Table of Contents


Resource Capital Fund IV LP v Commissioner of Taxation, [2018] FCA 41 (Federal Court of Australia)

processing assets of mining company were more valuable than its mining assets

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. Although their (income account) gains were from selling the shares of Talison Lithium were not exempted under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 (as expanded in Australian domestic legislation) for dispositions of (deemed) real property situated in Australia, their appeals of nonetheless were allowed on the basis that the shares of Talison Lithium were not taxable Australian real property because their value was attributable more to the “downstream” lithium processing operations than to the “upstream” mining operations.

In particular acceptance, Pagone J acccepted of the valuation approach of the taxpayer’s valuation expert, under which the valuation of the assets and operations involved the mining of the ore body (“the upstream operations”) was lower than that for the subsequent operations after extraction and severance of the ore from the ground (“the downstream operations”), with the value of the ore extracted from the ground not being part of the taxable Australian real property and being valued for the above purposes immediately after that resource had been extracted and severed from the ground.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares private equity fund LP with 5-year holding objective realized share gain on income account 167
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) gains of a NR PE fund from disposals of Australian share investments that were managed in part in Australia were derived from Australia 411
Tax Topics - Treaties - Income Tax Conventions - Article 3 each U.S.-resident partner of a Caymans PE LP carried on a U.S. “enterprise” 222
Tax Topics 386
Tax Topics - Treaties - Income Tax Conventions - Article 13 exclusion in Art. 13 of Aust.-U.S. Treaty for real property dispositions extended to shares of Australian holding company holding mining leases through grandchild
Tax Topics - General Concepts - Stare Decisis lower court not bound by a point of law that was assumed rather than examined by a higher court 272
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) assessment of partnership was assessment of partners 83
Tax Topics - Treaties - Income Tax Conventions - Article 6 Art. 6 extends common law meaning of real property 180
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) shares of lithium mining and processing company were derived principally from the processing rather than mining operation and, thus, were not taxable Australian real property 500
Tax Topics - Income Tax Act - Section 218.3 - Subsection 218.3(1) - Canadian Property Mutual Fund Investment shares of Australian mining company were primarily attributable to the processing rather than mining operations 140

Maréchal v. Canada, 2006 DTC 6524, 2005 FCA 124

The Tax Court had not committed a reviewable error in finding that an item of sculpture donated by the taxpayer to a museum had a fair market value equal to the price paid by him, multiplied by a factor of three to take into account the fact that it was obtained at public auction.

Canada (Attorney General) v. Nash, 2005 DTC 5696, 2005 FCA 386

A company ("CVI") operated a program through which it sold groups of limited edition prints to individuals, arranged for appraisal and located registered charities to whom the prints could be donated on behalf of the individuals.

The Court found that the Tax Court Judge had committed two errors: in accepting valuation evidence based on the retail market for individual prints when there was a normal market (that through which CVI actually purchased the prints) for the groups of prints the valuator was required to value; and in finding that the fair market value of the property was approximately three times the amount paid for the property by CVI with no credible explanation for the apparent three-fold increase.

CIT Financial Ltd. v. Canada, 2004 DTC 6573, 2004 FCA 201

The Tax Court Judge did not err in finding that the replacement cost method was the best way to value software that specifically had been designed to run a particular steel mill. An alternative valuation based on the present value of lease payments to be received for the rental of the software in a non-arm's length transaction was flawed as the lease payments were based on a faulty (and excessive) valuation of the software.

Canada v. Malette, 2004 DTC 6415, 2004 FCA 187

981 works by a particular Canadian artist that the taxpayer donated to an art gallery had their fair market value reduced by a blockage discount, i.e., the depressive effect on the value of individual items that occurs due to the fact that the number of items offered for sale exceeds the number of willing buyers.

Petro-Canada v. The Queen, 2003 DTC 94 (TCC), aff'd supra.

In valuing seismic data, Bowie T.C.J. took into account that in large transactions, such as those before him, purchasers would negotiate various substantial discounts given that in a large block it was unlikely that all the data would be useful.

Semet-Solvay Co. Deputy v. MNR (1958), 20 DLR (2d) 663 (Ex Ct)

S.35(1) of the Customs Act provided that "the value for duty shall be the fair market value of such or the like goods when sold for home consumption in the ordinary course of trade under fully competitive conditions, in like quantities and under comparable conditions of sale at the time when and place whence such goods were exported by the vendor abroad to the purchaser in Canada; or ... the price at which the goods were sold by the vendor abroad to the purchaser in Canada ... whichever may be greater". The U.S. exporter of coke to the Canadian importer charged a higher price ($25.50 per ton) in the Detroit area than it charged for coke in other areas further away from Detroit. Thurlow J. found that the Tariff Board erred in viewing itself as compelled to choose one of the foreign prices at which the U.S. exporter sold its coke as the fair market value of the coke in question, rather than being equally at liberty to consider that none of such prices was representative and to adopt such other amount, within the range of foreign prices, as it thought more merely representative of the fair market value.

Sweeney v. The Queen, 90 DTC 6507 (FCTD)

In 1950, a written agreement between the taxpayer's father and the taxpayer provided that the son could purchase his father's shares in a company for a stipulated sum upon the father's death. The agreement provided that the price per share was reviewable by the father, gave the son a right of first refusal in the event of a sale of the shares, and was revocable by either party upon 60 days' notice. Following the repudiation of this agreement by the executors of the father's estate following his death in 1983, the taxpayer was paid $625,000 in lieu of damages.

Denault J. accepted the Crown's submission that the V-day value of the taxpayer's entitlement under this agreement was nil in light of the above conditions of the agreement, in light of there being nothing to prevent the father from decreasing the value of the company through mismanagement or otherwise, and in light of the risk that the father would have denied the validity of the agreement had the son assigned it.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) 124

Friedberg v. The Queen, 89 DTC 5115 (FCTD)

An antique textile collection which the taxpayer purchased for $67,500 and shortly thereafter donated to a museum was found to have a fair market value equal to its appraised value of $496,175 (based on price lists from various auction houses). "Auction prices provide an excellent basis for determining fair market value since auction sales occur in an open and unrestricted setting where both purchaser and vendor can be assumed to be informed, prudent and acting at arm's length."

The Queen v. Demco Management Ltd., 84 DTC 6065, [1983] CTC 419 (FCTD), aff'd 85 D.T.C 5603, [1986] 1 CTC 92 (FCA)

The V-Day value of a private hospital was set at its going-concern value. There was no statutory basis for limiting the value of the hospital assets, taken as a whole operation, to the sum of the values of the component physical or identifiable assets.

Goodwin Johnson (1960) Ltd. v. The Queen, 83 DTC 5417, [1983] CTC 389 (FCTD), aff'd 86 DTC 6185, [1986] CTC 448 (FCA)

It was accepted that since the taxpayer's interest in a contract, under which it managed timber-cutting operations, was assignable, the valuation of its interest should be on a going-concern basis and should reflect inter alia the minimum annual management fee that the taxpayer was entitled to receive, and its estimated production fees (i.e., $1.00 for every 1000 board feet cut multiplied by estimated production minus a moderate discount).

The Queen v. Schubert, 80 DTC 6366, [1980] CTC 497 (FCTD)

Notwithstanding the hindsight rule, evidence of subsequent increases in profits and sales of a business may be used as confirmation of the business owner's assessment of the value of the goodwill of the business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 81

Lipper v. The Queen, 79 DTC 5246, [1979] CTC 316 (FCTD)

"[W]here, as in the case at Bar, large and irreconcilable differences occur in the opinion evidence of various experts, subsequent events can be used to test the accuracy and, at times also, the bona fides of the opinions expressed".

Kennedy v. MNR, 73 DTC 5359, [1973] CTC 437 (FCA)

A company conferred a benefit on its sole shareholder by inter alia gratuitously making improvements to land held leased by him to the company under a 4 1/2 year lease. The value of the benefit was less than the amount of the expenditure due to the effect of the lease on the value of the shareholder's reversionary interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) benefit in year of note issuance/tenant improvement benefit based on PV of reversion boost 305
Tax Topics - Income Tax Act - Section 9 - Timing 64

See Also

Kaul v. The Queen, 2019 TCC 17

art work was donated at a FMV equal to its cost rather than appraised value

The sole issue in the Appellants’ appeals was the fair market value (“FMV”) of art that was purchased and subsequently donated by the Appellants in a buy-low-donate-high art donation program that was in operation from 1998 to 2003. The participants would pay a specified price (e.g., $3,500) for a “unit” (i.e., grouping) of 11 prints (which came out of unsold inventory of the vendor or had been purchased by it at a cost of less than about 1/7 of that price). Of the unit, they selected one to keep and donated the other 10 to a charity which gave a donation receipt for, say, $10,000. A group purchased by a particular participant would not be the same as a group donated to the charities, as employees of the promoter group (“Artistic”) would split up the groups so that different prints within these groups would be donated to a variety of charities.

After accepting (at para. 70) the submission of the Crown that “the shuffling or shifting of prints would not affect the market value,” Rossiter CJ noted (at para. 71) that “It is evident that what was purchased by the donor were groups of prints, eleven in total.”

In finding that the donated works’ FMV was their purchase price rather than their higher appraised value, he stated (at paras. 74, 90, 96):

Although the participant experts did their best to explain why the donated value was higher than the price actually paid, … I refer … to the statement … in Klotz “…it is devoid of common sense and out of touch with ordinary commercial reality”. It is as simple as that!

It appears … that the appraisers deliberately turned away from other markets. … [T]hey did not comply with the USPAP standards. … (1) they did not refer to prior sales of the property; (2) there is no reference to providence; (3) there was multiples of the same print bought and dated; (4) there was no reference to the price paid by the donors; (5) the use of the art was not considered; and (6) no consideration was given to the impact of the flooded market place.

The Appellants attempted to establish the art was appraised individually. I believe this was done solely for the purposes of documenting the tax shelter being sold to the public. … [T]he appraisals … are unreliable and not credible… . The artwork was acquired in bulk, pedaled in bulk, sold in bulk, packaged in bulk and delivered in bulk – bulk being eleven (11) pieces at a time.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts donated art work had FMV equal to its cost 164

Stewart v. The Queen, 2019 TCC 22

mortgage issued in a scam had full FMV

The RRSPs of the two taxpayers and for 117 other investors were defrauded. They were induced to purchase undivided interests in mortgages for an aggregate amount of $7 million, bearing interest at 12%, secured by mortgages on land with a value of around $5,000. Those proceeds immediately disappeared.

D'Arcy J first found that each purchased interest qualified as a qualified investmetn, and then found that there was no income inclusion in the RRSP annuitants’ income under s. 146(9)(b), on the basis that such mortgage interests had a fair market value that equaled rather than being less than the cash consideration paid by the RRSPs therefor, stating (at paras. 64, 68) that:

[T]he appellants purchased those interests as willing buyers from an arm’s length seller and ... neither the appellants nor the seller (U-Have) were under any compulsion to buy or sell. The appellants were two of a number of arm’s length buyers who purchased interests in the Zowtra Mortgage. ...

In summary, they paid fair market value for the interests in the Zowtra Mortgage. They paid a price negotiated with an arm’s length vendor, namely Mr. Rusnak and his companies. The fact that they paid a price similar to the price paid by 117 other individuals evidences that they negotiated the price in “a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length”.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(j) mortgage secured by largely worthless land was a mortgage 237
Tax Topics - Income Tax Act - Section 146 - Subsection 146(9) - Paragraph 146(9)(b) mortgage issued in scam had full FMV until the funds were stolen 395

Commissioner of State Revenue v Placer Dome Inc., [2018] HCA 59

discounted cash flow valuation undervalued resource lands and residual valuation overstated goodwill

Whether the acquisition by Barrick Gold of Placer Dome (“Placer”) triggered Western Australia stamp duty of A$55 million on the lands of in Western Australia of an Australian subsidiary of Placer Dome turned on whether, on a global consolidated basis, the value of all of Placer Dome's land (defined to include mining tenements and improvements) equalled or exceeded 60% of the value of all its property.

The post-acquisition balance sheet of Placer valued its land assets at $5.694 billion, and recognized goodwill of $6.506 billion, being the excess of the acquisition cost (grossed-up for liabilities) over the fair value of the specifically identified tangible and intangible assets.

In rejecting the proposition that sufficient value could thus be assigned to the goodwill to avoid a conclusion that Placer did not exceed the 60% threshold, the plurality stated (at paras. 78, 87, 141 and 143):

The accounting approach in Murry [(1998) 193 CLR 605] was described as "the difference between the present value of the predicted earnings of the business and the fair value of its identifiable net assets". That methodology is not the same as comparing the fair value of Placer's identifiable net assets to the purchase price of the business, the accounting approach adopted by Barrick.

Murry did not broaden the legal concept of goodwill to include sources which did not generate or add value (or earnings) to the business by attracting custom. …

… [A]t the acquisition date, there were no sources of goodwill that could explain the $6 billion gap which was attributed by Barrick to goodwill. That unexplained gap suggests that the DCF calculations used by Barrick's valuers to value Placer's land, its principal asset, were wrong. … [T]he danger identified by the majority in Murry of attributing a value to goodwill which actually inheres in an asset was readily apparent. …

At the acquisition date, Placer was a land rich company which had no material property comprising legal goodwill. … [italics in original]

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Schedules - Schedule II - Class 14.1 - Paragraph (a) goodwill must have a connection to attracting custom 453
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property protean nature of property concept 445

Morrison v. The Queen, 2018 TCC 220

Ontario list price of generic pharmaceuticals substantially exceeded their FMV in the international market

One of the taxpayers (Morrison) participated in a charitable gift program (the “CGI Program”) under which he purchased pharmaceuticals for a cheque of $9,500 and then donated the pharmaceuticals to a registered charity and received a charitable receipt for $56,502.80. CRA reassessed on the basis that the pharmaceuticals had a fair market value (“FMV”) of $1,759.35 (based on pricing indicated by the International Drug Price Indicator Guide), so that the balance of the claimed amount of the gift-in-kind by him was denied. The gift-in-kind had been valued by the promoter based on data such as Ontario list prices for the pharmaceuticals (e.g., the Ontario Drug Benefit Formulary/Comparative Drug Index as prescribed under the Ontario Drug Benefit Act). However, the Crown expert evidence was that Canadian pharmacies actually paid up to 80% less than the wholesaler catalogue prices for generic pharmaceuticals. Moreover, the pharmaceuticals were delivered outside Canada in bulk.

In confirming this assessment, Owen J found (at para. 127):

… Since the pharmaceuticals were not (and could not be) imported into Canada for sale, the approach to valuation adopted for the CGI Program is patently flawed since it is using a Canadian market (Ontario) to value generic pharmaceuticals that cannot be sold in that market.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus taxpayers had the burden of disproving the Minister’s assumptions about their gift tax shelter about which they knew virtually nothing 400
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts gift was not vitiated by benefits 518

SRI Homes Inc. v. The Queen, 2014 DTC 1185 [at 3693], 2014 TCC 180

full repayment of shareholder loan, subsequent to its sale for less than book value, was not anticipated

The taxpayer made shareholder loans to two companies, and then disposed them to a related company for less than their book value, deducting the difference as a business loss. Before finding that the loss was non-capital in nature (see summary under s. 18(1)(b) - Capital Loss v. Loss), Graham J found that the taxpayer's valuation of the loans at the time of disposition matched their fair market value in light, inter alia, of evidence of the companies' poor financial condition. The Minister had not argued the point, having only made the assumption that the fair market value was equal to book value. Although one of the loans were subsequently repaid in full, this occurred because of an unexpected offer for that company's assets.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss shareholder loans to trailer park companies were made to earn income in taxpayer's own manufactured home business 223

Lupien v. The Queen, 2016 CCI 2

distributor earning significant relative profits had no transferable goodwill where no evidence of long-term distributorship agreement

A lacquer-manufacturing corporation (“Antoni”) indirectly owned by the taxpayer’s brother imported one of its product lines from an Italian company pursuant to an exclusive distribution agreement with it, and used the services of the taxpayer’s company (“LCR”) to distribute those products in Canada and the U.S. and provide after-sales service. Shortly before the sale of all the assets of Antoni to an arm’s length purchaser (“Chemcraft”), Antoni purchased all the assets of LCR. Lamarre ACJ affirmed the Minister’s finding that as the purchased LCR assets did not include any valuable goodwill (notwithstanding that LCR earned a significant portion of the combined profits), s. 160 applied to this purchase (and to a subsequent dividend paid by LCR to the taxpayer) on the basis that Antoni, which was a tax debtor, had paid more that the purchased assets’ fair market value.

In so finding, she noted that although goodwill “is a residual category of property which can encompass various diverse elements” (para. 90, TaxInterpretations translation), there was no evidence of a distributorship agreement with LCR that could not be terminated on short notice or that the LCR name, which was acquired by Chemcraft, was of any value to it, and that the asset sale agreement between LCR and Antoni had not listed goodwill as a transferred asset

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) double application of s. 160 re asset sale for excess consideration 90

Mariano v. The Queen, 2015 DTC 1209 [at 1331], 2015 TCC 244

courseware licences valued at modest initial cost, given relevant wholesale market and depressive effect of huge volumes purchased

The taxpayers were participants in a leveraged donation scheme, in which courseware licenses were purchased by a corporation ("Phoenix") from a Florida corporation ("Infosource") which also packaged and sold such licences in the course of its business, contributed by it to a purported Trust, purportedly distributed under s. 107(2) to the participants and then purportedly gifted by them to a registered charity with charitable receipts being issued which assigned a value to the donated licences of several hundred times their previous cost to the corporation (para. 125). After finding that the taxpayers' claimed charitable tax credits should be disallowed for lack of donative intent (see summary under s. 118.1 - total charitable gifts), Pizzitelli J found that the valuation in the charitable receipts was unsupportable for any number of reason, including basic common sense.

One particular deficiency in the scheme promoters' valuation was the failure to consider the effect of the supply of licences on the market. The market in question was the "charitable donation market" in Canada. The reason the courseware preparer was willing to sell the licences so cheaply was because it recognized that the licences would be distributed in Canada to persons who would otherwise be unable to purchase them (para. 105). Within such a narrow market, failing to consider the impact of approximately 3 million licences distributed through the donation scheme was (para. 123):

...contrary to the definition of fair market value, where buyers and sellers would be informed and supply and demand would be an essential element... .

Furthermore, such expert erred in treating retail sales by Infosource as a relevant comparable for valuing the licences here as they essentially had been acquired on a wholesale basis – so that the modest price paid to Infosource represented the licences' fair market value.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership no acquisition of unascertained property 66
Tax Topics - General Concepts - Sham taxpayer involvement in deceit unnecessary 357
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(1) void for lack of certainty of objects 208
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2) delegation of power of appointment to promoter not authorized 222
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts no gift where no intent for impoverishment and where gifted property not yet identified 526
Tax Topics - Income Tax Act - Section 248 - Subsection 248(35) attempted use of initial gift to step-up ACB under s. 69(1)(c) 238

Commissioner of Taxation v. Resource Capital Fund III LP, [2014] FCAFC 37 (Fed. Ct. of Austr.)

mining information not to be valued separately at reproduction cost

The appellant ("RCF") was a non-Australian partnership which was assessed on the basis that its gain from the sale of a "member ship interest" in an Australian company ("SBM") with two underground gold mines in Western Australia was from "taxable Australian real property". The SBM membership interest qualified as TARP "if the sum of the market value of [SBM]'s assets that [were] taxable Australian real property exceed[ed] the sum of the market values of its assets that [were] not taxable Australian real property." The primary judge below had found that the SBM membership interests were not TARP, in part, on the basis that the mining information of SBM (a non-TARP asset) had a substantial value in light of the substantial exploration cost that would be required to reproduce this information, as well as the substantial present value of the mining production that would be foregone during the three to five year exploration and evaluation process and that the valuation of the mining rights (a TARP asset) should be discounted by the same factors.

In rejecting this approach on appeal, the Court stated that the market values of the various assets should be made:

on the hypothesis of a simultaneous sale to the one purchaser with the capacity to use those assets in combination in a gold mining operation as their highest and best use. …[A]ll the experts…agreed that in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information and plant and equipment for less than their re-creation costs with little or no delay.

Accordingly, it appeared that the Commissioner was successful, although the parties could make submissions on the final calculations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property mining information not to be valued separately at reproduction cost 286
Tax Topics - Treaties - Income Tax Conventions - Article 13 mining information not to be valued separately at reproduction cost 286
Tax Topics - Treaties - Income Tax Conventions - Article 4 reverse hybrid partnership 415

Resource Capital Fund III LP v. Commissioner of Taxation, [2013] FCA 363 (Fed. Ct. of Austr.), rev'd supra.

The appellant ("RCF") was a Caymans limited partnership with mostly US-resident partners, which was assessed under the "taxable Australian real property" rules on its gain from the sale of an Australian company ("SBM") with two underground gold mines in Western Australia. The SBM shares qualified as TARP "if the sum of the market value of [SBM]'s assets that [were] taxable Australian real property exceed[ed] the sum of the market values of its assets that [were] not taxable Australian real property." After already having decided in RCF's favour on the basis that the gain was Treaty-exempt, Richard Edmonds J further found that the SBM shares were not TARP, so that the gain also was not assessable under the TARP rules.

In reaching this conclusion, he found that:

  • the plant and equipment, to the extent it was fixtures, was fixtures to the land (which was not owned by SBM and, therefore, was not TARP of SBM) and not to its mining rights (which were TARP): para. 112
  • the mining information of SBM (which was not TARP) had a substantial value in light of the substantial exploration cost that would be required to reproduce this information, as well as the substantial present value of the mining production that would be foregone during the three to five year exploration and evaluation process (para. 105, 132)
  • the question of what a hypothetical purchaser would pay for the mining information, being anything in the range of nil (being what it could be sold for by itself) to the full replacement cost (including foregone production as noted above), was indeterminate – however, "the fair valuation is one which shares equally between the holder, and the potential user, of the relevant asset the benefit to the user of immediate acquisition of the asset" (para. 157, see also 106, 129), so that the mining information was valued at the mid-point between the two extremes
  • similarly, the plant and equipment should be valued "by dividing the notional ‘bargaining zone' equally" (para. 159, see also 107) between its replacement cost and its minimal scrap value
  • it was not necessary to address whether any value should be assigned to goodwill as the SBM non-TARP assets were more valuable even without doing so
  • it was inappropriate to add an asset value representing the excess of the market capitalization of SBM (which was a listed company) over its discounted cash flow valuation (para. 111, 121)
Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 13 mine deriving value from information 392
Tax Topics - Treaties - Income Tax Conventions - Article 4 310

Canadian Winesecrets Inc. v. The Queen, 2011 DTC 1310 [at 1742], 2011 TCC 390 (Informal Procedure)

The taxpayer was incorporated by a non-resident individual carrying on a proprietorship. It then acquired assets of the proprietorship (comprising cash and accounts receivable) for a total of $118,342 and assumed accounts payable of $118,342 (for a difference of $63,015). The Minister assessed the taxpayer for failure to remit Part XIII tax under s. 215(1) on the basis that the proprietor was deemed to receive a dividend 0f $63,015 (perhaps under ss. 15(1) and 214(3)(a), although Angers J referred instead to s. 212.2).

The taxpayer did not establish that the $63,015 difference corresponded to a transfer of goodwill. Angers J. noted that there was "no information concerning a client's list or regarding reputation, location, or brand loyalty" (para. 19). Whatever goodwill existed was personal goodwill towards the proprietor rather than commercial goodwill towards the proprietorship, and therefore was not transferable. He then stated (at para. 21):

[T]he question to ask to determine whether goodwill is personal is this: if the person withdraws from the business will any goodwill remain?

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) mere personal goodwill 160

Anthony v. The Queen, 2010 DTC 1356 [at 4392], 2010 TCC 533 (Informal Procedure), aff'd 2012 DTC 5019 [at 6633], 2011 FCA 336

Free parking for school employees was found to be a taxable benefit which should be valued at fair market value. The Minister's and taxpayers' valuations both used the direct comparison approach, which determines value by checking prices for similar products or services. Paris J. rejected comparisons to parking lots that were far away from the school, and ones that were close to busy streets. Of all parking places that experts compared, the only reasonable ones were in two nearby apartment buildings. Paris J. took the average of their prices, less 10%, as the fair market value of the benefits; experts for both sides agreed that, being outdoors, the school parking was worth 10% less than in the comparable apartments.

Nantel v. The Queen, 2010 DTC 1264 [at 3836], 2009 TCC 599

The taxpayers donated paintings to a museum. In upholding the Minister's valuation (less than 10% of the taxpayers') and rejecting a submission that the museum represents a "special purchaser" (a buyer willing to pay more than others because of a special need or interest), Bédard J. noted that a special purchase can raise the fair market value of property, but the existence of such a buyer must be well supported in evidence.

Bédard J. also noted that, in a very small market, the hypothetical sale of the property in question might itself amount to a substantial increase in supply, which would reduce the property's marginal fair market value accordingly.

Russell v. The Queen, 2009 TCC 548, 2009 DTC 1371 (Informal Procedure)

C. Miller, J. followed the Nash decision in finding that quantities of art purchased by the taxpayers and immediately donated to charities had a fair market value equal to their purchase price. In rejecting the taxpayers' submission that the fair market value determination should be based on the retail market (i.e. what the art might be sold for to the public by galleries), he stated (at para. 25) that this argument "ignores the reality that the buyers/donors have no access to that retail market, other than through a gallery" and that he could speculate "that the buyers/donors might go knocking on the galleries' doors to sell in bulk, but this would not yield the retail price the gallery would sell the art for, only the wholesale price the gallery would buy the art for".

Nguyen v. The Queen, 2008 DTC 4390, 2008 TCC 401 (Informal Procedure)

The taxpayers purchased groups of paintings (approximately 40 or 50 in each year) for consideration that represented a substantial mark-up over the cost to the vendor ("CAAS") and that included a 15% retainer fee paid to CAAS for arranging for the donation of the paintings (almost immediately after their purchase by the taxpayers) to charities at an appraised value over three times the taxpayers' purchase price.

The Minister assessed on the basis that the fair market value of the donated paintings was equal to their cost to the taxpayers excluding the retainer fee.

In confirming this basis of reassessment, Campbell, J. found that the almost contemporaneous purchase transaction by the taxpayers were the best evidence of the paintings' fair market value and, with respect to the retainer fee, noted (para. 28) that "if the Appellants had decided to retain the art and not donate it, they would not have incurred this 15% retainer fee".

Baxter v. The Queen, 2006 DTC 2642, 2006 TCC 230

The taxpayer and others purchased a sublicence of futures trading software which was then utilized for that purpose by a company connected with the licensor of the software under an agency agreement with the taxpayer. Before going on to find that the fair market value of the sublicensed software to the taxpayer was equal to his purchase price therefor, Bell J. indicated that the analogy of the taxpayer's valuation expert to a lobster trap was helpful, stating (at p. 2663):

"The engagement by the purchaser of someone to use the lobster trap is analogous to the engagement of an agent to use the license. He submitted that the lobster trap, just as the license, earned value on its own."

Westward Explorations Ltd. v. The Queen, 2006 DTC 2443, 2006 TCC 105

An 11.12% interest in a gold mine that the taxpayer purchased was to be valued, for purposes of s. 69(1)(a) of the Act, on the basis that the whole mine, which was estimated by the Crown's expert to have a resource of 246,700 ounces (proven and probable - 29,600; possible - 25,100; and drill indicated - 192,000), and that that resource should be valued at $25 per ounce. The inferred ounces included in the valuation of the taxpayer's expert were too speculative.

Quinn v. The Queen, 2004 DTC 3328, 2004 TCC 649

In accepting the valuation used by the taxpayer with respect to her donation of art to a registered charity, Bell J. adopted (at p. 3359) the definition of fair market value used by the taxpayer's expert, namely, "the highest price reasonably expected if an asset is sold in the normal method in the ordinary course of business in a market without undue stress composed of willing buyers and sellers". The taxpayer's submission that cost alone is not necessarily determinative of market value, and that in this case no blockage discount was applicable since the market was large enough to absorb the prints donated by the taxpayer, also was accepted.

Maréchal c. La Reine, 2004 DTC 3227, 2004 TCC 464

A sculpture by a well-known Quebec sculptor was purchased in December 1999 by the taxpayer for $1,300 plus taxes and commission and was donated by him to a Canadian museum. The valuation by the Canadian Cultural Property Export Review Board of the sculpture at $5,000 (rather than $8,000, as contended by the taxpayer) was confirmed. The reports that were tendered on behalf of the taxpayer did not "contain within themselves the type of evidence that would justify the conclusion that this work of art has appreciated in value by 500 percent" (p. 3233) including the absence of any recent sales of similar ceramic sculptures by that sculpture.

Morley v. The Queen, 2004 DTC 2604, 2004 TCC 280, briefly aff'd 2006 DTC 6351, 2006 FCA 171

Archambault J. concluded that the fair market value of Canadian rights to software acquired by a partnership was lower than the figure suggested by the expert for the Minister (and substantially lower than that advanced by the partnership). In particular, he found that a discount rate of 40% to 45% should be used in discounting projected future cash flows to be generated by the property given that the partnership only had limited territorial rights, a short life and many features were required to be added to the software in order to make it competitive with existing competitive products.

CIT Financial Ltd. v. The Queen, 2003 DTC 1138, 2003 TCC 544

see also 2003 DTC 1545, 2003 TCC 544

The fair market value of custom software that a New Zealand company had developed to run its steel mill was found to have a fair market value equal to the amount shown in the New Zealand company's records as being the cost, plus a 70% adjustment factor to reflect the fact that most companies' tracking systems do not record between 30% and 70% of the real effort that goes into software. The capital cost to the taxpayer of the software was reduced from the purchase price to this amount.

Malette v. The Queen, 2003 DTC 1078, 2003 TCC 542

A donation of 981 paintings by the taxpayer to a public gallery was to be valued for purposes of s. 32 of the Cultural Property Export and Import Act on the basis of the fair market value of each work of art without any discount for blockage.

World Corp. v. The Queen, 2003 DTC 951, 2003 TCC 494

The taxpayer assigned a commission of $3.9 million that was to be paid on a deferred basis by a limited partnership in consideration for the taxpayer having helped secure $49 million in equity capital that was to be invested (largely on as deferred basis) in the limited partnership, which was slated to purchase an office tower property approximately six months later, to a Cayman Islands corporation that was an indirect shareholder and with which it did not deal at arm's length, for cash consideration of $41,300. It was assessed for Part XIII tax on the basis that the fair market value of the commission was $2,458,700.

In allowing the taxpayer's appeal, Bell T.C.J. noted that there was no signed agreement respecting the commission and apparently no oral agreement or understanding between the taxpayer and the limited partnership promoter as to the terms and conditions of such agreement, that the general partner of the partnership was without significant assets, that no commission would be payable until the partnership acquired the property and there was significant uncertainty as to whether such acquisition would occur.

Brown v. The Queen, 2001 DTC 1094 (TCC), aff'd supra 2003 DTC 5298 (FCA)

In determining the principles to be applied in determining the fair market value of "game engines" acquired by a partnership (i.e., the cores of computer games that when a graphic element was added thereto would be functional computer games), Rip T.C.J. indicated that: the fact that the vendor ("ASC") granted to developers of the engines the right to use elements of the source code of the engines on a royalty-free basis was not a detraction from the value of the engines because such licence-back agreements would not cause the engines to produce more revenues; that in the absence of evidence as to the value of each specific engine purchased, it would be necessary to assess what average game sales would be; that in determining average game sale the unsuccessful track record of ASC to date should be taken into account; that in determining such average it would not be appropriate to take into account the possibility of one or more of the eleven engines being a "hit" given that valuation should be performed on a conservative basis; and that the expected decline in the market for engines using 16-bit platforms should be also taken into account; and that the calculations should find after-tax values.

Hallatt v. The Queen, 2001 DTC 128 (TCC)

The V-day value of a nursing home was determined using a capitalized earnings approach.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Onus 77

Teleglobe Canada Inc. v. The Queen, 2000 DTC 2493 (TCC), aff'd 2002 DTC 7517, 2002 FCA 408

Part of the consideration for assets purchased by the taxpayer was the issue by it of special shares with an aggregate stated capital of $1,000. The articles of incorporation provided that the corporation would pay a dividend on the special shares on December 31, 1987 at the rate of $60,909 per day from the date of issue (April 3, 1987) to that date, namely, an amount of $16.57 million. In finding that the portion of the assets acquired through the issue of the special shares should be considered to have a cost to the taxpayer of $1,000, Rip T.C.J. stated (at pp. 2510-2511) that "it is the directors who determine the stated capital of shares and the consideration for the issue of the shares", and further noted that the date of payment of the dividend might have been delayed indefinitely until the directors determined to pay it.

Aikman v. The Queen, 2000 DTC 1874 (TCC)

In considering the fair market value of a "Cyclo-Crane" (a lighter-than-air, heavy lift vehicle) that the taxpayers had donated to the Canadian Museum of Flight and Transportation, Bowman TCJ. stated (at p. 1886) that "what it cost historically to produce a prototype, or what it might cost to reproduce it, might have nothing to do with what price the object would command on the open market".

Pustina v. The Queen, 96 DTC 1594 (TCC)

Mogan TCJ. accepted (at p. 1612) the unanimous opinion of the taxpayer's expert that the retail gallery market rather than the auction market was the best market to obtain the highest price for the paintings of a contemporary artist. He went on to find that the paintings should be valued at $2 per square inch, rather than the approximate amount of $3 per square inch which the artist's works subsequently commanded when he had established an exclusive distributorship relationship with a Toronto gallery, given that in the years in question the personal life of the artist was at a low ebb (including alcoholism) and many of his works were being sold at distress prices on street corners in Thunder Bay.

Gilvesy v. The Queen, 96 DTC 1417 (TCC)

An option to acquire land with an exercise price equal to the fair market value of the land at the date of grant of the option, plus interest at the prime rate between the date of grant and date of exercise of the option, had a fair market value of nil.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 131

Les Placements A & N Robitaille Inc. v. MNR, 96 DTC 1062 (TCC)

In determining the fair market value of the goodwill of a business of reconditioning and selling boats and other nautical products, Archambault TCJ. applied a relatively low capitalization rate of 4.0 to normalized earnings in light of the yield on long-term federal government bonds of 9.5%, the competitive nature of the business, the risk of expropriation of the premises occupied by the business, and the lack of expertise on the part of the staff.

R. v. A.G., Ex parte Imperial Chemical Industries PLC, [1985] BTC 8003 (HC), rev'd [1986] BTC 8015 (C.A.)

rev'd on other grounds [1986] BTC 8015 (C.A.)

Woolf, J. noted that for the purpose of determining the arm's length value of ethane, "the parties are agreed that an arm's length contract for ethane for petrochemical or other purpose which was to continue for a period of time would undoubtedly have three provisions: first of all, a base price which was the price which should reflect the initial price which would be paid in an arm's length transaction; secondly, an escalator, which is designed to ensure the base price keeps up with the market price as time passes; and finally, a reopener provision to cover the situation if there is a change of circumstance."

Administrative Policy

P113 – "Gifts and Income Tax" 2013

Fair market value (FMV)—This is usually the highest dollar value you can get for your property in an open and unrestricted market, between a willing buyer and a willing seller who are acting independently of each other.

13 August 2013 External T.I. 2012-0471401E5 F - FMV - partnership interest

deferred tax liability re deferred (s. 34) partnership income recognition reduces partnership interest FMV

A partner of a professional partnership which has elected under s. 34 to exclude work-in-progress from its income transfers his partnership interest to a corporation in consideration for preferred shares, utilizing the s. 85(1) election. Can the deferred tax liability respecting the work-in-progress be taken into account in determining the fair market value of the partnership interest at the time of transfer; and, if not, can the redemption amount of the preferred shares subsequently be reduced when the taxes actually become payable?

After emphasizing that valuation was a question of fact, CRA stated (TaxInterpretations translation):

A potential purchaser [of such a partnership interest] thus would be inclined to accord some value to work-in-progress which had been performed but not invoiced. However, such value would likely be discounted, for example, for…all risks associated with recovery as well as income taxes. In the case where the receipt of revenues is not anticipated in the immediate future, the time value of money also should be considered….

We should also note among other things that the general position of the CRA is to the effect that deferred taxes respecting a property which is the subject of a rollover should not be considered for the purposes of determining the FMV of such property.…

In light of the foregoing, it was not "pertinent" to comment on the 2nd question.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) - Paragraph 85(1)(c) FMV of professional partnership interest would normally discount the value of s. 34-elected WIP for income taxes 126
Tax Topics - Income Tax Act - Section 34 FMV of partnership interest reduced re deferred income taxes on WIP subject to s. 34 election 39

7 November 2012 External T.I. 2012-0466681E5 F - Frais de gestion environnementale

mandatory ecocharges added to cost of electronic goods also included in their FMV

The "écofrais," which vendors of various types of electronic products are now required under Quebec law to (at their option) add to or include in the price of such products sold in Quebec and remit to the applicable recycling agency, must be included in the determination of the fair market value of such products for purposes of computing an employee benefit when such products are gifted or awarded to an employee.

CRA stated (TaxInterpretations translation):

It appears that the écofrais are environmental charges which are incorporated in or added to the final sales price of a product, and which the enterprise has the option of making visible or not visible. Furthermore, it appears that they are not required to be presented as an addition to the initial price as, for example, a sales tax.

Consequently, as the payment of these charges is mandatory, taking into account that they are provided for in provincial legislation and regulations, these charges must be added in computing the FMV of gifts or awards.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) ecocharges payable on any purchase of electronic goods included in benefit from their gift 169

15 June 2012 External T.I. 2012-0434761E5 F - Dons liés à une police d'assurance-vie

7 factors to be considered in valuing a donated life insurance policy

CRA stated that, in valuing a life insurance policy donated to a charity, the principles set out in IC 89-3, paras. 40-41 should be applied, stating that:

Factors to be considered in making this determination include:

(a) the cash value of the policy;
(b) the amount of policy loans available;
(c) the face value;
(d) the state of health of the insured and that person’s life expectancy;
e) conversion privileges;
(f) other policy terms, such as term riders and double indemnity provisions;
(g) the replacement value.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts gift if pay policy premiums following assignment of policy to charity, but not by virtue of designating charity as policy beneficiary 250
Tax Topics - Income Tax Act - Section 248 - Subsection 248(31) donated life insurance policy to be valued on ordinary principles 126

4 October 2002 External T.I. 2002-0154725 - LIFE INTEREST-REMAINDER INTEREST

On the death of Mrs. X, a life interest in a residence was received by her surviving husband (Mr. X) and the remainder interest by her daughter (Ms. A), with Mr. X then being was deemed to dispose of his life interest for its fair market value immediately before his death. CRA stated:

the FMV of a remainder interest in a real property at a particular time is equal to the FMV of that real property minus the FMV of the life interest therein. The calculation of the FMV of the life interest would usually be based on the following elements: FMV of the real property, a reasonable rate of interest, life expectancy of the beneficiary of the life interest at the date of transaction, and any other factors relevant to the specific case… .

2000 Ruling 1999-001072 -

Deferred taxes in respect of a property be transferred pursuant to an s. 85(1) election in the course of a butterfly reorganization would not be relevant for purposes of valuing the property so transferred.

5 October 1994 External T.I. 5-942164 -

Discussion of method of valuing an equitable interest in a trust.

3 December 1993 T.I. 920099 (C.T.O. "Transfer of Farm Inventory to a Corporation")

Where the market price of wheat is $2 per bushel but under a gross revenue insurance program a farmer is guaranteed a price of $4 per bushel, the fair market value of wheat inventory transferred to his corporation will be considered to be $2 per bushel. Any entitlement under the insurance program will be considered to be separate property that is an account receivable of the individual.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) 57

September 1992 B.C. Revenue Canada Round Table, Q. 31 (May 1993 Access Letter, p. 228)

The fair market value of an interest in a fully discretionary trust is generally indeterminable.

Tax Professionals Mini Round Table - Vancouver - Q. 31 (March 1993 Access Letter, p. 110)

The fair market value of an interest in a fully discretionary trust is indeterminable.

4 February 1992 Memorandum (Tax Window, No. 16, p. 21, ¶1730)

Appraisals of art collections should be made on a piece by piece basis with little or no consideration given to premiums or discounts.

20 September 1991 T.I. 911923 [FMV excludes GST]

FMV excludes GST

If a corporation or individual donated a work of art to a public cultural institution, does the tax receipt reflect the fair market value plus the original GST paid on the original purchase? CRA responded:

The amount recorded on the receipt does not include the amount of GST paid on the original purchase. In fact, the fair market value of property at a particular point in time does not include any costs incurred by the donor.

26 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 23, ¶1070)

Where a winner of a lottery price has agreed, prior to winning, to give the prize to charity, the amount of the gift will be the fair market value of the chance to win represented by the particular ticket.

89 C.R. - Q.32

The fact that a government agency might not grant a renewal of a taxi licence, timber licence or other quota in the nature of government rights is considered by each RC valuator. The commercial reality of such assets are traded with a particular region is also researched.

81 C.R. - Q.49

For purposes of s. 15(1), the repayment of a note bearing little or no interest will not be regarded as entailing the conferral of a benefit on the shareholder holding the note provided that the consideration given for the note was equal to its face value.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 39


Peter Neelands, Suzy Lendvay, "Valuation of IP based on a royalty stream", The Lawyer's Daily (LexisNexis Canada), January 24, 2018

Relief-from-royalty method of valuing intellectual property (IP)

One common approach to value IP is the relief from royalty method. The relief from royalty method determines the value of IP as the present value of the royalty or licence fees that would have been paid, had the asset had been licensed in an arm's length transaction.

Georgia Pacific factors

[T]he Georgia Pacific Factors [in Georgia-Pacific Corp. v. United States Plywood Corp. 318 F Supp 116] require that the royalty rate (in the context of determining damages in IP litigation) be determined by considering the factors that would influence a hypothetical reasonable and voluntary negotiation.

A variety of public and paid resources exist to benchmark an appropriate royalty rate for a subject IP. Proprietary databases such as RoyaltySource and ktMINE, reported case decisions, SEC filings, business periodicals and valuation books contain many examples.…

25% profit-split method

In addition, there are several "rules of thumb" which can be utilized in determining an appropriate royalty rate. One such rule is the "25 per cent profit split valuation method" which determines a royalty rate in order to allocate 25 per cent of the licensee's profits to the licensor. Although this may serve as a useful starting point to begin consideration of the value of IP, courts have been reluctant to accept this methodology.

Uncertainties re relief-from-royalty method

Significant judgment exists in the valuation of IP using the relief from royalty method due to the uncertainty surrounding the selection of the royalty rate to apply to the cash flows generated by IP, and the selection of the discount rate to apply to the royalty stream….

Wolfe D. Goodman, "Valuation of an Interest in a Discretionary Trust Under the Family Law Act", Goodman on Estate Planning, Vol. IV, No. 4, 1998, p. 464.

Wolfe D. Goodman, "American Family Limited Partnerships as an Estate Planning Tool?", Goodman on Estate Planning, Vol. VI, No. 3, 1997, p. 447

Discussion of the valuation of limited partnership interests gifted by a parent to a child.

Hayhurst, "Transactions in Income and Capital Interests in Trusts", 1988 Conference Report, c. 38

Discussion of the valuation of interests in trust.