Shulkov v. The Queen

Shulkov v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2012-12-31
Neutral citation
2012 TCC 457
File numbers
2008-1842(IT)G
Judges and Taxing Officers
Steven K. D'Arcy
Subjects
Income Tax Act
Decision Content
Docket: 2008-1842(IT)G
BETWEEN:
ELENA SHULKOV,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
____________________________________________________________________
Appeal heard on May 2-5, 2011, June 21–22, 2011,
December 5–8, 2011 and January 19–27, 2012 at Ottawa, Canada.
Before: The Honourable Justice Steven K. D’Arcy
Appearances:
Counsel for the Appellant:
Terry D. McEwan
Karine Veilleux
Kristina M. Mahon (student-at-law)
Counsel for the Respondent:
Ifeanyi Nwachukwu
Mélanie Sauriol
Shane Aikat
____________________________________________________________________
JUDGMENT
The appeal from the reassessment issued by the Minister of National Revenue on March 6, 2008 and made under the Income Tax Act is dismissed, with costs to the Respondent, in accordance with the attached Reasons for Judgment.
Signed at Ottawa, Canada, this 31st day of December 2012.
“S. D’Arcy”
D'Arcy J.
Citation: 2012 TCC 457
Date: 20121231
Docket: 2008-1842(IT)G
BETWEEN:
ELENA SHULKOV,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
D’Arcy J.
[1] The Appellant has appealed a reassessment issued by the Minister of National Revenue (the “Minister”) on March 6, 2008. The reassessment was made pursuant to section 160 of the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) (the “Act”), in respect of shares transferred to the Appellant by her spouse.
[2] The Appellant argues that the Minister overstated the fair market value of the shares and failed to take into account consideration paid by her to her spouse for the shares.
[3] I heard the appeal over 17 days. In addition to being given a 39-page Partial Agreed Statement of Facts (the “PASF”), the Court heard from 8 witnesses (including 3 who were offered as expert witnesses) and was provided with 17 joint books of documents (containing over 400 exhibits), over 30 exhibits filed by the Appellant and over 110 exhibits filed by the Respondent.
Summary of Facts
[4] The Appellant was the common‑law spouse of Mr. Tom Hinke from 1999 until they were married in September 2005.
[5] Mr. Hinke was the founder of Thermal Energy International Inc. (“TEI”) a Canadian publicly-traded company which provides custom energy and emission reduction solutions.
[6] Between 1994 and November 2004, Mr. Hinke was the president and chief executive officer of TEI. TEI terminated his employment on June 21, 2005.
[7] On February 23, 2006, the Minister issued an assessment for $708,155, pursuant to section 160 of the Act, in respect of the transfer of the following shares of TEI by Mr. Hinke to the Appellant (the “Original Assessed Share Blocks”):[1]
Transfer Date Assumed by the CRA
Number of Shares Transferred
Fair Market Value Determined by the CRA
May 27, 2005
678,500
$210,335
August 3, 2005
426,000
$136,320
October 12, 2005
800,000
$208,000
January 5, 2006
300,000
$55,500
February 15, 2006
490,000
$98,000
Total
2,694,500
$708,155
[8] After receiving representations from the Appellant, the Minister reassessed the Appellant, reducing the amount of the assessment by $161,320 as follows:
- The Minister excluded the 426,000 shares of TEI that she previously assumed Mr. Hinke had transferred to the Appellant on August 3, 2005 (the “August 2005 Shares”). This resulted in the assessed amount being reduced by $136,320, being the amount the Minister assumed was the fair market value of the August 2005 Shares on the date they were transferred to the Appellant. When making this reduction the Minister assumed the Appellant had purchased the August 2005 Shares directly from TEI using her own funds.
- The Minister concluded that the Appellant paid a consideration of $25,000 for the transferred shares. This consideration comprised amounts allegedly paid by the Appellant on behalf of Mr. Hinke for legal services.
[9] After making the above adjustments, the Minister reassessed the Appellant $546,835 with respect to the transfer of 2,268,500 TEI shares (the “Revised Assessed Share Blocks”) with a fair market value of $571,835 less consideration of $25,000. The Revised Assessed Share Blocks comprised the following share transfers:
Transfer Date Assumed by the CRA
Number of Shares Transferred
Fair Market Value Determined by the CRA
May 27, 2005
678,500
$210,335
October 12, 2005
800,000
$208,000
January 5, 2006
300,000
$55,500
February 15, 2006
490,000
$98,000
Total
2,268,500
$571,835
[10] I heard testimony from both the Appellant and Mr. Hinke. As I will discuss in these reasons for judgment, the credibility of the Appellant and Mr. Hinke was destroyed during the six days that Mr. Hinke was cross-examined.
The Issues
[11] In Wannan v. the Queen,[2] Justice Sharlow of the Federal Court of Appeal described subsection 160(1) as follows:
Section 160 of the Income Tax Act is an important tax collection tool, because it thwarts attempts to move money or other property beyond the tax collector's reach by placing it in presumably friendly hands. It is, however, a draconian provision. While not every use of section 160 is unwarranted or unfair, there is always some potential for an unjust result. There is no due diligence defence to the application of section 160. It may apply to a transferee of property who has no intention to assist the primary tax debtor to avoid the payment of tax. Indeed, it may apply to a transferee who has no knowledge of the tax affairs of the primary tax debtor. However, section 160 has been validly enacted as part of the law of Canada. If the Crown seeks to rely on section 160 in a particular case, it must be permitted to do so if the statutory conditions are met.
[12] Subsection 160(1) applies where a person transfers property, either directly or indirectly, by means of a trust or by any other means whatsoever, to the person’s spouse. The Appellant accepts that Mr. Hinke transferred property to his spouse, that is, the Appellant.
[13] For the purposes of this appeal, the amount payable by the Appellant under subsection 160(1) is determined under paragraph 160(1)(e) and is equal to the lesser of:
(i) the amount, if any, by which the fair market value of the property at the time it was transferred to the Appellant exceeds the fair market value at that time of the consideration given by the Appellant for the transfer of the property, and
(ii) the total of all amounts each of which is an amount that Mr. Hinke is liable to pay under the Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year.
[14] There is no dispute with respect to Mr. Hinke’s liability under the Act. The parties agree that between May 2005 and February 2006 (the “Transfer Period”) Mr. Hinke’s liability under the Act exceeded $1.4 million.
[15] However, the parties do not agree on the amount determined under subparagraph 160(1)(e)(i). The parties raised the following three issues: the number of shares of TEI that were transferred to the Appellant, the fair market value of the TEI shares on their transfer date, and the consideration, if any, paid by the Appellant for the TEI shares.
[16] The Respondent argued that the property transferred for the purposes of section 160 was the Original Assessed Share Blocks. Counsel for the Respondent argued that the Minister’s decision to remove the August 2005 Shares from the amount assessed under section 160 was an error caused by misrepresentations made by the Appellant.
[17] The Appellant disagreed. Counsel for the Appellant argued that the only property transferred was the Revised Assessed Share Blocks.
[18] Counsel for the Appellant argued that the fair market value of the property transferred was the fair market value of the Revised Assessed Share Blocks, which she calculated as being $271,895.
[19] Counsel for the Respondent argued that the fair market value of the property transferred was the fair market value of the Original Assessed Share Blocks, which she calculated as being $678,535.
[20] Counsel for the Appellant argued that the Appellant paid a consideration of $199,333 to Mr. Hinke for the Revised Assessed Share Blocks.
[21] The Respondent disagreed. Counsel for the Respondent argued that the Appellant did not pay any consideration to Mr. Hinke for the Original Assessed Share Blocks (which include the Revised Assessed Share Blocks).
[22] In summary, the Appellant accepts that she is liable under section 160 of the Act. However the Appellant believes the liability is $72,562 not the $546,835 assessed by the Minister. The Respondent believes that the Appellant is liable under section 160 for the $546,835 the Minister assessed.
Number of TEI Shares Transferred by Mr. Hinke to the Appellant
[23] The first issue I will address is the number of shares transferred by Mr. Hinke to the Appellant during the relevant period.
[24] When reassessing the Appellant the Minister excluded the August 2005 Shares from the transferred property on the assumption that the Appellant purchased the August 2005 Shares directly from TEI using her own funds.
[25] It is the Respondent’s position that the Minister erroneously excluded the August 2005 Shares because of misrepresentations made by the Appellant. Counsel for the Respondent argued that the Appellant did not purchase the August 2005 Shares directly from TEI, rather the shares were transferred by Mr. Hinke to the Appellant. Further, counsel for the Respondent argued that the Appellant did not pay any consideration for the August 2005 Shares.
[26] The Respondent accepted that the Court cannot increase the tax payable beyond the amount assessed. However, counsel for the Respondent argued that, pursuant to subsection 152(9), the Minister is entitled to present alternative arguments to justify the amount assessed. In particular, counsel for the Respondent argued that I should include the August 2005 Shares when determining whether the Appellant’s liability under subsection 160(1) was at least $546,835, the amount assessed by the Minister.
[27] Both the Appellant and Mr. Hinke testified that the Appellant received the August 2005 Shares directly from TEI as a result of the exercise of a stock option held by Mr. Hinke, using funds provided by the Appellant.
[28] The following excerpt from an affidavit sworn by Mr. Hinke before the Federal Court accurately summarizes his and the Appellant’s sworn testimony before this Court with respect to the 426,000 August 2005 Shares:
August 3, 2005: . . . On this date, I arranged for Ms. Shulkov to exercise stock options I held to purchase 426,000 shares of TEI at .18/share. I am advised by Ms. Shulkov, and believe, that she paid TEI the sum of $76,680 to acquire the shares on or about June 6, 2005. I also arranged for a business associate to exercise 50,000 options on that date, for the same price, who again paid TEI the sums required for purchase.[3]
[29] After reviewing the evidence, it is clear that the exercise of the option occurred as follows:
- On May 31, 2005, the CFO and treasurer of TEI wrote a letter to Mr. Hinke informing him that he held one million stock options that would be expiring on June 6, 2005.[4]
- On June 6, 2005, Mr. Hinke wrote a letter to the CFO and treasurer of TEI in which he stated that he was exercising his option to acquire 500,000 shares of TEI for $0.18 per share or $90,000.[5] The Appellant confirmed that the $90,000 was paid by a June 6, 2005 $70,000 TD bank draft[6] and a June 7, 2005 cheque for $20,000 written on the Appellant’s TD bank account.[7]
- On June 21, 2005, TEI terminated Mr. Hinke’s employment.[8]
- Mr. Hinke stated the following in a June 22, 2005 email to the CFO and general manager of TEI, “It is now over two (2) weeks since June 6th/05 when I gave you $90,000 cash to exercise my $0.18 stock option to purchase 500,000 ‘free trading’ common shares of Thermal Energy International Inc.. Please advise when and where my 500,000 shares will be provided to me?”[9]
- On June 22, 2005, Computershare issued share certificate number 0748 in the name of Mr. Hinke for 500,000 shares of TEI.[10] Mr. Hinke confirmed that this share certificate represented the shares purchased on the exercise of his option.[11]
[30] In summary, the option for 500,000 shares was exercised on June 6, 2005 and the shares were issued in the name of Mr. Hinke on June 22, 2005, as evidenced by the share certificate numbered 0748.
[31] On July 18, 2005, Mr. Hinke provided Computershare with written instructions to transfer 700,000 shares of TEI, represented by nine consecutively numbered share certificates (1758 to 1766). The nine consecutively numbered share certificates were all dated February 19, 2004. Mr. Hinke instructed Computershare to transfer the 700,000 shares as follows:[12]
- 426,000 shares were to be transferred to the Appellant.
- 50,000 shares were to be transferred to Mr. Proulx.
- 124,000 shares were to be transferred, in various amounts, to two individuals and a law firm.
- 100,000 shares were to be retained by Mr. Hinke.
[32] Computershare complied with Mr. Hinke’s instructions and, in particular, issued share certificate number 0844 for 426,000 shares of TEI in the name of the Appellant on August 3, 2005.[13] Mr. Hinke agreed that the certificate for the 426,000 shares represented the August 2005 Shares.
[33] The objective documentary evidence before the Court shows that, in August 2005, the Appellant did not receive any of the 500,000 TEI shares issued by TEI on the exercise of Mr. Hinke’s stock option. The 426,000 August 2005 Shares received by the Appellant were a portion of the 700,000 that, as evidenced by the nine consecutively-numbered share certificates, were issued to Mr. Hinke on February 19, 2004.
[34] Mr. Hinke eventually transferred the 500,000 TEI shares that he received on the exercise of his stock option to the Appellant. On October 7, 2005, Mr. Hinke instructed Computershare to transfer the 500,000 TEI shares, together with 300,000 other TEI shares, to the Appellant.[14]
[35] During cross-examination, counsel for the Respondent asked Mr. Hinke to reconcile his testimony that the Appellant received the August 2005 Shares directly from TEI with the evidence before the Court that Mr. Hinke transferred the August 2005 Shares to the Appellant using shares he had held since at least February 2004.
[36] He first explained this discrepancy as follows:
I explained that because of the amount of time that had lapsed between the June 6th exercise date to when Thermal fired me on the 21st of June and then afterwards issued the 500,000 shares from the stock option, the people that had advanced funds to buy the shares [from] the stock option wanted the shares sooner and so that’s why the date of this letter is July 18th, 2005.[15]
[37] Counsel for the Respondent then took Mr. Hinke to the evidence I just discussed, which clearly shows that he received the 500,000 shares on June 22, 2005, nearly a month before he instructed Computershare to transfer the 426,000 August 2005 Shares to the Appellant. He stated that his memory was not correct with respect to what occurred in June and July of 2005.[16]
[38] Mr. Hinke then provided a second explanation of what had occurred: he stated that “There was a number of transactions that had been arranged during this period and so to in the -- in terms of being efficient I did an all in one instruction letter to Computershare.”[17] This does not explain the inconsistency between his testimony that the Appellant acquired the 426,000 August 2005 Shares directly from TEI and the objective evidence before me.
[39] In summary, the objective documentary evidence before me clearly shows that the Appellant did not purchase the 426,000 August 2005 Shares from TEI. Rather, Mr. Hinke made the transfer of 426,000 shares to the Appellant in August 2005 using shares that he had owned since February 2004. As a result, for the purposes of subsection 160(1), the property transferred from Mr. Hinke to the Appellant during the relevant period included the 426,000 August 2005 Shares. Therefore, the total property transferred by Mr. Hinke to the Appellant was the Original Assessed Share Blocks.
[40] The Appellant’s and Mr. Hinke’s testimony with respect to the Appellant’s acquisition of the August 2005 Shares seriously damaged (if not destroyed) their credibility.
Fair Market Value of the Original Assessed Share Blocks
[41] I must now determine the fair market value of the Original Assessed Share Blocks, that is, the property transferred by Mr. Hinke to the Appellant during the Transfer Period.
[42] The Court received the following statements and reports from persons put forward by the parties as expert witnesses:
- Affidavit of Mr. Lindsay Malcolm sworn on March 29, 2011.[18]
- Affidavit of Dr. Jamal Hejazi sworn on March 28, 2011 (referred to as “Dr. Hejazi’s First Report”).[19]
- Letter of Ms. Cheryl McCann dated April 12, 2011 filed in rebuttal to Dr. Hejazi’s First Report.[20]
- Letter of Ms. McCann dated April 12, 2011 filed in rebuttal to Mr. Malcolm’s affidavit.[21]
- Valuation Report of Ms. McCann filed on April 18, 2011.[22]
- Affidavit of Dr. Jamal Hejazi sworn on May 2, 2011 (referred to as “Dr. Hejazi’s Second Report”).[23]
- Letter of Ms. Cheryl McCann dated June 3, 2011 filed in rebuttal to Dr. Hejazi’s Second Report.[24]
[43] The letters and reports relate to both the Revised Assessed Share Blocks and the Original Assessed Share Blocks (jointly referred to as the “Share Blocks”).
[44] The Appellant put forward Mr. Lindsay Malcolm as an expert witness.
[45] Mr. Malcolm did not provide the Court with a c.v.. He stated in his affidavit that he has been self-employed as a corporate development and investor relations consultant for 27 years.
[46] Counsel for the Appellant argued that Mr. Malcolm had special knowledge and experience that qualified him to tell the Court what the effect was of placing large blocks of TEI shares on the public market. He argued that Mr. Malcolm was qualified to offer an opinion with respect to whether a price discount applied on the sale of the Share Blocks and regarding the quantum of that discount.[25]
[47] Mr. Malcolm agreed on cross-examination that the opinion he intended to provide was an estimate of the value of the Share Blocks.[26]
[48] Counsel for the Respondent did not accept Mr. Malcolm as an expert witness. It was the Respondent’s position that Mr. Malcolm does not possess special knowledge or peculiar knowledge that would assist the Court in estimating the value of the Share Blocks. In addition, the counsel for the Respondent argued that Mr. Malcolm does not possess the independence required of an expert witness.
[49] I reserved my decision with respect to whether I should qualify Mr. Malcolm as an expert witness. I did not feel that reserving my decision prejudiced either party. More importantly, it respected the Appellant’s right to put forward the most complete evidentiary record possible that was consistent with the rules of evidence.
[50] After hearing Mr. Malcolm’s oral testimony and observing his conduct during that testimony, I have concluded that he was not a credible witness. For this reason alone I have given no weight to either his testimony or his report. I have also concluded that Mr. Malcolm lacked the expertise and impartiality required to provide the Court with an opinion on the fair market value of the Share Blocks.
[51] I will first address his credibility. I do not believe that Mr. Malcolm was completely forthcoming during his testimony. One reason for my conclusion is his close personal relationship with the Appellant and her spouse. More importantly, in numerous instances he was simply not as forthcoming in his testimony as the Court would expect from an expert witness.
[52] The following two examples illustrate my concerns with respect to Mr. Malcolm’s testimony:
[53] The first example relates to his testimony with respect to TEI shares that he received as compensation for his services. Mr. Malcolm stated in his affidavit that, in 2004, he received shares of TEI on two occasions: 32,998 shares on April 30, 2004 and 23,943 shares on September 24, 2004. He stated that he received these shares in satisfaction of amounts he was owed by TEI.[27]
[54] During cross-examination, counsel for the Respondent asked Mr. Malcolm if those were the only TEI shares that he received. Mr. Malcolm replied that they were the only shares he received.[28]
[55] The Respondent then filed two exhibits (R-3 and R-4) which show that TEI issued 100,000 shares to Mr. Malcolm on July 2, 2003 and that Mr. Malcolm received 60,000 TEI shares on February 20, 2003.
[56] When confronted with this evidence, Mr. Malcolm stated that he did not beneficially receive the 100,000 TEI shares issued on July 2, 2003. He did not explain who received the shares. He acknowledged that he did receive the 60,000 TEI shares on February 20, 2003. He then changed his testimony. Whereas he had previously stated that he had only received the 56,941 shares noted in his affidavit, after reviewing Exhibits R-3 and R-4 he stated that the shares noted in his affidavit were only examples of shares that were transferred to him. His testimony in this regard seriously damaged his credibility.
[57] A second example of Mr. Malcolm’s evidence that I found troubling was his testimony with respect to the work he performed for TEI. He stated in his affidavit that he provided services to TEI during the period from December 2002 to December 2004.[29] During his testimony, he stated that he operated his consulting business as a sole proprietor for 27 years. After reading his affidavit and listening to his examination-in-chief, I thought he was telling the Court that he provided his services to TEI personally through his sole proprietorship.
[58] However, on cross-examination it became clear that he also carried on his business through a corporation, Compliant Capital Corp. Mr. Malcolm owned 100% of the shares of this corporation. Further, the Respondent produced a consulting agreement between Compliant Capital Corp. and Mr. Hinke (as president of TEI) dated October 1, 2004. The agreement states that Mr. Malcolm will provide consulting services to TEI through Compliant Capital Corp.[30] There is no evidence before me with respect to when the parties terminated the contract.
[59] It is not clear to me why Mr. Malcolm attempted to hide the fact that he provided services to TEI through Compliant Capital Corp. The fact that he did try to hide this fact further damaged his credibility.
[60] In addition to not finding Mr. Malcolm a credible witness, I believe he did not possess the requisite expertise to provide an opinion on the value of the Share Block.
[61] “Expertise” is a modest status that is achieved when the “expert… possesses special knowledge and expertise going beyond that of the trier of fact.”[31] The witness may have acquired this special knowledge through either study or experience. It is important that the expert’s special knowledge and expertise be in respect of the subject matter of his or her opinion.
[62] Mr. Malcolm indicated that much of his value to a company was in corporate development and dealing with investors in the company. He stated that he has provided services to hundreds of companies listed on the TSX Venture Exchange (and its predecessor exchanges). His services primarily involved the writing of news releases, advising companies on the timing of such releases in order to “have a positive effect on share prices” and acting as the primary public spokesperson for the company. He also testified that he was involved in creating presentations for investors and annual reports.[32]
[63] He testified that his role with his clients did not involve valuing shares. He also confirmed that he was not a chartered business valuator, a chartered accountant, a chartered financial analyst, or a certified general accountant. In addition, he has not taken any valuation courses offered by any of the institutions that govern those professions.[33]
[64] Counsel for the Appellant argued that Mr. Malcolm was qualified to give expert evidence on the value of the Share Blocks given his special knowledge and expertise with regard to the operation of the TSX Venture Exchange and his specific knowledge of TEI and the pricing of its shares on the TSX Venture Exchange.
[65] I do not agree. In my view, his personal experience does not provide him with the expertise required to value the Share Blocks. Mr. Malcolm certainly acquired knowledge of the TSX Venture Exchange and TEI through his work experience. However, this experience did not cause him to acquire the skills of a valuator. He acknowledged that he does not have any formal training as a valuator.
[66] Mr. Malcolm recognized a number of the approaches used to value shares, however, he admitted that he did not apply any of the accepted valuation approaches in valuing the Share Blocks. After listening to his testimony, I have concluded that, while he was aware of the valuation approaches, he did not possess the requisite skill to apply these approaches to a specific fact situation.[34]
[67] Mr. Malcolm’s affidavit (Exhibit A-3) reflects his lack of expertise. I found the affidavit to be a superficial attempt to value the shares.
[68] In summary, because of Mr. Malcolm’s lack of expertise and the nature of his report, I do not find either the report or his testimony to be reliable.
[69] My third concern with respect to Mr. Malcolm is his objectivity.
[70] The party presenting the proposed expert witness must satisfy the trier of fact that he or she possesses not only the necessary expertise, but also the requisite independence as well.[35] An expert witness should provide independent assistance to the court and should not assume the role of an advocate.[36]
[71] It is clear from the testimony of Mr. Malcolm and Mr. Hinke that Mr. Malcolm and Mr. Hinke are close friends. Mr. Malcolm prepared his report because of that friendship.
[72] Mr. Malcolm testified that the Appellant did not retain him to provide the report. Rather, he prepared his report “on a gentleman’s basis” for a friend[37]. He noted that he was asked to prepare the report one week before it was filed with the Court.[38]
[73] Mr. Malcolm’s relationship with Mr. Hinke is not, in and of itself, sufficient to disqualify Mr. Malcolm as an expert. However, that relationship, when combined with his testimony during the hearing, is sufficient for me to conclude that he did not have the requisite independence to provide an expert opinion to the Court.
[74] A great deal of Mr. Malcolm’s testimony was in the nature of advocacy. He clearly felt that his primary purpose in testifying was to support his close friend Mr. Hinke.
[75] For the foregoing reasons I have given no weight to Mr. Malcolm’s affidavit.
[76] The Appellant also put forward Dr. Jamal Hejazi as an expert witness. The majority of Dr. Hejazi’s report and testimony related to the expert report filed by the Respondent. As a result, I will consider Dr. Hejazi’s evidence after I have considered the evidence of the Respondent’s expert.
[77] The Respondent put forward Ms. Cheryl McCann as an expert witness. Ms. McCann is a certified general accountant and certified business valuator. After hearing submissions from counsel, I qualified Ms. McCann as an expert witness for the valuation of the TEI shares at issue.
[78] Ms. McCann testified that her valuation report[39] is a comprehensive valuation report prepared in accordance with the practice standards of the Canadian Institute of Chartered Business Valuators (CICBV).[40] Her report provides a fair market value for the Original Assessed Share Blocks and the Revised Assessed Share Blocks at three separate groups of dates, namely, the transfer dates assumed by the CRA, the transfer dates assumed by the Appellant and the SEDI valuation dates.[41]
[79] Ms. McCann first, in accordance with CICBV standards, considered the economic environment at the time of the valuation, the industry in which TEI operated, and the business carried on by TEI itself, including the history of that business.
[80] After reviewing the history and overall operations of TEI, she determined that the going concern basis should be used for the purpose of valuing the shares. She then decided upon the market approach as the technique to apply in valuing the shares. She based this decision on the assumption that markets generally determine the value of a publicly-traded company’s shares.
[81] She began her valuation by examining the trading data of the company. She reviewed trading data for two years prior to the first valuation date and for two years beyond the last valuation date.[42] She felt that a review of the trading data helped her understand the market for the shares and “it ultimately spoke to the nature of the shares”.[43]
[82] She organized her review of the trading data into three sections: trend line and average trading volumes and prices, daily trading volume in excess of 250,000, and the nature of the shares. That review formed the basis of her valuation.
[83] The first section of her valuation report relating to trading data considered TEI’s average daily trading price and daily trading volumes. After analyzing the data, Ms. McCann reached the following conclusions:
1. There was no reason to expect share prices to decrease over the valuation period due to the placement of the Share Blocks on the open market.[44]
2. Because there was regular trading activity and increasing share prices, there was no reason to expect share prices to decrease over the valuation period as a result of the placement of the shares on the open market.[45]
[84] The second section of her valuation report relating to trading data considered trading volumes in excess of 250,000 shares. Ms. McCann stated that she wanted to see how the market reacted to trades of large volumes of TEI shares. She wanted to determine if she could use this information to ascertain whether a blockage discount[46] applied to the sale of the Share Blocks and, if it did, what the amount of the discount was.
[85] After considering the trading volumes in excess of 250,000 shares, she reached the following conclusion:[47]
Based on my observations, I would not expect that the Share Blocks would be subjected to a blockage discount imposed by open market trading during the valuation period because there were average increases in the Company’s share price during the 2 years preceding the valuation period on dates where trading volumes exceeded 250,000.
[86] She noted that, with the benefit of hindsight, a maximum blockage discount of 4.86% could be considered that would be based on the average decrease in the share price over the previous day during the valuation period. However, during her testimony she stated that she did not apply the discount because she did not think it was warranted and because she did not use hindsight.[48] She stated that, if hindsight were to be used, consideration would have to be given to the fact that there were average increases in share prices observed in the two years subsequent to the valuation period.[49]
[87] In the third section of her valuation report relating to trading data, Ms. McCann considered the nature of the TEI shares. She reached the following conclusions:[50]
1. The TEI shares were penny stock since the shares traded at less than $1.00 per share during the review period.
2. The TEI shares were speculative stock since the shares were listed on the TSX Venture Exchange and because of TEI’s history of losses and the actual trading price of the shares.
3. The TEI shares were not highly illiquid as they were listed on the TSX Venture Exchange (as opposed to shares of a private company or shares that are traded over the counter) and were not thinly traded. She based her conclusion that the shares were not thinly traded on her review of the public float versus insider holdings, and the trading volumes of the shares.
4. The TEI shares exhibited normal to moderate volatility. Ms. McCann used the Black-Scholes option pricing model to arrive at this conclusion. This model, which won its developers a Nobel Prize, calculates a hypothetical stock option price. Ms. McCann noted that a high calculated price relative to the stock price indicates that volatility is high. Conversely, a low option price indicates low volatility.[51] The calculation showed that the cost to guarantee the selling price of one of TEI’s shares was .005 cents, which represented 1.8% of the volume-weighted average trading price.
[88] Ms. McCann concluded that her findings with respect to the nature of the shares did not support a finding that a blockage discount was required.
[89] After examining the trading data of TEI, Ms. McCann considered private placements and exchanges of TEI shares. She conducted this analysis in order to determine if the difference (if any) between issue prices and trading prices and the fact that there were restrictions on many of the issued shares could be used to determine whether a blockage discount should apply to the Share Blocks.[52]
[90] After examining 22 transactions, she concluded that there was no recognizable relationship between the quantities of shares issued, the associated restrictions, the issue prices and the trading prices. As a result, she could not use the data to determine if a blockage discount was warranted.[53]
[91] The next portion of Ms. McCann’s expert report considers the sale of TEI shares by and on behalf of the Appellant and her spouse. She wanted to see how the market reacted to dispositions of large blocks of shares over time.[54] She considered open market sales, privately arranged sales and the sale by the Minister of seized shares.
[92] Ms. McCann first considered open market sales by the Appellant and her spouse for the two years prior to the first valuation date and during the valuation period. During that period, the Appellant and her spouse sold 4.9 million shares, including 2.7 million shares between May 2005 and February 2006 (that is, during the Transfer Period).
[93] After reviewing the sales, Ms. McCann reached the following conclusion:
. . . it appears that dispositions of large blocks of shares, over a short period of time, did not generally result in a decrease in the market price. That is to say that where there were dispositions of large blocks of shares over a short period of time, the share prices were not subjected to a blockage discount imposed by open market trading.[55]
[94] Ms. McCann then considered private market sales by the Appellant and her spouse. She reviewed two private market sales made by the Appellant: one of 100,000 shares and the second of 111,000. She determined that no blockage discount was imposed on these share sales.
[95] The third set of sales of the Appellant’s and her spouse’s shares considered by Ms. McCann was the sale of shares seized by the Minister. Ms. McCann noted that this was hindsight information that she used to test the assumption that a blockage discount was not required.
[96] Sales of these shares occurred at discounts of between 20% and 29% of the TSX trading price. Ms. McCann noted that one would expect such sales to draw a blockage discount since the seized shares represented a sizable block, considerably larger than any of the Share Blocks. She also considered the fact that the seized shares were not sold on the open market, but rather were sold in private sales. She concluded that the private sales would be subject to factors that would have affected the selling prices but not the trading prices and not fair market value.
[97] After considering the trading data of TEI, the private placements and exchanges of TEI shares, and the sale of TEI shares owned by the Appellant and her spouse, Ms. McCann considered certain jurisprudence relating to the valuation of shares.
[98] I have ignored that portion of her report. While it is perfectly acceptable for an expert to consider numerous factors coming within the scope of that expert’s training as a chartered business evaluator, it is not acceptable for the expert to provide me with an opinion on the application of certain jurisprudence to the valuation of shares. That, in my view, is an attempt by the expert to provide an opinion on domestic law.
[99] My decision to ignore that portion of Ms. McCann’s report has no impact on the conclusions reached in her report. The intent in that section of the report was to add additional support to her expert finding. Such additional support was not, in my view, required.
[100] After considering the results of her work, Ms. McCann reached the following conclusions:[56]
1. A blockage discount is not warranted in determining the fair market value of the shares.
2. A discount may be warranted to represent the cost of selling the shares on the open market over a reasonable period of time.
3. In order to avoid potential distortions in a single day’s trading, the fair market value of the Share Blocks should be based upon the volume‑weighted average trading price of the Company’s shares, calculated by dividing the total value by the total volume of shares traded for the five trading days immediately preceding the relevant date.
[101] Ms. McCann then determined that a discount in the range of 1.3% to 3.6% would represent the cost of selling the shares on the open market over a reasonable period of time. She used actual sales of TEI shares by the Appellant and her spouse to estimate a reasonable period of time to dispose of the shares (between 16 and 44 days) and used TEI’s weighted average cost of capital (30% annual interest rate) to represent the cost of selling the shares over a period of time.[57]
[102] Counsel for the Appellant argued that Ms. McCann made an error in her determination of the discount by not incorporating days when the TSX was closed (i.e. weekends). If weekends were taken into account, the discount would be in the range of 2% and 5.5%. I would not expect such a small change to have a material impact on Ms. McCann’s conclusion.
[103] On the basis of those conclusions Ms. McCann calculated the following valuations for the Share Blocks:[58]
Revised Assessed
Share Blocks[59]
Original Assessed
Share Blocks[60]
Transfer dates assumed by CRA
$540,496
$678,535
Transfer dates assumed by Appellant
$525,867
$643,676
SEDI valuation dates
$532,964
$639,771
[104] During cross-examination, the Appellant’s counsel asked Ms. McCann a number of questions with respect to her report. He raised a number of issues, including her use of the Black-Scholes model, her determination of a reasonable time period for the disposition of the TEI shares, her conclusions with respect to the proceeds realized by the CRA on the sale of the seized shares, whether TEI shares were thinly traded shares, and the use of a blockage discount. Ms. McCann was, in my view, able to address each issue raised by counsel.
[105] After considering Ms. McCann’s report and her testimony, I have concluded that her conclusions provide a reasonable valuation for the Share Blocks.
[106] Dr. Hejazi was put forward by the Appellant on the basis that he is “qualified to analyze and interpret statistical data and studies dealing with both arm's length and related party business transactions and to express an expert opinion whether and to what extent the data and the studies support or do not support conclusions based on the same.”[61]
[107] Dr. Hejazi holds a Ph.D. in Economics and works in matters relating to transfer pricing and taxation. After hearing submissions from counsel, I qualified Dr. Hejazi as an expert witness with respect to the analysis and interpretation of statistical data.
[108] Dr. Hejazi presented two report