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Fiducie famille Gauthier v. Canada, 2012 FCA 76, aff'g 2011 DTC 1343 [at 1917], 2011 TCC 318

The taxpayer, a family trust, made a non-arm's-length sale of shares to a numbered corporation for a promissory note of approximately $2.6 million. The numbered corporation then immediately sold the shares at arm's length to a third party ("Keolis") for approximately $2.8 million. The lower sale price on the first transfer reflected that it had been determined that 404 would bear the cost of professional fees, relating to the structuring of the sale to Keolis, of $233,786. In finding that the $233,786 was a deemed dividend received by the taxpayer by operation of s. 84.1(1)(b), Archambault J. noted that the subsequent sale to the outside party clearly established a fair market value of approximately $2.8 million for the shares, and that it would be very strange for the taxpayer to have disposed of the shares for the lowered price if it had not also received the benefit of the fee payments as additional consideration (TCC para. 14).

In the Court of Appeal, Noël JA noted the taxpayer's argument that the Minister was statute-barred from applying s. 69(1)(b) to deem the sale of the shares of the numbered company to have been made for the shares' fair market value of $2.8 million, stating (at FCA para. 17):

[I]t was neither necessary nor useful to rely on paragraph 69(1)(b), since the value of this consideration tallies with the price at which the shares were sold by [the numbered company] as part of the arm's length transaction that took place the same day and is therefore their fair market value.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) fees borne by transferee were "consideration" 318

Attridge v. The Queen, 91 DTC 5161 (FCTD)

Given the unreliability of the expert evidence of both the Crown and the taxpayer, Muldoon J. selected a V-day value for the shares of a private trucking company which was between the two extremes advanced by the respective experts and which, in large part, was based on evidence as to an offer for the shares which was made in 1972. Muldoon J. noted that the value of the shares would be their value to a special purchaser, i.e., the purchaser of a specialized trucking enterprise.

Winter v. The Queen, 89 DTC 5304 (FCTD)

The court valued common shares which the taxpayer had gifted to his daughter at $1,089 per share, which was significantly less than a roughly contemporaneous bid of about $2,000 per share which was made for a different block of common shares of the company. "A swing block of shares, as in the block of the Harvey company shares held by the Royal Trust Company in England, is particularly attractive and, as we have seen, may command a price for beyond the breakup value or any reasonable cost/earnings ratio."

McPherson v. McPherson (1988), 48 DLR (4th) 577 (Ont CA)

Mrs. McPherson was entitled to receive a cash payment from Mr. McPherson calculated on the basis that she had a 1/2 interest in a company controlled by her husband. It was held that the amount of the payment should take into account taxes that would be payable by him if he sold 1/2 the shares or received a dividend of 1/2 the assets. Finlayson, J.A. stated "an allowance should be made in the case where there is evidence that the disposition will involve a sale or transfer of property that attracts tax consequences, and it should not be made in the case where it is not clear when, if ever, a sale or transfer of property will be made and thus the tax consequences of such an occurrence are so speculative that they can safely be ignored."

Brant Investments Ltd. v. Keeprite Inc. (1987), 37 BLR 65 (S.C.O.)

While hindsight "is not probative of value at the valuation date, it may be used to measure the reasonableness of assumptions or projections made in the process of evaluation." Interest rate assumptions of two valuation experts were found to reflect their knowledge that interest rates did not increase after 1983.

Anderson, J., in coming to a determination of the "fair value" of shares, chose to arrive at his "own valuation upon [his] view of the evidence as a whole and without resort to any sophisticated method" rather than either selecting his own parameters or "controlling factors" and applying them, or making his own selection of controlling factors and remitting the matter for fresh consideration and further evidence.

Manning v. Harris Steel Group Inc., [1987] 1 WWR 86 (BCSC)

"Hindsight appraisals are not acceptable to reach a fair value. Information obtained subsequent to the valuation date has a limited use such as measuring the accuracy of projections or testing assumptions which are used by valuators in the preparation of opinion evidence."

Re Cyprus Anvil Mining Corp. (1986), 33 DLR (4th) 641 (BCCA)

A mining company ("Cyprus Anvil") whose deposits in the "Faro" operation were expected to be exhausted in 10 years time agreed with the majority shareholder of a private company ("Vangorda") which had deposits nearby, to purchase the shares of the majority shareholder for the equivalent of $1.75 per share. The Court of Appeal, in determining the fair value of the shares of dissenting shareholders of Vangorda to be $8.00 per share, indicated that the negotiated price was a good starting point, but was of the view that since Cyprus Anvil was the only prospective purchaser of the Vangorda deposits, the negotiated price did not reflect the value of those deposits when integrated with the Faro operation. The trial judge, in adhering solely to a discounted-cash-flow value of $19.04 per share "fell into the error of letting adherance to a mathematical formula usurp the exercise of judgment".

Buckingham v. Francis, [1986] 2 All E.R. 738 (Q.B.D.)

Staughton, J. stated that in determining the value of a company with minimal tangible asset backing, on a going-concern basis, there were two unknowns: "what the future profits would be, and what price/earnings ratio would commend itself to a purchaser as appropriate for capitalization. It is possible to make an allowance for risks in calculating either figure. What one must guard against is making allowance for the same risks twice over, i.e., in the assessment of future profits and also in the choice of price/earnings ratio."

Steen v. The Queen, 86 DTC 6498, [1986] 2 CTC 394 (FCTD), aff'd 88 DTC 6171, [1988] 1 CTC 256 (FCA)

In finding that the "value" of shares of British Columbia Forest Products for purposes of s. 7(1)(a) equalled their price on the TSE, Rouleau, J. stated:

"there is no clog on the disposal of Plaintiff's shares that would justify a discount from the market price quotation nor is it necessary to take into account Plaintiff's minority position in BCFP in view of the fact that stock market prices of shares in a company listed on a public stock exchange, widely distributed and regularly traded in, as is the case at bar, will reflect a minority discount given that the stock exchange is a market of minority interest."

Terry v. The Queen, 85 DTC 5179, [1985] 1 CTC 135 (FCTD)

A fledgling distillery company was found to have a "nominal" fair market value of $1.00 per share, or $667,000, in total, notwithstanding a contemporaneous issue to the public at $4.00 per share, because it had no history of earnings and no net tangible assets, and because "projected earnings were largely based on the hope of making bulk whiskey sales in the United States" after aging the whiskey for 3 years.

Class A participating non-voting shares in a holding company which controlled the distillery company were found to have a fair market value of nil for federal gift tax purposes, because the hypothetical purchaser in the market place would seek to purchase control, and such control could not be secured through a purchase of the Class A shares alone, although the Class A participating non-voting shares and the Class B voting non-participating shares of the holding company "as a package, might have had some value to a hypothetical purchaser".

Ronald Elwyn Lister Ltd. v. Dayton Tire Canada Ltd. (1985), 52 OR (2d) 88 (C.A.)

The Court adopted evidence that "the most common method of determining going concern value is that which relates to the capitalization of the future anticipated income of the business. This approach contemplates the estimation of a maintainable income level after tax and its capitalization at a rate of return which an investor would consider appropriate to the business in question."

Yager v. The Queen, 85 DTC 5494, [1985] 1 CTC 89 (FCTD)

All the common shares of a private company were held as follows: 44% by Mr. Yager; 4% - Mrs. Yager; 44% - Mr. Fast; and 8% - Mrs. Fast. A minority discount of only 10% was applied to the Yager shares since Mr. Fast and Mr. Yager treated each other essentially as equal partners in the business at all times, notwithstanding the 52% combined shareholding of the Fasts.

The Queen v. Landsman, 84 DTC 6278, [1984] CTC 274 (FCA)

It was appropriate to assume in determining the fair market value of shares, that the owners and officers of affiliated companies would attempt to avoid bankruptcy and would pay other creditors in full, thereby leaving nothing to be paid to the companies whose share values were at issue. Those shares, accordingly, were worthless.

The Queen v. Hugh Waddell Ltd., 83 DTC 5309, [1983] CTC 270 (FCA)

The beneficial owner of shares of a corporation was precluded by the terms of a trust agreement from having his interest in those shares sold for more than a formula amount. This amount was less than what otherwise might have been the market value of the shares. Because he was not obliged to sell at the formula amount but could instead choose to retain his interest in the shares, the fair market value of his interest on V-Day was higher than the formula amount.

Stanton v. Drayton Commercial Investment Co. Ltd., [1982] BTC 269, [1982] 2 All E.R. 943 (HL)

A reference in the Finance Act 1965 to "value" should not be taken as synonymous to "market value". In cases where bargains have been made at arm's length, the value agreed upon by the parties is conclusive. Parliament had regard to the practical inconvenience of leaving agreements liable to be reopened to an inquiry as to what the market value was.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base 70

Carruthers v. The Queen, 82 DTC 6009, [1982] CTC 5 (FCTD)

A minority block of shares in a closely-held company was valued by capitalizing normal earnings and subtracting a minority discount and a further discount to reflect the risk that the majority shareholder might exercise his option to purchase minority shares at less than their fair market value. This option agreement could not be ignored since the hypothetical willing and fully-informed purchaser would take it into account before purchasing the shares. A liquidation value was rejected since a purchaser of the minority interest would not be in a position to force the winding-up of the company, and in any event such a purchaser would be unlikely to be buying in contemplation of the company being wound-up. Also relevant was that a purchaser would probably be losing the services of the minority shareholder who had been the company's driving force - and the strength of this assumption as to the probability of losing him was confirmed by subsequent events. The sale of shares pursuant to option agreements close to the valuation date did not represent the shares' fair market value, notwithstanding that the share-purchase agreements stated that the parties were dealing at arm's length and that the sales represented market value.

It also was stated that "it is invidious to make comparison of experts' reports and to weigh the validity of them on the basis of their qualifications" (rather than on the basis of the reports' contents and the evidence of the experts when cross-examined thereon).

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

market price best test

Market price is the best test of fair market value. Although the taxpayer held the view on V-Day that the majority shareholder of the company whose shares he owned would seek to acquire the taxpayer's minority shares at a price substantially in excess of their quoted TSX price, a view which was vindicated only 10 months later, it was stated that "that view was not one to which the public at large, including the holders of 12,000 odd shares, was privy." The quoted price accordingly was a better measure of fair market value. A further argument that the admittedly thin market for the shares on V-Day was "ephemeral" or "spasmodic," and therefore to be disregarded, also was rejected.

Connor v. The Queen, 78 DTC 6497, [1978] CTC 669, aff'd 79 DTC 5256, [1979] CTC 365 (FCA)

leasehold asset

A company, whose principal asset was a leasehold interest in a parking garage which was to expire on May 31, 1981, was valued on V-Day by taking the present value of maintainable earnings over the term of the lease (i.e., parking stall revenues minus lease payments to the landlord, municipal taxes, utilities and maintenance), excluding earnings that first would be required to eliminate the company's deficit. A minority discount of 10% to 20% was applied to the fair market value of the plaintiff's shares.

Mahoney, J. stated: "The reasonableness of projected earnings may be measured against the yardstick of actual results without arriving at those projections by application of hindsight."

Bendix Automotive of Canada Ltd. v. The Queen, 78 DTC 6137, [1978] CTC 194 (FCA)

The taxpayer paid a dividend in kind consisting of a control block of CDC shares to its U.S. parent, which thereupon exchanged the CDC shares for treasury shares of Control Data Corporation. The "amount" of the dividend for the purpose of s. 212(2) was the fair market value of the Control Data shares (whose fair market value in the hands of the taxpayer's parent was reduced by its agreement not to sell more than 50% of those shares within 2 years of their acquisition), and not the market value of CDC shares which were held by minority shareholders. The minority shareholders also were entitled to exchange their CDC shares for Control Data shares, and the market value of their shares appeared to be influenced by the exchange offer of Control Data.

Corlite Petroleums Ltd. v. The Queen, 76 DTC 6450, [1976] CTC 766 (FCTD)

The value of shares was taken by deducting a 5% discount to reflect the agreement of the holder to submit to any escrow arrangement that the B.C. Securities Commission might require (although that possibility did not materialize).

West Estate v. Minister of Finance (B.C.), [1976] CTC 313 (BCSC)

An executive died possessed of shares of Wood Gundy which were subject to a buy-sell agreement which provided that all transfers of shares in Wood Gundy (generally to other employees of Wood Gundy) would occur at a formula price equal to 2/3 of the net asset value of Wood Gundy. The fair market value of his shares for purposes of the Succession Duty Act (B.C.) were equal to the formula price rather than a "notional price purchasers unable to purchase may be willing to pay" (p. 319).

Rosenblat v. The Queen, 75 DTC 5274, [1975] CTC 472 (FCTD)

The taxpayer was granted the right to acquire 300,000 shares of a corporation in consideration of past services in June of 1967 and the shares were issued to him in December. The shares were to be valued for purposes of s. 15 at the date of the contract with the corporation.

Huron Steel Fabricators (London) Ltd. v. M.N.R., 75 DTC 5006, [1974] CTC 889 (FCTD)

The shares of a minority shareholder in a private Ontario company were subject to the standard private-company restrictions on transfer contained in the company's charter, and accordingly had little, if any, value.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 126

Smith Estate v. M.N.R., 74 DTC 6291, [1974] CTC 317 (FCTD)

At the time of her death in 1969, the deceased owned 2,000 Class B voting shares, and her two sons each owned 12 Class A voting shares, of an investment holding company. The Class A shares were entitled to a preferential 5% dividend; and the Class B shares were entitled to dividends out of the remaining earnings and to receive their par value on any winding-up of the company. In 1963 the shareholders had agreed that on the death of the deceased, her executors would cause the company to be wound up, and in 1966 supplementary letters patent were issued providing that by-laws could be passed changing the rights or restrictions attaching to the Class B shares provided that such by-law was sanctioned by the vote of the holders of at least 2/3 of each class.

Gibson J. followed the Beament case in finding that the value for estate tax purposes of the Class B shares was limited to their par value.

Henderson Estate v. M.N.R, 73 DTC 5471, [1973] CTC 636 (FCTD), aff'd 75 D.TC 5332, [1975] C.TC 485 (FCA)

The Minister's method of valuing a 15% block of shares that the deceased held in a mining company, which was to take the market price on the TSE immediately before the time of the deceased's death and subtract a 25% discount for blockage, was upheld, notwithstanding the estate's contention that the stock market price reflected a transient boom, that the market was not in possession of accurate information on ore reserves and that the deceased had been manipulating the market price. Cattanach, J., however, accepted "that the market price must have the element of consistency which precludes the existence of a transient boom or sudden panic and that the market price should be realistic rather than 'ephemeral'."

Winram v. MNR, 72 DTC 6187, [1972] CTC 193 (FCTD)

At the time of his death, the deceased owned 9 Class A voting shares of a private investment company and his wife owned the other Class A share and 990 Class B non-voting shares. The Court affirmed the assessment of the Minister that for purposes of the Estate Tax Act the 9 Class A voting shares of the deceased represented approximately 9/10 of the value of the company given that the board of directors (on which the deceased held the casting vote) was accorded the discretion to pay dividends on the Class A shares without paying dividends on the Class B shares, and given that the deceased's voting control of the corporation also would have enabled him to secure approval for any sale of his shares.

Re Mann Estate, [1972] 5 WWR 23 (BCSC), aff'd [1973] CTC 561 (BCCA), aff'd [1974] CTC 222 (SCC)

At the time of his death, the deceased owned 10 voting common shares of a private investment company and his children owned the balance of its shares, namely, 990 non-voting common shares. McIntyre J. found that the fair market value of the deceased's voting common shares for purposes of the Succession Duty Act (B.C.) represented 1% of the net asset value of the company. In rejecting the evidence of the Crown's valuation expert that a hypothetical purchaser of the voting common shares would be able to engage in various profitable schemes by virtue of exercising control of the company, he noted that such hypothetical purchaser should be taken to be aware of the risk of attack by the non-voting shareholders under ss.185 and 219 of the Companies Act (B.C.) which, if it were successful, would result in a winding-up under which the hypothetical purchaser would receive only his pro rata portion of the net asset value of the company.

Beament et al. v. Minister of National Revenue, 70 DTC 6130, [1970] CTC 193, [1970] S.C.R. 680

The deceased had held Class B shares of a private company which were participating as to earnings but only entitled to receive their nominal par value on a winding-up of the corporation, and agreed with his children (who held Class A shares which were non-participating as to earnings but participating on a liquidation) that in his Will he would direct the executors to wind-up the corporation. In finding that the fair market value of the Class B shares was limited to their par value plus unpaid dividends thereon, Cartwright C.J. stated (pp. 6133-6134):

"Once it is established (and it has been conceded) that the contract binding the deceased and his executors to have the Company wound-up was valid, the real value of the shares cannot be more than the amount which their holder would receive in the winding-up ... [I]t is irrelevant to consider what result would have flowed from the executors acting in breach of contract or in breach of trust."

Lawson v. Minister of National Revenue, 69 DTC 5155, [1969] CTC 201, [1969] S.C.R. 587

A mining stock promoter acquired treasury shares of a junior mining company and while he was selling as many shares as he could on The Toronto Stock Exchange also bought substantial quantities of the shares in order "to maintain the market". At the end of his fiscal year (May 31, 1955) his shares had an average cost of 34.1¢ and a market quotation of 67¢.

Pigeon J. stated (p. 5157):

"In my view, the trial judge was fully justified in holding that there was no evidence that a reasonable program of disposition of the inventory would have brought the market price below cost."

Attorney-General of Ceylon v. Mackie, [1952] 2 All E.R. 775 (PC)

Under the Estate Duty Ordinance, 1938 (Ceylon), the 5,000 management shares of a Ceylonese company engaged in the business of buying rubber and grading it for resale were to be valued at the price which they would fetch if sold in the open market at the time of death of the deceased. The Court accepted the appellant's submission that although these shares did not by themselves carry with them voting control of the company, they should be valued on the basis that the deceased, in order to get the largest price for his combined holding of management shares and voting preference shares (which collectively represented more than 50% of the votes), would have offered the preference shares for sale together with the management shares. However, the Court rejected the appellant's position that the company should be valued on the basis of its average profits for the five years preceding death, given that the profits of the business were highly variable and subject to extreme risk. Instead, the shares were valued on the basis of the much lower tangible net asset break-up value of the company.

See Also

Mady v. The Queen, 2017 TCC 112

arm’s length sales price established FMV for closing-date internal transfer of same shares

The taxpayer, who owned all the shares of his dental corporation (“MDPC”), agreed to sell all the MDPC shares to third-party purchaser (the “Dental Corporation”) and its affiliate for $4.5 million. The taxpayer Immediately before the closing of the sale to MDPC, the taxpayer exchanged all his commons shares of MDPC under s. 86 for preferred shares with a redemption value of $2 million and for new common shares of MDPC, and then immediately sold 85% of those common shares equally to his wife and two children for nominal consideration. Those three family members then immediately sold those common shares to DCC for cash proceeds of $2.2 million in the aggregate. The preferred shares’ redemption value equalled the $2 million equity value of MDPC as estimated by a colleague at the same firm as the taxpayer’s tax advisor (Van Essen). She was not informed by Van Essen that DCC had agreed to purchase that equity for $4.5 million. The taxpayer also executed a Professional Services Agreement with DCC in conjunction with the sale, under which there would be a claw back in his salary if EBITDA growth projections were not achieved.

Hogan J affirmed the Minister’s alternative position that s. 69(1)(b)(i) applied to the sale by the taxpayer to his wife and children on the basis that the transferred common shares had a fair market value 85% of the excess of $4.5 million over the preferred shares’ redemption amount of $2 million. He stated (at paras 136-137, 140):

I accept the opinion of…the expert witness for the Crown… that the market price approach should be used to value the shares because the shares were sold by the Appellant and his wife after the parties had agreed to sell those shares to Dental Corporation for $4.5 million. …

The [wife and children] acquired the shares from the Appellant for a purchase price of $0.01 per share and immediately thereafter sold them for a cash purchase price of $8,645 per share. The purchase price paid by Dental Corporation to the Appellant’s wife and daughters was final. Unlike the Appellant, they were not parties to the SPA and had no obligations thereunder towards Dental Corporation. If the minimum EBITDA Target set out in the SPA was not met, the Appellant’s wife and daughters were still entitled to retain the full cash purchase price that they received.

… [T]he price agreed to by the Appellant’s wife and two daughters on the one hand, and Dental Corporation on the other, satisfies the definition of the term “fair market value”, which is understood to mean “the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method . . . in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm’s length and under no compulsion to buy or sell”.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(11) transfer from wife to higher-income husband was infused with his income-splitting purpose (as well as regulatory breach if she didn’t transfer) 355
Tax Topics - General Concepts - Ownership wife and children did not acquire beneficial interest in shares the taxpayer was to transfer to them, under tax plan, until the share transfer occurred 253
Tax Topics - Income Tax Act - Section 86 - Subsection 86(2) family members did not acquire beneficial interest in new shares until after completion of s. 86 reorg 285
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) - Subparagraph 69(1)(b)(i) contemporaneous arm’s length sale price established that shares previously transferred at undervalue 468
Tax Topics - Income Tax Act - Section 163 - Subsection 163(2) was not responsible under s. 163(2) for the unbeknownst sharp practice of his tax advisor 658
Tax Topics - General Concepts - Price Adjustment Clause no jurisdiction to comment on application of price adjustment clause where the affected taxpayers are not appellants 223

Grimes v. The Queen, 2016 TCC 280

no discount for shareholder-level taxes, minority discount re NAL party’s voting control, marketability discount, advances valued at nil given practice of converting to bonuses

The taxpayer trust was deemed under s. 104(4) to have disposed of common and preferred shares of a holding company (“Holdco”) for their fair market value (“FMV”) on February 1, 2011 (the “Valuation Date”), which the Minister assessed as being $5.3 million and $2.7 million, respectively. The Trust held the only issued and outstanding common share of Holdco and most of its preferred shares. Holdco, in turn, held a construction corporation (“SPL”).

Lafleur J found (at para. 129) that substantial advances owing as at the Valuation Date to SPL by a director should be treated as having a nil value since the practice was for SPL to annually declare bonuses payable by way of set-off against the director’s advances, stating (at para. 134) that this approach accorded with “the general rule…that hindsight is not admissible except to test the reasonableness of the assumptions made by the valuators” (para. 134). However, advances owing as at the Valuation Date to Holdco by the shareholder were not to be reduced notwithstanding that they subsequently were repaid by way of set-off against a dividend. She stated (para. 141) that “I doubt that Ms. Grimes and Mr. Ozerdinc, as trustees of the Trust, would have agreed to sell their Class A Common Share of Holdco at a price that would not have taken into account an amount of $1,144,887 representing the Holdco Advances that they subsequently would have been called upon to pay to Holdco.”

The taxpayer’s expert considered that the FMV of the shares of Holdco should take into account income taxes payable by the shareholder of Holdco on its own account (discounted to 50%) in the event of a redemption of the shares. In concluding instead (at para. 145) that “income taxes at the shareholder level should not be taken into consideration in the determination of the fair market value of the shares of Holdco,” Lafleur J stated (at para. 150):

[T]here is no reason to believe that Holdco will be liquidated in the near future. If I were to take into account, in the determination of the fair market value of the shares of Holdco, the taxes payable at the shareholder’s level on the redemption of the shares of Holdco, that would not lead me to determine the highest price between a willing purchaser and willing seller.

One of the two individuals who was a trustee of the taxpayer (Ms Grimes) also held voting preferred shares of Holdco in her personal capacity that represented 69% of the total voting rights. After concluding (at para. 173) that “it is reasonable to apply a minority discount in the determination of the fair market value of the Class A Common Share of Holdco held by the Trust at a rate of 12.5% and a marketability discount at a rate of 15%,” Lafleur J stated (at paras. 178, 182, 187-188):

The Court cannot assume that Ms. Grimes would be compelled to sell her controlling shares of Holdco. I am of the view that the determination of fair market value has to be done, instead, on the assumption that only the Trust is disposing of its shares… .

The case law dealing with the determination of fair market value… has often applied a minority discount in the valuation of minority shares of a family‑controlled corporation… .

The marketability discount has been described as the ability to convert the property to cash quickly, with minimal transaction costs, with a high degree of certainty of realising the expected amount of net proceeds… .

[T]he absence of any put arrangements, the limited market for the share, the absence of a redemption policy, the absence of distributions prior to the Valuation Date or any assurance of future distributions and the potential for capital appreciation during the holding period…are all relevant in the determination… of the marketability discount… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a) FMV determined with minority discount and without discount for shareholder taxes 186

Montminy v. The Queen, 2016 TCC 110, rev'd 2017 FCA 156

capitalization of normalized cash flow accepted

The taxpayers were management employees of a software company (“Cybectec”), which was a wholly-owned subsidiary of a holding company (“9135-8184”). They were granted option in 2001 to acquire Class A common shares of Cybectec at an exercise price of $0.20 per share. In January 2007, they exercised their options immediately upon the closing of a sale of substantially all the assets of Cybectec to a third-party purchaser, and sold their shares on exercise to 9135-8184 for a price of $1.2583 per share.

After having found that the taxpayers were not entitled to the s. 110(1)(d) deduction on the ground that their shares were not prescribed shares, D'Auray J went on to find that the exercise price of $0.20 per share was equal to the fair market value of the Cybectec shares at the time of the grant of the options. Among her specific findings:

  • revenues should not have been adjusted (by the taxpayers' experts) by excluding rents from a subtenant in the Montreal office space as there were also expenses which related to this space;
  • it was inappropriate for the Crown expert to include the value of work-in-progress in revenue for the most recent (2001) year in the three-year review period as Hydro Quebec (the source of most of the revenues) had obtained Cybectec’s agreement not to be billed until it had granted its approval, and similar adjustments would be required to back out revenue for prior years’ WIP under this alternative methodology;
  • it was inappropriate for the Crown's expert to capitalize R&D expenditures (mostly payroll) given inter alia that rights to the resulting intellectual property usually accrued to the clients (and the value of IP of Cybectec relating to a project still in progress for Hydro One was quite speculative), consistent with the R&D expenditures not having been capitalized in Cybectec’s financial statements;
  • a Crown expert proposal to limit R&D expenses to 5% of revenues was "not grounded in reality" (para. 151);
  • an adjustment by the taxpayers' expert for 1999 and 2000 payroll being abnormally low was rejected;
  • a small reduction was accepted for imputed interest on Cybectec's additional borrowing capacity;
  • capitalizing the normalized cash flows at 4.6 to 4.8 times was accepted in light of the risks associated with the business; and
  • the valuation was increased for excess (mostly liquid) assets plus some additional borrowing capacity
Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 6204 - Subsection 6204(1) - Paragraph 6204(1)(b) shares tainted by right to sell immediately after exercise to controlling shareholder 244

UBS AG v Commissioners for HMRC; DB Group Services (UK) Ltd v. Commissioners for HMRC, [2016] UKSC 13

shares’ value reduced by contingent obligation to sell at discount to NAV

Lord Reed found that a scheme to avoid income tax on bankers’ bonuses, which entailed awarding the employees redeemable shares in an offshore company (“ESIP”) which were subject to a commercially remote risk of forfeiture of a portion of their value. The contingency was a rise in the FTSE 100 within the next three weeks of greater than 6.5%, thereby triggering a requirement for the shares of ESIP to be sold for 90% of their market value to a UBS employee benefit trust (but with such an increase being hedged against through the purchase by ESIP of call options so as to increase its NAV by 10% in such event - so that the employee would suffer less than a 1% loss). After finding that the employees were taxable on the value of the ESIP shares awarded to them, Lord Reed stated (at para. 94):

The Revenue argued that the shares should be valued for income tax purposes without regard to the restrictive conditions, since those conditions were not intended to be commercially relevant. I am unable to agree. The shares were subject to conditions which, as the First-tier Tribunal found, had the effect of reducing their value on the date of acquisition by a small amount... . Applying ordinary taxation principles, as laid down in Abbott v Philbin, the value of the shares has to be assessed as at the date of their acquisition, taking account of those conditions. … It is however also necessary to take account of the call options purchased by ESIP out of the sum paid by UBS for its subscription for the shares. Since the options offset the risk to shareholders arising from the conditions, they presumably enhanced the value of the shares and are therefore relevant to the valuation of the perquisite received by the employees.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Tax Avoidance unexpressed intention of Parliament to give relief for restrictive conditions attached to shares only where those conditions had a commercial purpose 531

Kruger Wayagamack Inc. v. The Queen, 2015 DTC 1112 [at 667], 2015 TCC 90, aff'd 2016 FCA 192

non-assignable put right ignored

Kruger Inc. was the 51% shareholder of the taxpayer. The taxpayer was associated with Kruger under s. 256(1.2)(c) as the Kruger bloc had more that 50% of the fair market value of all the shares. The 49% bloc might have had a greater value to its current shareholder than that of the 51% bloc to Kruger because of a contingent put right accorded to the minority shareholder under the USA. However, since this put could not be assigned to any third-party purchaser, it did not affect the shares' FMV.

See summary under s. 256(1.2)(c).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(2) - Paragraph 251(2)(b) - Subparagraph 251(2)(b)(i) de jure control requires strategic control, not merely operational control 83
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1) - Paragraph 256(1)(a) de jure or de facto control requires strategic control, not merely operational control 314
Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.2) - Paragraph 256(1.2)(c) effect of s. 256(1.2)(g) is as if company were run by 3rd party 236
Tax Topics - Income Tax Act - Section 256 - Subsection 256(5.1) de facto control requires strategic control, not merely operational control 200

Avrams v. The Queen, 2012 TCC 247

The taxpayer's common law husband transferred significant blocks of shares of a TSXV-listed public company, of which he was CEO, to the taxpayer at times at which he owed over $1.4 million in income taxes. D'Arcy J. accepted the Minister's valuation of the transferred shares, so that the taxpayer's appeal of the Minister's assessment under s. 160 was dismissed.

The report of the taxpayer's purported expert witness, that a substantial "blockage discount" should be applied to the share valuation, was rejected, as the witness was a friend and de facto advocate and was experienced in investor relations rather than valuation. Conversely, the report of the Minister's expert was accepted.

In such report:

  • The fair market value of a share block on a particular day was based on the five-day VWAP immediately preceding that day (para. 100).
  • To that value discounts in the range of 1.3% to 3.6% were applied to reflect that it would take between 16 and 44 days to sell each block (para 101).

Douglas Zeller and Leon Paroian Trustees of the Estate of Margorie Zeller v. The Queen, 2008 DTC 4441, 2008 TCC 426

At the time of the death of the taxpayer, she was the sole shareholder of a holding company ("701") that, in turn, held a 50% interest in a Canadian subsidiary operating company ("890") and a 1/3 interest in an American operating company ("123"). In valuing the shares of 701 at the time of the taxpayer's death, Campbell, J. found that:

  1. the determination of the maintainable earnings of the operating companies should not be adjusted for the 10% interest rate charged on loans made by 701 to them;
  2. the risk-free rate component of the discount rate should be the yield on ten-year government bonds in the case of 890, and the yield on long-term U.S. bonds in the case of 123;
  3. there should be a size premium added on to the risk-free rate of 5%;
  4. there should be a further increase in the discount rate of 10% to reflect company-specific rate (along with an adjustment for growth rates);
  5. a 15% discount for lack of control should be applied to the block held in 123 and a discount of 10% for the block held in 890; and
  6. the fair market value of the shares of 701 should be adjusted to take into account capital gains that would be realized on a distribution by it of its assets net of refundable tax.

Lockhart v. The Queen, 2008 DTC 3044, 2008 TCC 156

A start-up company ("AVL") of which the taxpayer was the president issued shares to him in recognition of past services. Although at the time of the issue of the shares, there was an expectation that he would exchange those shares for shares of a corporation ("USX") that would be acquiring all the shares of AVL, with such shares of USX to be held in escrow, this did not represent a contractual restriction on his right to deal with AVL shares that affected their value.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1) 81

Laflamme v. The Queen, 2008 DTC 482, 2008 TCC 255

In the context of estate freeze transactions, a trust that the taxpayer had established for the benefit of his children transferred a portion of the Class A shares of a corporation that was controlled by him ("335") to his son's holding company ("2165") in consideration for shares of 2165. Although the taxpayer held Class D shares of 335 with only a nominal redemption value, they were convertible (before his death) into a very large number of Class A shares. The position of the Minister was that the Class A shares had substantially lower fair market value than that attributed to it by the terms of the sale to 2165 given the potential dilutive effect of a conversion by the taxpayer of the Class D shares, so that an s. 56(2) benefit was assessable on the taxpayer. In rejecting this position, Lamarre, J. stated (at para. 37) that:

"If the intent in the instant case had been to sell the Class A shares to a third party, the Appellant, who controlled 332 Canada, would have had no problem waiving the conversion right attached to his Class D shares so that the Class A shares could be given their full value. Common sense would dictate this."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) 196

McClintock v. The Queen, 2003 DTC 576, 2003 TCC 259

Rip T.C.J. accepted the position of the Minister that the fair market value of shares of a Canadian-controlled private corporation three months before it did an initial public offering should be valued at a discount of 25% to the public offering price (to reflect a marketability discount).

Shepp v. The Queen, 99 DTC 510 (TCC)

Non-voting Class B common shares of a private company that generally were non-voting and not entitled to dividends (although the directors could choose to pay dividend on the Class B common shares in addition to the Class A voting and fully participating common shares) and that had an equal entitlement with the Class A common shares on a liquidation or winding-up were found nonetheless to have an equal fair market value on a per-share basis with the Class A common shares given that at the valuation date, there was an offer from a third-party arm's length purchaser to purchase the company.

Dairy Queen Canada Inc. v. The Queen, 95 DTC 634 (TCC)

Bell TCJ. rejected the view of the Crown's expert valuator that the taxpayer was a special purchaser and, therefore, the fair market value of shares of a Canadian corporation that it had purchased did not reflect the special value of that corporation to the taxpayer. First, an insider group had also been prepared to pay a relatively high price for the shares. Furthermore, the taxpayer had earned a handsome return on the high price paid by it for the shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212.1 - Subsection 212.1(1) 51

Husky Oil Ltd. v. The Queen, 95 DTC 316 (TCC), aff'd 95 DTC 5244 (FCA)

In finding that the taxpayer had paid the fair market value of shares acquired by it in an arm's length loss utilization transaction, where the amount indirectly paid for the losses was significantly less than the taxes ultimately saved, Kempo TCJ. stated (at p. 326):

"It is inappropriate to apply subsequently gained knowledge in the determination of value, especially if it differs from the information known and the value established by the parties in arm's length negotiation."

Ritson Estate v. MNR, 93 DTC 1078 (TCC)

The executors were unsuccessful in establishing that the fair market value of shares of the deceased should be discounted for the requirement under British Columbia securities law that the shares be held pursuant to an escrow agreement given that, in fact, none of the shares issued to the deceased were ever deposited in escrow.

Groupe d'Investissement Savoie, Lavoie Inc. v. M.N.R., 92 DTC 1531 (TCC)

The taxpayer acquired the personal residence of a related individual in consideration for issuing non-voting preference shares which were redeemable by the taxpayer but not retractable by the individual. In finding that the shares had no fair market value for purposes of s. 160, Dussault TCCJ. stated (p. 1541):

"The restrictions encumbering the preferred shares and the absence of control thus prevented anyone, including anyone who were to seize all of the shares held by Mr. Pierre Savoie [the individual], from recovering any value whatever in respect of the property transferred to [the taxpayer], since the redeeming of class G shares received in consideration could not have been obtained by a holder who did not have legal control, whether direct or indirect."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) 120

Leung v. MNR, 92 DTC 1090 (TCC)

Shares of a private consumer electronics company with a 20:1 debt to equity ratio which was "propped up" through shareholder loans, were found to have a nil fair market value rather than the $500,000 amount originally reported for income tax purposes by the shareholders given that a purchaser of the shares would need to inject additional capital in order to normalize the debt to equity ratio. The Crown expert's theory "that a notional vendor would not give away its shares but rather would reorganize the companies to convert their non-interest-bearing loans into equity so as to be able to attract some value to shares and to obviate a notional purchaser's difficulty in obtaining long-term borrowing to normalize the debt" was rejected because "the sole matter for valuation was that which had been disposed of (i.e., the shares) and not the Appellants' entire interests, direct and indirect, in [the corporation]" (p. 1096). Although the loans might be treated like equity for financing purposes, the vendors' "creditor position at all times ranked superior to their position as shareholders" (p. 1096).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 74

Holt v. Holt, [1990] 1 WLR 1250 (TCC)

The appellant owned the only Class A share of a cattle and sheep farming company having a net asset value of not less than $800,000. 999 Class B shares were held by a trust for the benefit of his children. The Class A share was entitled to 10,000 votes and the Class B shares were entitled to one vote per share. The Class A and Class B shares ranked pari passu in the distribution of dividends and on liquidation. (The reasons for judgment assume - apparently, incorrectly - that the Class A share was therefore entitled to 1/2 rather than 1/1,000 of such distributions.)

In connection with matrimonial litigation, the Class A share of the appellant was found to have a fair value of $150,000 rather than the $10,000 figure advanced by the appellant, in light of its entitlement to 1/2 the net property on a winding-up and in light of the entitlement of a holder of that share to hire himself as a manager of the farm and pay himself reasonable remuneration for its services, without fear of being dismissed and without the obligation to consult or take instructions from anyone.

Taylor Estate v. MNR, 90 DTC 1777 (TCC)

"In preparing a valuation to be used as evidence in court, a valuer may not accept figures that he did not check or take facts for granted over the correctness of which he had no control. Expert testimony must be the product of the expert's personal opinion based on established facts the existence of which is proved, and not on conjectures or information he receives from third persons" (p. 1784).

Mayson v. MNR, 85 DTC 341, [1985] 1 CTC 2395 (TCC)

The taxpayer's voting and non-voting common shares were found to have the same per-share V-Day value given that, in light of the shareholdings in the company, the share provisions and the governing corporate law, the entitlements attached to the non-voting shares could not be prejudicially affected.

Curry Estate v. U.S., 83-1 U.S.TC ¶13:518 (5th. C.A. 1983)

In finding that the non-voting shares of a private company held by the decedent were worth as much per share as his voting shares (which gave him control of the company), the court noted that for U.S. estate tax purposes what was to be valued was the interest which ceased by reason of death rather than the interest which the legatees acquired, that to adopt an alternative rule would invite "an executor to invent elaborate scenarios of disaggregated disposition in order to minimize total value" and furthermore:

"It is well established that the willing buyer-willing seller rule presumes that the potential transaction is to be analyzed from the viewpoint of a hypothetical buyer whose only goal is to maximize its advantage ... And it does not comport with common sense that a willing buyer would be likely to purchase non-voting shares in a small, family-held business, without concommitantly purchasing a controlling voting interest."

Furthermore, a provision in the company's articles of incorporation which gave minority shareholders a right of first refusal to purchase at the book value of the shares had a depreciatory effect even though the book value of the shares at the time of death exceeded their fair market value otherwise determined.

Finally, a government submission that the minimum value of the shares is equal to their liquidation value was rejected, because this argument assumed that the controlling shareholder "could automatically liquidate the company to realize its asset value, unconstrained by the rigorous fiduciary duties which attach to possession of a controlling equity interest".

Ahmanson Foundation v. U.S., 81-2 U.S.TC ¶13:438, 674 F. 2d 761 (9th C.A. 1981)

At the time of his death, the decedent held an income interest in approximately 10% of the non-voting common shares of a holding company ("HFA") and held a controlling interest in the voting common shares of HFA through a revocable inter vivos trust. HFA, in turn, owned 81% of the shares of a savings and loan company. The Court held that "it was not clear error for the district judge to find that the ownership of control shares in HFA, under all the circumstances, would provide no economic benefit beyond that of ownership of an equal number of non-voting shares", after referring to legal restraints that the holder of a control block would face in exploiting such control to his advantage.

Fiddes Estate v. MNR, 70 DTC 1117, [1970] Tax A.B.C. 156

At the time of his death, the deceased owned ten voting common shares of a B.C. personal corporation and his adult daughter owned 975 non-voting common shares. Mr. Fordham accepted the estate's submission that the value of the decedent's voting common shares for purposes of the Estate Tax Act was 10/985 of the fair market value of the corporation, given that the decedent could not have affected his daughter's entitlement to a pro rata portion of dividends and liquidation distributions without taking proceedings under the Companies Act (B.C.), and given that there was "nothing to suggest that litigation would not have ensued if anything leading to interference with the daughter's right to dividends had been attempted" (pp. 1119-1120).

Barber Estate v. MNR, 66 DTC 315, 41 Tax A.B.C. 27

At the date of death of the deceased, he owned 4,497 Class B shares of a private investment company and his wife owned the only other issued share, namely, 1 Class A share. The Class A share was entitled to one vote, had a fixed dividend entitlement and was entitled to all the net assets of the company on a liquidation after payment of the fixed liquidation entitlement of the Class B shares. The Class B shares were entitled to one vote per share, were fully participating as to dividends and had a fixed liquidation entitlement. Mr. Fordham held that because the deceased, by virtue of his voting control, was free to change at will the amount which he might receive from the company, the value of his Class B shares for purposes of the Estate Tax Act was equal to the fair market value of the company net of the par value of the Class A shares.

Administrative Policy

3 December 2015 External T.I. 2015-0593941E5 F - Allocation of the safe income on hand

FMV of discretionary share increased at moment of dividend declaration to exclusion of other discretionary shares

Where Mr. A holds 99 Class A discretionary-dividend common shares of Opco and his estranged wife (Ms. A) held 1 Class B discretionary-dividend common share (issued at the same time as the Class A shares), which she has transferred under s. 85(1) to a new Holdco, CRA accepts (subject to Part IV tax considerations) the tax-free payment of all of Opco’s safe income on the 1 Class B share and, in particular, that that the fair market value of the Class B share immediately before the dividend payment reflects the amount of the declared dividend.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) flexible allocation of SIOH where discretionary common shares 1215
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(b) quaere whether 8% reduction is significant 19

4 May 2015 External T.I. 2013-0502761E5 F - Stock Options and Earnout

FMV of shares at time of stock option exercise determined by valuing earn-out clause in subsequent sales agreement

At the very moment of the acquisition by employees of shares under a stock options agreement, it is agreed that their shares will be subsequently sold to an arm's length purchaser. CRA stated (TaxInterpretations translation):

[T]he earnout clause had become known before exercise of the options. In these circumstances,…the value of the rights under this clause must be taken into account in determining the FMV of the shares and be used in the computation of the benefit determined under paragraph 7(1)(a).

See summary under s. 7(1)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(a) FMV of shares at time of stock option exercise determined by valuing earn-out clause in subsequent sales agreement 201

10 October 2014 APFF Roundtable, 2014-0538121C6 F - Détermination de la JVM des actions

deferred tax liabilities not factored into share FMV

Would CRA consider deferred taxes on properties owned by a corporation in determining the fair market value of its shares? Consider, for example, Father who wishes to sell to Son the shares of a corporation without debt and holding a building with a FMV of $1,000,000 and an estimated latent tax liability of $150,000. Per the questioner (TaxInterpretations translation):

According to the CRA position, Son must pay $1,000,000 to Father for his acquisition of the shares, even though a third party would offer a reduced amount for the shares because there would be a discount for the amount of the latent taxes… .

After referring to share FMV being a question of fact that is not affected by who the parties are, and to IC 89-3, CRA stated:

In the above example, it is likely that the FMV of the shares would be evaluated in accordance with the going concern value of the enterprise.

In general…deferred tax is not considered as property of the enterprise because it is not receivable (or payable). …[D]eferred taxes are not considered in the determination of FMV in the context of a butterfly distribution…as well as in a rollover under subsection 85(1). Furthermore, the CRA is of the view that a deferred tax asset is not an asset for purposes of the definition of a small business corporation and of a qualified small business corporation share.

In the situation provided, the CRA would not accept the deferred taxes respecting the assets held by the corporation being considered in the determination of the FMV of the shares of the corporation.

10 October 2014 APFF Roundtable Q. 26, 2014-0538201C6 F - 2014 APFF Roundtable, Q. 26 - Cost of property

definition of FMV, which may differ from the s. 247 arm's length price

On a non-arm's length transfer of capital property by a non-resident in favour of a resident Canadian, whether by donation or disposition, what value should be used in any adjustment to the property's deemed cost? CRA responded (TaxInterpretations translation):

[I]f a non-resident disposes or makes a gift of taxable Canadian property in favour of a person with whom it does not deal at arm's length, the disposition is deemed to be made at FMV in accordance with section 116. On the other hand, in the transfer pricing context, when the conditions for the application of subsection 247(2) are satisfied, the arm's length transfer price is used. … As for FMV, it generally represents the highest price obtainable for a property on a sale in a free and open market between two willing, informed and prudent persons acting independently. In a transfer pricing context where these values are different, subsection 247(8) confirms…that if the transfer price is adjusted pursuant to the application of subsection 247(2), subsections 69(1) and (1.2) are not applicable. Thus, the arm's length transfer price generally would be used… .

Words and Phrases
fair market value
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) arm's length transfer price prevails over FMV 176
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(3) - Subparagraph 247(3)(a) - Subparagraph 247(3)(a)(iii) general requirement for penalty elimination re transfer pricing capital setoff adjustment 140

11 October 2013 APFF Roundtable, 2013-0495721C6 F - APFF 2013- Round table question 7

FMV is a question of fact within TCC's discretion

In the context of a general discussion as to complying with the Sommerer exception from S. 75(2) for sales of property (here, a rental property or common shares) at FMV, CRA stated:

As stated by the FCA in CIT Financial ...:

“The jurisprudence is clear that the determination of fair market value is a question of fact rather than a question of law. … There is ample authority for the proposition that a trial judge is entitled to arrive at his own opinion as to value.”

In Carr ... the TCC noted that the legal definition of "fair market value" adopted by Canadian courts was:

“...the highest price an asset might reasonably be expected to bring if sold by the owner in the normal method applicable to the asset in question in the ordinary course of business in a market not exposed to any undue stresses and composed of willing buyers and sellers dealing at arm's length and under no compulsion to buy or sell.

This judicial definition reflects the key elements of the definition of "fair market value" in Information Circular IC-89-3 (footnote 4).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) Sommerer FMV sale exception maintained with price adjustment clause 200

5 October 2012 APFF Roundtable, 2012-0454061C6 F - Transfer of a Lossco to a related corporation

non-capital losses taken into account

An individual holding a former small business corporation with no assets or liabilities but with significant non-capital losses ("Lossco") claims an allowable business investment loss under ss. 50(1)(b)(iii) and 39(1)(c), and then transfers Lossco to a corporation owned by his father, with Lossco being wound-up into such corporation.

Before commenting on the loss utilization transaction, CRA indicated that the individual likely did not qualify for an ABIL having regard inter alia to Lossco's shares having a positive value. It stated (TaxInterpretations translation):

The condition provided in ITA clause 50(1)(b)(iii)(C) is that the fair market value of the shares which are subject to the election under ITA subsection 50(1) must be nil. In this regard, it appears to us that the valuation of the shares in the situations described above would normally take into account the accumulated tax losses which can eventually be deducted in the calculation of a corporation's income.

28 November 2010 CTF Roundtable, 2013-0487431C6 - Value of Vote-Only Shares – 2010 CTF Conference

premium for voting rights

The questioner referenced the CRA statement at the 2009 British Columbia Tax Conference that, in the context of an estate freeze of a Canadian-controlled private corporation, where the freezor, as part of the estate freeze, keeps controlling non-participating preference shares in order to protect his economic interest in the corporation, CRA generally accepts that no premium should be attributed to such shares in determining their fair market value under s. 70(5), and asked whether this position also applies for the purposes of s. 104(4)(a), e.g., re the deemed disposition arising on the death of the spouse who is the beneficiary of a spousal trust. CRA stated: was noted, CRA generally will ignore any premium that could be attributed to controlling non-participating preference shares, for purposes of subsection 70(5)...where the shares were held to protect the deceased's economic interest in the corporation....[W]e have not had the opportunity to give full consideration to whether the above position should apply for purposes of [s. 104(4)(a).]

16 December 2003 Internal T.I. 2003-04616 -

With respect to the situation where a parent corporation ("Parentco") would elect to have s. 50(1) apply in respect of the shares of one of its wholly-owned subsidiaries ("Lossco") and then, in a subsequent taxation year, Parentco disposes of its Lossco shares in favour of another wholly-owned subsidiary ("Profitco") for a nominal cash consideration, the Agency commented that it would be difficult for Parentco to satisfy the requirements of ss.50(1)(b)(iii)(A) and (C) stating that "the benefits that can be derived from the utilization of non-capital losses should generally be taken into consideration in assigning a value to the shares of a corporation".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) 104

28 June 2001 External T.I. 2001-007320 -

Where a corporation proceeds with a substantial issuer bid at a price that is at a premium over the previous trading price of its shares on a stock exchange, the shares will not necessarily be considered to be purchased for a price in excess of their fair market value for purposes of the definitions of taxable preferred shares and short-term preferred shares. Although the value of a share on the stock exchange is an indication of its fair market value, the Agency feels that all the circumstances surrounding each particular situation must be examined to make this determination. Furthermore, the definitions make specific reference to alternative valuation methods employing assets and/or earnings of the corporation.

IT-113R4 "Benefits to Employees-Stock Options"

Where an employee requires shares pursuant to a stock option agreement that prohibits transfers of the shares for a period of time, the shares should be valued at an appropriate discount.

24 November 1997 T.I. 972284

Respecting the application of s. 7(1.4), RC stated that "the use of a ten-day closing price averaging, prior to the spin off, which is acceptable for IRS purposes re: an approximation of fair market value would be accepted by Revenue Canada".

14 October 1997 T.I. 970653

In finding that the fair market value of mutual fund units held by an RRSP would take into account redemption fees, RC stated that "if units of a fund cannot be transferred between persons dealing at arm's length but must be redeemed, we would expect that the fair market value of the units would be their value otherwise determined less any applicable redemption charges".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(8.8) 64

24 July 1997 T.I. 971601

In response to an inquiry as to whether a formula for determining the number of new options to be issued to an employee in replacement of her old option would comply with s. 7(1.4) if the average trading value of the old and new shares for a period of five consecutive business days ending with the date the reorganization was utilized, RC listed the criteria that are considered in determining the fair market value of publicly-traded shares.

1 May 1997 T.I. 963998

Notwithstanding the application of section 3860 of the CICA Handbook, the removal of a retraction feature from preferred shares generally would cause their fair market value to no longer be equal to their redemption amount. However, a preferred share generally would have a fair market value equal to its redemption amount where it carries a fixed cumulative dividend entitlement at a rate which reflects market conditions at the time the share is issued.

3 December 1993 T.I. 920099 [no discount for future taxes]

no discount for future taxes

"The value of property relates to the attributes of the property itself and is unaffected by the tax position."

93 C.R. - Q. 47

The share provisions that RC requires to be present in order to be satisfied that the fair market value of estate freeze shares is equal to the value of the exchanged shares can be provided by corporate law or in the articles.

13 January 1993 T.I. (Tax Window

underline;">, No. 28, p. 22, ¶2370): Preferred shares that carry a dividend based on the prime lending rate, and preferred shares that are entitled to a reasonable discretionary dividend, will be considered to have a fair market value equal to the redemption amount in the context of an estate freeze.

Tax Professionals Mini Round Table - Vancouver - Q. 4 (March 1993 Access Letter, p. 102)

Discussion of criteria for determining the "value" of publicly treated shares for purposes of s. 7(1)(a).

1993 Conference for Advance Life Underwriting, Q. 13 (931011) (C.T.O. "CALU Ques. 13-Buy-Sell Agreement & Valuation of Shares")

Where a corporation is required under a bona fide shareholders' agreement to pay life insurance proceeds as a capital dividend either to the estate of the deceased or to the surviving shareholders, such provision would be determinative of value as stated in paragraphs 28-31 of IC89-3, so that in valuing the share sold the fair market value of the life insurance proceeds would be offset by the liability to pay the dividend.

1992 A.P.F.F. Annual Conference, Q. 11 (January - February 1993 Access Letter, p. 54)

adjustment for benefit of tax losses

In valuing shares, RC will take into account accumulated tax losses of the corporation if they may eventually be deductible in the computation of taxable income of the corporation.

10 February 1992 T.I. (Tax Window, No. 16, p. 12, ¶1742)

The fair market value for purposes of s. 6(15) of shares which are actively traded is their average trading price on the day in question.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(15) 100

20 November 1991 T.I. (Tax Window, No. 13, p. 19, ¶1603)

Where a taxpayer acquires a share in respect of which she is entitled to a tax credit and, within 30 days, transfers the share to an RRSP, RC accepts that the fair market value of the share is equal to her original cost minus the tax credit.

4 October 1991 T.I. (Tax Window, No. 10, p. 16, ¶1498)

Where a public corporation plans to distribute, as a dividend in kind, all the shares of a wholly-owned subsidiary which have a fair market value to it of $1 per share but which, because of minority discounts, will have a fair market value of 80¢ per share after the distribution, the amount of the dividend will be $1 per share.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 212 - Subsection 212(2) 57

23 and 29 August 1991 T.I. (Tax Window, No. 8, p. 20, ¶1411)

A shareholders' agreement which limits the number of preferred shares that may be retracted in the year adversely affects the fair market value of those shares; and if the redemption amount is payable over a period of time, the outstanding balance should bear interest.

24 July 1991 T.I. (Tax Window, No. 7, p. 11, ¶1369)

Discussion of criteria for establishing that the fair market value of estate freeze preference shares is equal to their redemption amount.

14 June 1991 T.I. (Tax Window, No. 4, p. 11, ¶1309) [maintaing value of preferred sahres]

maintaing value of preferred shares

Where related persons on a s. 86 reorganization change their common shares of Opco into retractable preferred shares, one of the related persons then subscribes for new common shares, and the parties agree that no preferred shares will be redeemed without the consent of all preferred shareholders, this agreement may affect the value of the shares and s. 86(2) may apply unless the value of the preferred shares is maintained by some other means such as a cumulative dividend entitlement.

Harris, "An Update of Revenue Canada's Approach to the Butterfly Reorganization", 1991 Conference Report

The view of Revenue Canada expressed at the 1981 Round Table, that deferred taxes in respect of a property to be transferred pursuant to an s. 85(1) election are not relevant for purposes of valuing the property to be transferred, have not changed.

15 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 14, ¶1078)

A taxpayer will not be considered to have conferred a benefit pursuant to s. 85(1)(e.2) where the redemption and retraction amount of preferred shares received in exchange for rental property transferred to a corporation equals the fair market value of that property, even if the dividend rate on the shares is low in relation to current market conditions.

30 April 1990 T.I. (September 1990 Access Letter, ¶1419)

Discussion of the valuation of shares of a corporation where there is a non-arm's length buy-sell agreement among the shareholders and the corporation holds insurance on the lives of the parties to the agreement.

19 April 1990 T.I. (September 1990 Access Letter, ¶1433)

In light of the jurisprudence, a minority discount generally will be applied to the valuation of shares held by a minority shareholder, for example, where the 10% of votes and value test under s. 186(4)(d) is relevant.

18 April 1990 T.I. (September 1990 Access Letter, ¶1430)

Where it is impossible to establish the fair market value of shares of a Quebec business investment company, it will be assumed that the value corresponds to the original cost minus the amount of provincial tax saved by the shareholder as a result of his investment in the shares.

1 March 1990 T.I. (August 1990 Access Letter, ¶1384)

In the absence of other evidence as to value, RC has taken the position that the fair market value of shares of a prescribed venture capital corporation which have been contributed to an RRSP within 30 days of their acquisition by the individual is equal to their original cost minus the amount of the tax credit received or receivable by the individual.

October 1989 A.P.F.F. Round Table - Q.9 (Jan. 90 Access Letter, ¶1075)

valuation of rollover property

The fair market value of property which is to be transferred on a rollover basis should be determined without regard to the tax position of the vendor, i.e., without regard to the tax basis of the property. However, if at the time of the transfer, it is known that a quick resale of the property is upcoming, RC might consider the tax liability in the valuation of the transferred asset.

October 1989 Revenue Canada Round Table - Q.18 (Jan. 90 Access Letter, ¶1075)

Listing of factors that are considered in assessing the size of a minority discount.

ATR-22R (14 April 89)

Favourable ss.15(1), 56(2) and 86(2) rulings were given with respect to an estate freeze transaction under s. 86(1) entailing the issuance of "special shares" which were non-voting, bore a quarterly non-cumulative cash dividend of 1.75% of the redemption price, were redeemable and retractable for the redemption amount, provided that any preference, right, condition or limitation attaching to the special shares could be amended only on a 2/3 vote of the shareholders of each class, and provided that no dividends could be paid on any other class if the resulting net assets of the corporation after the payment of such dividends would be less than the aggregate redemption price of these special shares.

ATR-36 (4 Nov. 88)

RC gives a favourable s. 15(1) ruling with respect to an estate freeze transaction where father receives redeemable retractable non-cumulative Class A shares where it is stipulated that the corporation will not declare dividends on any other class which will result in it having insufficient net asset to settle in full the principal amount of the promissory note and the redemption amount of the Class A shares and it is stipulated that the corporation will not acquire any of its Class A shares for cancellation for an amount per share which is less than the lesser of the redemption amount per share and the net assets per outstanding Class A shares at the time of such acquisition. RC also requires that the corporation will not settle the principal amount of the promissory note for an amount which is less than the lesser of its principal amount and the net assets at the time of such settlement. Adult children subscribe for Class B non-participating shares in order to permit dividends to be paid by the corporation to the holders of its shares. Semble, that this funding was required by RC.

87 C.R. - Q.37

RC will provide to the taxpayer a detailed explanation of the proposed valuation or appraisal.

87 C.R. - Q.38

The principal criteria for determining the appropriate size of a minority discount are listed.

ATR-17 9 February 1987 (Cancelled)

public shares valued at 5-day average

The trustees of an employee benefit plan will distribute common shares of "EmployerCo" which were purchased by the trustees on the open market.

Ruling that an amount equal to the fair market value of the common shares of EmployerCo distributed by the trustees to the employee's account under the term of the plan at the end of a year will be taxable as income to the employee under s. 6(1)(g) in the year the shares are distributed by the trustees. For the purposes, such FMV will be calculated as follows:

the average of the closing price of EmployerCo's common shares on a Canadian stock exchange on the five days on which at least a board lot of EmployerCo's common shares was traded immediately preceding the end of the year (but excluding the days from December 21 to December 31).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 32.1 - Subsection 32.1(1) deduction for employer portion of previous contributions to employee stock purchase plan 422

81 C.R. - Q.35

RC may accept more than the prescribed value for shares of a public corporation held on V-Day where the taxpayer was the member of a group of minority shareholders who together exercised control.

81 C.R. - Q.45

Preferred shares issued on an estate freeze generally have a value equal to their redemption amount if they are retractable.

81 C.R. - Q.53

The value of property relates to the attributes of the property itself and is unaffected by the tax position of the owner.

80 C.R. - Q.13

In order for preference shares to have a value equal to their redemption amount they must be retractable, entitled to a dividend (not exceeding a reasonable amount), be fully voting or voting on any matters involving a change in the share provisions, and entitled to the redemption amount on a liquidation. In addition, the corporation must undertake that no dividends will be paid on other classes of shares that would result in it having insufficient assets to redeem the shares.

80 C.R. - Q.15

Where an option agreement is entered into by parties dealing at arm's length, RC will take the option price into consideration in determining fair market value.

80 C.R. - Q. 52

RC valuators only deal with valuation assignments resulting from completed transactions.

IC 89-3 "Policy Statement on Business Equity Valuations"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(5) 19

IT-269R3 "Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation"

"Where a corporation is controlled ... and the recipient [of a dividend] does not control, and is not a member of the group that controls, the corporation, a discount from the pro rata value would normally be applied to determine the fair market value of the shares held by the recipient to reflect the recipient's minority interest status."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 186 - Subsection 186(4) 0

IT-140R3 "Buy-Sell Agreements"

IT-96R5 "Options Granted by Corporations to Acquire Shares, Bonds or Debentures" under "Shareholder Benefit"

Where a corporation grants to a shareholder an option to acquire shares in the corporation, the amount of any benefit is the greater of the trading value of the rights received and the amount by which the fair market value of the shares subject to the option at the time of distribution exceeds the exercise price provided in the option.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) 0


Shaun Doody, "The Effect of Embedded Capital Gains on Fair Market Value", Tax Litigation, 2011, p. 1094

Courts in both Canada (including in 1234 Mountain Realty Corp. v. Ionidis, [2000] QJ No 264, varied [2002] JQ No. 5674 QCCA, Re Canadian Rocky Mountain Properties, 2006 ABQB 251 and Zeller Estate v. The Queen, 2008 TCC 426) and the US are willing to take embedded capital gains into account when valuing corporate shares.

Alan MacNaughton, Amin Mawani, "CRA: Employee Stock Options TFSAs", Canadian Tax Highlights, Vol. 17, No. 5, May 2009

Discussion of CRA Shift to Using Black-Scholes Rather than Intrinsic Value.

David Lewy, "Valuation and Family-Business Share Structures - Some Musings", CCH Tax Topics, No. 1920, 16 October 2008, p. 1

Discussion of Valuation of Control Premium.

Donald N. Cherniawsky, "Further Comments on Revenue Canada's Approach to Exclusionary Dividend Shares: The Shepp case", Business Vehicles, Vol. V, No. 2, 1999, p. 238.

D.M. Chernawsky, "Revenue Canada Issues Valuation, on Exclusionary Dividend Shares", Business Vehicles, Vol. IV, No. 4, 1998, p. 210.

Wolfe D. Goodman, "American Family Limited Partnerships as an Estate Planning Tool?", Goodman on Estate Planning, Vol. VI, No. 3, 1997, p. 454

His answer is that they continue to have a value equal to their redemption amount if the holder continues to control the company through another class of shares.

Sutherland, "The Valuation for Tax Purposes of Controlling Holdings of Unquoted Shares", British Tax Review, 1996, No. 4, p. 397.

Dorner, "Reality Check", CA Magazine, August 1995, p. 54

In the author's experience, small private businesses typically sell for a purchase price between 3.2 and 3.7 times adjusted earnings.

Bradley, "Forward Participation Shares - Emerging Income Tax Issues", 1991 Conference Report, p. 8:2.

Wise, "The Valuation of Preferred Shares Issued on a Section 85 Rollover", 1984 Canadian Tax Journal, March-April, p. 239.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) 0

Wise, "Valuation Aspects of Shareholders' Buy-Sell Agreements", 1984 Conference Report, p. 1013.

Wise, "Fair Market Value Determinations - A Few More Requirements", 1983 Canadian Tax Journal, May-June, p. 337.

Wise, "Valuation and the Income Tax Act", 1981 Canadian Tax Journal, September-October, p. 626.

Wise, "The V-Day Value of Publicly Traded Shares", 1980 Canadian Tax Journal, May-June, p. 253.