (22%)
|
- 44,000
|
-
44,000
|
|
|
Income tax at high rate (31%)
|
- 169,183
|
- 271,483
|
|
|
Capital reinvestment
|
- 80,000
|
-
105,000
|
|
|
Representative cash flow
|
452,568
|
655,268
|
|
|
|
|
|
|
|
Capitalization rate (multiple)
|
4.80
|
4.60
|
|
|
Present value of representative cash flows
|
2,172,324
|
3,014,231
|
|
|
Present value of tax savings
|
45,000
|
45,000
|
|
|
Surplus assets
|
1,635,000
|
1,635,000
|
|
|
Value of development projects
|
500,000
|
625,000
|
|
|
|
|
|
|
|
FMV at April 30, 2011
|
4,352,324
|
5,319,231
|
|
|
Rounded median value
|
|
|
|
|
|
|
|
|
|
Less: 26 Class C shares
|
832,000
|
832,000
|
|
|
12 Class D shares
|
244,200
|
244,200
|
|
|
17,400,000 Class A shares
|
3,276,124
|
4,243,031
|
|
|
|
|
|
|
|
FMV of 1 Class A share
|
0.188
|
0.244
|
|
SCHEDULE 3
CYBERTEC
INC.
Final
Evaluation
Tax Court
of Canada
|
|
2001
|
2000
|
1999
|
|
Earnings
before tax
|
705,000
|
1,497,000
|
1,581,000
|
|
|
|
|
|
|
Adjustment
|
|
|
|
|
Amortization
|
99,000
|
97,000
|
93,000
|
|
Rental income
|
|
|
|
|
Rent
|
|
|
|
|
Interest income
|
- 74,000
|
- 47,000
|
- 17,000
|
|
Loss on disposal of
capital assets
|
1,000
|
5,000
|
|
|
Executive life
insurance
|
4,000
|
4,000
|
4,000
|
|
Executive
remuneration
|
- 130,000
|
- 40,000
|
- 42,000
|
|
Professional fees
|
|
|
|
|
Adjusted
professional fees
|
|
|
|
|
Provision for future
billing
|
|
|
|
|
Bill to Hydro One
|
|
|
|
|
Sales and marketing
costs
|
225,000
|
|
|
|
Additional SR&ED
expense
|
|
|
|
|
SR&ED costs
incurred
|
|
|
|
|
Payroll increase
|
|
|
|
|
EBITDA
|
830,000
|
1,516,000
|
1,619,000
|
|
|
Low
|
High
|
|
|
Representative cash
flows used
|
900,000
|
1,321,667
|
|
|
Int. on additional
borrowing capacity
|
- 2,750
|
- 2,750
|
|
|
|
- 15,075
|
- 19,575
|
|
|
Income tax at low
rate (22%)
|
- 44,000
|
- 44,000
|
|
|
Income tax at high
rate (31%)
|
- 211,474
|
- 340,796
|
|
|
Capital reinvestment
|
- 80,000
|
- 105,000
|
|
|
Representative cash
flow
|
546,701
|
809,546
|
|
|
|
|
|
|
|
Capitalization rate
(multiple)
|
4.80
|
4.60
|
|
|
Present value of
representative cash flows
|
2,624,164
|
3,723,910
|
|
|
Present value of tax
savings
|
45,000
|
45,000
|
|
|
Surplus assets
|
1,300,274
|
1,400,274
|
|
|
Value of development
projects
|
500,000
|
600,000
|
|
|
|
|
|
|
|
FMV at April 30,
2011
|
4,469,438
|
5,769,184
|
|
|
Rounded median value
|
|
|
|
|
|
|
|
|
|
Less: 26 Class C
shares
|
832,000
|
832,000
|
|
|
12 Class D
shares
|
244,200
|
244,200
|
|
|
17,400,000 Class A
shares
|
3,393,238
|
4,692,984
|
|
|
|
|
|
|
|
FMV of 1 Class A
share
|
0.195
|
0.270
|
|
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