Grimes v. The Queen

Grimes v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2016-11-29
Neutral citation
2016 TCC 280
File numbers
2014-2006(IT)G
Judges and Taxing Officers
Dominique Lafleur
Subjects
Income Tax Act
Decision Content
Docket: 2014-2006(IT)G
BETWEEN:
M. KATHLEEN GRIMES AND M. ERSIN OZERDINC,
TRUSTEES OF THE OZERDINC FAMILY TRUST NO. 2,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on June 8 and 9, 2016, at Ottawa, Canada
Before: The Honourable Justice Dominique Lafleur
Appearances:
Counsel for the Appellant:
Paul C. LaBarge
Estelle Duez
Counsel for the Respondent:
Pascal Tétrault
Nicholas MacDonald (student-at-law)
JUDGMENT
The appeal from the reassessment made pursuant to the Income Tax Act, the notice of which is dated October 17, 2013, for the 2011 taxation year, is allowed and the matter is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the attached Reasons for Judgment and the summary of adjustments found in Appendices B to D which form an integral part of the Reasons for Judgment.
The matter of costs is reserved. The parties will have 60 days from the date of this Judgment with Reasons to reach an agreement on costs, failing which they are directed to file their written submissions on the issue of costs, not to exceed (10) pages, within 30 days of the expiration of the initial 60‑day period.
Signed at Ottawa, Canada, this 29th day of November 2016.
“Dominique Lafleur”
Lafleur J.
Citation: 2016 TCC 280
Date: 20161129
Docket: 2014-2006(IT)G
BETWEEN:
M. KATHLEEN GRIMES AND M. ERSIN OZERDINC,
TRUSTEES OF THE OZERDINC FAMILY TRUST NO. 2,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Lafleur J.
A. OVERVIEW.
[1] This appeal arises out of the reassessment of the Ozerdinc Family Trust No. 2 (the “Trust”) with respect to its 2011 taxation year. On October 17, 2013, the Minister of National Revenue (the “Minister”) reassessed the Trust, in accordance with the provisions of the Income Tax Act, R.S.C., 1985, c. 1 (5th supp.), as amended (the “Act”), and increased the Trust’s taxable income by the amount of $4,035,242 and therefore included a corresponding tax liability of $1,870,045.22 and accrued interest of $151,483.35 (Exhibit AR‑2, tab 19). The reassessment is the result of the application of the rules found in subsections 104(4) and 104(5.8) of the Act, referred to as the “21‑year deemed disposition rules”. On January 15, 2014, Ms. Marion Kathleen Grimes and Mr. Ersin Ozerdinc, as trustees of the Trust (the “Appellant”), filed a notice of objection in respect of the notice of reassessment. On May 5, 2014, the Appellant filed a notice of appeal pursuant to paragraph 169(1)(b) of the Act, because the Trust had not received a notice of confirmation and 90 days had elapsed since the notice of objection was filed.
[2] The fact that the Trust was subject to the application of the 21‑year deemed disposition rules is not in issue in this appeal, the deemed disposition day being February 1, 2011, at the end of the day (the “Valuation Date”). In issue is the determination of the fair market value of some of the capital property held by the Trust at that time.
[3] In accordance with paragraph 7(g) of the Reply to the Notice of Appeal and the Agreed Statement of Facts (Partial) filed as Exhibit AR‑1 and as corrected by the parties, the capital property held by the Trust as of the Valuation Date and subject to the 21‑year deemed disposition rules comprises the following:
1 Class A Common Share and 2,699,900 First Preferred Shares of the share capital of 1634158 Ontario Inc. (“Holdco”) and an interest in Site Preparation Limited Partnership (“SPLP”).
[4] The fair market value of the interest in SPLP is not in dispute (Exhibit AR‑1, para. 46). Holdco, in turn, held all the issued and outstanding shares of a corporation called Site Preparation Limited (“SPL”).
[5] The Minister concluded that the fair market value of the shares of Holdco owned by the Trust as of the Valuation Date was $7,993,655, allocated as follows: $2,699,900 for the 2,699,900 First Preferred Shares and $5,293,655 for the Class A Common Share.
[6] One of the trustees of the Trust, Ms. Marion Kathleen Grimes, testified at the hearing, along with one expert witness called by the Appellant, Mr. Gerald S. Blackman from the firm MNP LLP. The Respondent called two expert witnesses, namely Mr. Timothy Spencer from the Canada Revenue Agency and Mr. Neil de Gray from the firm Campbell Valuation Partners Limited (“CVPL”).
B. THE RELEVANT LEGISLATION.
[7] The relevant parts of paragraphs 104(4) and 104(5.8) of the Act read as follows:
104(4) Deemed disposition by trust — Every trust is, at the end of each of the following days, deemed to have disposed of each property of the trust (other than exempt property) that was capital property (other than excluded property or depreciable property) or land included in the inventory of a business of the trust for proceeds equal to its fair market value (determined with reference to subsection 70(5.3)) at the end of that day and to have reacquired the property immediately after that day for an amount equal to that fair market value, and for the purposes of this Act those days are
. . .
(b) the day that is 21 years after the latest of
(i) January 1, 1972,
(ii) the day on which the trust was created, and
(iii) where applicable, the day determined under paragraph (a), (a.1) or (a.4) as those paragraphs applied from time to time after 1971; and
. . .
(5.8) Trust transfers — Where capital property (other than excluded property), land included in inventory, Canadian resource property or foreign resource property is transferred at a particular time by a trust (in this subsection referred to as the “transferor trust”) to another trust (in this subsection referred to as the “transferee trust”) in circumstances in which subsection 107(2) or 107.4(3) or paragraph (f) of the definition disposition in subsection 248(1) applies,
(a) for the purposes of applying subsections 104(4) to 104(5.2) after the particular time,
(i) subject to paragraphs (b) to (b.3), the first day (in this subsection referred to as the “disposition day”) that ends at or after the particular time that would, if this section were read without reference to paragraphs (4)(a.2) and (a.3), be determined in respect of the transferee trust is deemed to be the earliest of
(A) the first day ending at or after the particular time that would be determined under subsection 104(4) in respect of the transferor trust without regard to the transfer and any transaction or event occurring after the particular time,
. . .
104(4) Présomption de disposition — Toute fiducie est réputée, à la fin de chacun des jours suivants, avoir disposé de chacun de ses biens (sauf les biens exonérés) qui constituait une immobilisation (sauf un bien exclu ou un bien amortissable) ou un fonds de terre compris dans les biens à porter à l’inventaire d’une de ses entreprises, pour un produit égal à la juste valeur marchande du bien (déterminée par rapport au paragraphe 70(5.3)) à la fin de ce jour, et avoir acquis le bien de nouveau immédiatement après ce jour pour un montant égal à cette valeur. Pour l’application de la présente loi, ces jours sont :
[…]
b) le jour qui tombe 21 ans après le dernier en date des jours suivants :
(i) le 1er janvier 1972,
(ii) le jour où la fiducie a été établie,
(iii) le cas échéant, le jour déterminé selon les alinéas a), a.1) ou a.4), dans leurs versions applicables après 1971;
[…]
(5.8) Transferts de fiducie — Lorsqu’une fiducie (appelée « fiducie cédante » au présent paragraphe) transfère à un moment donné à une autre fiducie (appelée « fiducie cessionnaire » au présent paragraphe) des immobilisations (sauf des biens exclus), des fonds de terre compris dans les biens à porter à son inventaire, des avoirs miniers canadiens ou des avoirs miniers étrangers dans les circonstances visées aux paragraphes 107(2) ou 107.4(3) ou à l’alinéa f) de la définition de disposition au paragraphe 248(1), les règles suivantes s’appliquent :
a) pour l’application des paragraphes (4) à (5.2) après le moment donné :
(i) sous réserve des alinéas b) à b.3), le premier jour (appelé « jour de disposition » au présent paragraphe) se terminant au moment donné ou postérieurement qui serait déterminé à l’égard de la fiducie cessionnaire si le présent article s’appliquait compte non tenu des alinéas (4)a.2) et a.3) est réputé être le premier en date des jours suivants :
(A) le premier jour, se terminant au moment donné ou après, qui serait déterminé selon le paragraphe (4) à l’égard de la fiducie cédante s’il n’était pas tenu compte du transfert ou d’une opération ou d’un événement survenant après le moment donné,
[…]
[Emphasis added.]
C. THE issues.
[8] In accordance with subsection 104(4) of the Act, I have to determine the fair market value as of the Valuation Date of the Class A Common Share and the 2,699,900 First Preferred Shares of the share capital of Holdco held by the Trust.
[9] In outlining the task faced by this Court, I would first note the classic discussions of the difficulties inherent in the valuation of the fair market value of capital property. The basic approach is aptly defined in Gold Coast Selection Trust Limited v Humphrey (Inspector of Taxes), [1948] AC 459, [1948] 2 All ER 379, a leading case decided by the House of Lords. Viscount Simon stated at pages 472-473:
In my view, the principle to be applied is the following. In cases such as this, when a trader in the course of his trade receives a new and valuable asset, not being money, as the result of sale or exchange, that asset, for the purpose of computing the annual profits or gains arising or accruing to him from his trade, should be valued as at the end of the accounting period in which it was received, even though it is neither realised or realisable till later. The fact that it cannot be realised at once may reduce its present value, but that is no reason for treating it, for the purposes of income tax, as though it had no value until it could be realised. If the asset takes the form of fully paid shares, the valuation will take into account not only the terms of the agreement, but a number of other factors, such as prospective yield, marketability, the general outlook for the type of business of the company which has allotted the shares, the result of a contemporary prospectus offering similar shares for subscription, the capital position of the company, and so forth. There may also be an element of value in the fact that the holding of the shares gives control of the company. If the asset is difficult to value, but is none the less of a money value, the best valuation possible must be made. Valuation is an art, not an exact science. Mathematical certainty is not demanded, nor, indeed, is it possible. It is for the commissioners to express in the money value attributed by them to the asset their estimate, and this is a conclusion of fact to be drawn from the evidence before them.
[Emphasis added.]
[10] In Conn v. MNR, 86 DTC 1669 [Conn], Justice Brulé of this Court noted the summary made by Justice McIntyre of the British Columbia Supreme Court of older Canadian authorities in Re Mann Estate, [1972] 5 WWR 23 at 26, 1 NR 518:
11 The expression “fair market value” is well known in law and, indeed, there is little dispute before me as to the definition of the term. It has been the subject of much judicial discussion and the appellants referred to such cases as Untermyer Estate v. A.G. of B.C., [1929] S.C.R. 84; Montreal Island Power Company v. The Town of Laval, [1935] S.C.R. 304; In Re Succession Duty Act re Leiser [1937] 2 W.W.R. 428; A-G of Alta. v. Royal Trust Co. [1945] S.C.R. 267; Smith et al v. M.N.R. [1950] S.C.R. 602; Semet-Solvay Co. v. Deputy M.N.R. [1960], 20 D.L.R. 663.
12 I do not intend to quote at length from these authorities, but it is clear, from an examination of them, that the expression “fair market value” means the exchange value, the value an asset will bring in the market and where no market exists, that value must be determined by other indicia of value. I refer to a passage in the judgment of Estey J. in Attorney General of Alberta v. Royal Trust Company, supra, at p. 288 which is representative of the views expressed in the other authorities referred to:
“It is not suggested that the Commissioner has overlooked any factor that ought properly to have been taken into account in determining the value of the property. He had to determine the market value and when, as in this case, no market exists, it is the task of the Commissioner, so far as he can, to construct a normal market and to determine the value by taking into account all the factors which would exist in an actual normal market - a market which is not disturbed by factors similar to either boom or depression, and where vendors, ready but not too anxious to sell, meet with purchasers ready and able to purchase. Such a task is often very difficult, and this case is no exception.”
[11] The specific situation where no ready market exists was examined by Justice Kellock in Smith v. Minister of National Revenue, [1950] SCR 602, wherein he said at page 605:
In determining the fair market value where there is no competitive market at the date as of which the value is to be ascertained, other indicia may be resorted to as pointed out by Sir Lyman Duff C.J. in Montreal Island Power Co. v. Town of Laval des Rapides, [1935] S.C.R. 304 at 306. The learned Chief Justice went on to say:
There may be reasonable prospects of the return of a market, in which case it might not be unreasonable for the assessor to evaluate the present worth of such prospects and the probability of an investor being found who would invest his money on the strength of such prospects; and there may be other relevant circumstances which it might be proper to take into account as evidence of its actual capital value.
[12] In Henderson Estate and Bank of New York v. MNR, 73 DTC 5471, [1973] CTC 636, Justice Cattanach of the Federal Court noted that:
The statute does not define the expression “fair market value”, but the expression has been defined in many different ways depending generally on the subject matter which the person seeking to define it had in mind. I do not think it necessary to attempt an exact definition of the expression as used in the statute other than to say that the words must be construed in accordance with the common understanding of them. That common understanding I take to mean 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. I would add that the foregoing understanding as I have expressed it in a general way includes what I conceive to be the essential element which is an open and unrestricted market in which the price is hammered out between willing and informed buyers and sellers on the anvil of supply and demand. These definitions are equally applicable to “fair market value” and “market value” and it is doubtful if the use of the word “fair” adds anything to the words “market value”.
[Emphasis added.]
[13] That definition has since been consistently cited with approval by the Federal Court of Appeal and this Court (see Attorney General of Canada v. Nash et al., 2005 FCA 386, 2005 DTC 5696; The Queen v. Gilbert et al., 2007 FCA 136, 2008 DTC 6295; Kruger Wayagamack Inc. v. The Queen, 2015 TCC 90, 2015 DTC 1112). Cattanach J. went on to observe that:
In my opinion the discussion of the meaning of the expression by Mr Justice Migneault in delivering the unanimous judgment of the Supreme Court of Canada in Untermyer Estate v. Attorney-General for British Columbia is a most useful guide to the meaning of the words “fair market value” as used in the Dominion Succession Duty Act as applicable to shares listed on a stock exchange. He said at page 91:
We were favoured by counsel with several suggested definitions of the words “fair market value.” The dominant word here is evidently “value,” in determining which the price that can be secured on the market—if there be a market for the property (and there is a market for shares listed on the stock exchange)—is the best guide. It may, perhaps, be open to question whether the expression “fair” adds anything to the meaning of the words “market value,” except possibly to this extent that the market price must have some consistency and not be the effect of a transient boom or a sudden panic on the market. The value with which we are concerned here is the value at Untermyer’s death, that is to say, the then value of every advantage which his property possessed, for these advantages, as they stood, would naturally have an effect on the market price. Many factors undoubtedly influence the market price of shares in financial or commercial companies, not the least potent of which is what may be called the investment value created by the fact—or the prospect as it then exists—of large returns by way of dividends, and the likelihood of their continuance or increase, or again by the feeling of security induced by the financial strength or the prudent management of a company. The sum of all these advantages controls the market price, which, if it be not spasmodic or ephemeral, is the best test of the fair market value of property of this description.
I therefore think that the market price, in a case like that under consideration, where it is shown to have been consistent, determines the fair market value of the shares. I do not lose sight of the fact that mining operations are often of a speculative character, that there is always a danger of depletion, and that a time will sooner or later arrive when no more minerals will be available, unless other properties are secured to keep up the supply. But all these elements have an effect on the price of the shares on the stock exchange, and no doubt they were fully considered by the purchasers of the stock at the then prevailing prices.
[Emphasis added.]
[14] The Untermeyer case makes a distinction between “market value” and “fair market value”. Similarly, courts have grappled with the distinction between “fair value” and “fair market value” in the context of other proceedings. For instance, in 1234 Mountain Realty Corp. c. Ioanidis, [2002] JQ No. 5674 (QL), J.E. 2003‑133, a case decided by the Quebec Court of Appeal, a dissenting shareholder, upon the liquidation of a corporation from which he dissented, was entitled to seek the “fair value” of his shares from the corporation under the Canada Business Corporations Act, R.S.C., 1985, c. C‑44 (the “CBCA”). The relevant provision of the CBCA defines “fair value”; however, Canadian jurisprudence has ruled that “fair value” is a concept that is not identical with “fair market value”. Indeed, the trial judge in 1234 Mountain Realty Corp. v. Ioanidis, [2000] QJ No. 264 (Superior Court), stated at paragraph 6, “fair value” departs from “fair market value” insofar as it excludes the minority discount and may add a premium for the “squeezing‑out” of the minority shareholder.
[15] Brulé TCJ, in Conn (cited above), noted the following:
E.N.R. Campbell in Canada Valuation Service, published by Richard De Boo Limited, indicates that there are two distinct markets where valuation determination may be required. One is the open market in which transactions are constantly consumated and the other is the less familiar notional market where valuation requirements are necessary for such things as income tax, expropriation, arbitration or divorce proceedings. In this latter instance, although it is necessary to make a value determination, there may be no contemplation of open market transactions.
[Emphasis added.]
That is the task faced by this Court. In Attridge v. The Queen, [1991] 1 CTC 247, 91 DTC 5161 [Attridge], Justice Muldoon discussed an important point pertaining to valuation cases: the trial judge is not bound to accept unquestioningly the expert evidence: “[this] Court will have to form its own conclusions necessarily without adopting those of the expert witnesses. . . . Having . . . stated reasons enough for not accepting the expert witnesses’ approaches and conclusions, the Court must nevertheless exercise the judgment which Parliament exacts despite its not having stated in the Income Tax Act any definition of “fair market value”” (pages 267 and 270). His conclusion, which departed from the approaches of both sets of experts in that valuation case on the ground that they reflected extreme views, was confirmed on appeal by the Federal Court of Appeal at [1994] 1 CTC 193, 94 DTC 6132 (leave to appeal to the Supreme Court of Canada was refused, [1993] SCCA No. 555).
[16] I emphasize Attridge since it reaffirms the independence of the trier of fact from the opinions of experts as well as the importance of applying the relevant principles drawn from the fair value concept of the CBCA in arriving at a valuation for the purposes of the Act. There is no similarity between the contribution of the experts who testified before Muldoon J. and that of the experts before me. While I have highlighted some erroneous assumptions on the part of the experts, I found their opinions overall quite helpful and well‑reasoned in most respects – in no way comparable to the “quite worthless” opinions and conclusions propounded before Muldoon J.
[17] In this appeal, in order to determine that fair market value, I will examine, inter alia, five (5) issues:
(1) Which financial statements should be the starting point for the evaluation of the shares of SPL: the internal financial statements of SPL as of January31,2011 prepared by the Management (filed as ExhibitAR‑2, tab8; the “Internal Statements”) or the audited financial statements of SPL as of February28,2011 prepared by Raymond Chabot Grant Thornton, CPA (“RCGT”) (ExhibitAR‑2, tab7L; the “RCGT Statements”)?
(2) Should the Shareholders’ Equity of SPL and, consequently, the fair market value of the shares of SPL, be reduced by the amount of the advances made to a director in SPL (“Directors’ Advances”) and, in the affirmative, what is the amount that should be deducted ($2,257,132 as indicated on the Internal Statements or $1,904,422 as indicated on the RCGT Statements)?
(3) Should the Shareholders’ Equity of Holdco and, consequently, the fair market value of the shares of Holdco, be reduced by the amount of the advances made to a shareholder ($1,144,887) (“Holdco Advances”)?
(4) Should embedded income taxes be considered in determining the fair market value of the shares of Holdco?
(5) Should a minority and/or marketability discount(s) be applied in the evaluation of the fair market value of the ClassA Common Share of Holdco held by the Trust?
D. THE FACTS.
1. Organizational Chart.
[18] At the hearing, the Appellant filed an organizational chart under Exhibit A‑2:
2. Agreed Statement of Facts (Partial).
[19] The parties also filed an Agreed Statement of Facts (Partial) under Exhibit AR‑1, which is reproduced in its entirety in Appendix A to these reasons. At the hearing, the parties indicated that paragraph 31 should be amended to refer to 2,699,900 First Preferred Shares instead of 2,700,000 First Preferred Shares.
3. Testimony of Ms. Grimes.
3.1 Background.
[20] Ms. Grimes testified at trial. She is one of two trustees of the Trust, the other trustee being her husband, Mr. Ersin Ozerdinc. She is also corporate counsel for SPL and was the sole director, president and secretary-treasurer of SPL at all material times (para. 18 of the Agreed Statements of Facts, Exhibit AR‑1). Furthermore, she was in 2011 and 2012, the director, president and the secretary-treasurer of Holdco; positions which she currently holds.
[21] She testified that she and her husband have been in business together since 1986. Since 1990, they have been operating SPL, which is active in the industrial, commercial and institutional sectors of the construction industry. SPL also performs excavation and shoring. At all material times, Mr. Ersin Ozerdinc and Ms. Grimes played and continue to play key management roles in SPL, as indicated in paragraph 17 of the Agreed Statements of facts (Exhibit AR‑1).
[22] In 2005, Holdco was created. The reason behind the creation of Holdco was to keep a minimal amount of cash in SPL; it was the intent of the controlling minds to transfer all extra cash to Holdco.
[23] Ms. Grimes and her husband were trustees for the Ozerdinc Family Trust (the “Original Trust”) which was settled in 1990. According to Ms. Grimes, the Trust was settled in 2007 pursuant to the legal advice of the Ozerdinc family’s counsel at that time; the objective was to allow a transfer without tax consequences of all the assets of the Original Trust to the Trust.
[24] In the fall of 2012 (probably around the end of October), an agent of Canada Revenue Agency (the “CRA”) informed Ms. Grimes that he was performing an audit of the Trust. As a result of this audit, the Trust was subject to a significant tax burden because of the application of the 21‑year deemed disposition rules. According to Ms. Grimes, the result of the audit came as a total surprise to her. She was not aware of any tax consequences that could result from the holding of assets by the Trust. Both parties engaged in lengthy discussions about the proper valuation of the assets held by the Trust (Exhibit AR‑2, tab 26 — letter from CRA explaining CRA’s position on the deemed disposition following the meeting of November 7, 2012). Furthermore, a legal proceeding has been commenced (and is still pending) in the Ontario Superior Court of Justice by Ms. Grimes, her husband, Holdco, SPL, the Trust and other parties against the legal counsel who had proposed and implemented the 2007 reorganization, including the creation of the Trust, alleging the legal counsel’s negligence and claiming damages resulting, inter alia, from the application of the 21‑year deemed disposition rules to the Trust (Exhibit AR‑2, tab 11) (the “Civil Litigation”).
3.2 Holdco Advances.
[25] Ms. Grimes explained that dividends received from SPL are the sole source of revenue of Holdco. Holdco is controlled by Ms. Grimes in her personal capacity through the ownership of shares (approximately 69% of the voting rights).
[26] A total amount of $1,144,887 (namely, the Holdco Advances) was transferred by Holdco to Ms. Grimes qua trustee in order to finance the purchase of an interest in a cooperative housing unit in New York City (the “Co‑op”), allowing one of her sons, who was then living in New York and who is a beneficiary of the Trust, to reside in an unit of the Co‑op. According to Ms. Grimes, since the Co-op did not allow the Trust to purchase an interest in the Co‑op, Ms. Grimes and her husband had to make the purchase in their own names. The closing took place in April 2011. According to the financial statements of Holdco for the year ending February 28, 2011, an advance to a shareholder in the amount of the Holdco Advances (Exhibit AR‑2, tab 1D) was made.
[27] Ms. Grimes insisted that the Holdco Advances were made to her as trustee, and not personally. She also insisted that there was no intent to ever pay back the Holdco Advances to Holdco.
[28] According to Ms. Grimes, dividends would be declared by Holdco to the Trust in order to settle the amount of the Holdco Advances. In fact, dividends in an aggregate amount of $2,107,965 had been made payable during the months of January and February 2012 (Exhibit AR‑2, tabs 4, 5 and 6) to the holders of the common shares of Holdco (namely, the Trust). The beneficiaries of the Trust were allocated the whole amount as a dividend and were taxed on said income in 2012 (copies of T3 statement, Exhibit AR‑2, tab 30). According to the financial statements of Holdco for the year ending February 29, 2012, an amount of nil is found under the heading “advances to a director” (Exhibit AR‑2, tab 1E).
3.3 Directors’ Advances.
[29] With respect to compensation received from SPL by Ms. Grimes and her husband for their work in SPL, Ms. Grimes explained that she and her husband are compensated by SPL by way of bonuses and they operate by way of a Shareholders’ Account. The amount stated in the Shareholders’ Account reflects all of their personal expenses (groceries, schooling fees, children’s expenses, etc.). At the end of each fiscal year, Ms. Grimes meet with their accountants to determine the amount of the bonus to be paid by SPL to Ms. Grimes and her husband which will be equal to the amount stated in the Shareholders’ Account and which was used for personal purposes; then, the Shareholders’ Account will be reduced accordingly by way of a set‑off against the bonuses. Taxes would be paid on this amount. Ms. Grimes and her husband do not receive a regular salary from SPL; they do not receive any compensation from their work apart from said bonuses.
[30] In cross‑examination, counsel for the Respondent referred to the Internal Statements, in particular an item called “Office salaries” in the amount of $99,013.06. According to Ms. Grimes, this amount does not include the bonuses since the bonuses are declared at year‑end; this refers to salaries paid to office staff only. In the Internal Statements is found an item called “Shareholders Advances” in the amount of $2,257,132.34. Even if it refers to Shareholders’ Advances, it is, in fact, the amount of the Directors’ Advances. In the RCGT Statements, this item is referred to as “Advances to directors” in an amount of $1,904,422. On the Financial Statements of SPL for the period ending Feb. 29, 2012 (Exhibit AR‑2, tab 7M), this same account is nil. The Agreed Statement of Facts (Partial) (Exhibit AR‑1, para. 34) sets out the history of the year‑end balances of the advances to a director in SPL and confirms a full repayment of the advances in 2012.
[31] Furthermore, paragraph 35 of the Agreed Statement of Facts (Partial) (Exhibit AR‑1) states the remuneration received by each of Ms. Grimes and her husband from SPL for calendar years 2000 to 2013. More specifically, in 2011, each received an amount of $400,000 and, for 2012, each received an amount of $616,025.
3.4 Credibility Findings.
[32] I am of the view that the testimony of Ms. Grimes was credible; she was a very straightforward witness. Furthermore, in view of her interaction with the CRA agent and counsel for the Respondent, I find that Ms. Grimes’ testimony reflects the true facts.
(a) In respect of Holdco:
[33] I find that the Holdco Advances were made to Ms. Grimes as trustee of the Trust, and not personally, in order to finance the acquisition of the interest in the Co‑op.
[34] The fact that the purchase of the interest in the Co‑op was made by Ms. Grimes and her husband personally does not change my conclusion, as Ms. Grimes had indicated that she had been told that the Co‑op did not allow a trust to purchase an interest in the Co‑op. Her belief as to the veracity of this statement explains her conduct.
[35] Furthermore, Article 10 of the Agreement creating the Trust provides that the assets constituting the trust fund shall be held by, and registered in, the name of the trustees or their nominees or otherwise, as the trustees may deem expedient (Exhibit AR‑2, tab 22). Accordingly, I accept that the fact that the interest in the Co‑op was in Ms. Grimes’ and Mr. Ozerdinc’s names, without mention of the Trust, will not preclude a finding that the interest was held by them as trustees of the Trust.
[36] Counsel for the Respondent argued that since the funds were transferred by Holdco to Ms. Grimes’ personal US account, this is an indicia that the Holdco Advances had been made to her personally and not as trustee (Exhibit AR‑2, tab 2). In accordance with Ms. Grimes’ credible testimony, and having regard to Article 10 of the Agreement creating the Trust, this argument does not change my conclusion.
[37] I also note that the financial statements of Holdco for the year ending February 29, 2012 refer to advances to a director but that the financial statements for the year ending February 28, 2011 refer to advances to a shareholder. Counsel for the Respondent did not make submissions on that difference in wording. However, since these financial statements have not been audited, I decline to give any weight to that change of language.
[38] Furthermore, counsel for Respondent insisted on the fact that the financial statements of Holdco have an item called “Due to a shareholder”. Consequently, according to the Respondent, if the Holdco Advances have been made to the Trust, there would have been a set-off in the Financial Statements. However, since these financial statements have not been audited, and in view of Ms. Grimes’ testimony, I do not accept this argument.
[39] Also, I find that Ms. Grimes, as trustee of the Trust, had no intention to ever repay the Holdco Advances by way of a transfer of cash to Holdco. Her testimony was very clear in that regard (see transcript, June 8, 2016, page 80, lines 13 and following).
[40] The payment of the dividend by Holdco to the Trust in 2012 by way of set‑off against the Holdco Advances confirms that such was the parties’ intention throughout the relevant period. I recognize that the corporate resolutions contain very broad language without referring specifically to the set‑off (Exhibit AR‑2, tabs 4, 5 and 6); however, I stand by Ms. Grimes’ justification of the facts surrounding the Holdco Advances.
(b) In respect of SPL:
[41] From Ms. Grimes’ testimony, I understand that SPL’s day-to-day operations are controlled by her and her husband and that the transactions pertaining to the bonuses are decided by Ms. Grimes and the accountants at year‑end. The facts also established very clearly that no regular salary is received by Ms. Grimes and Mr. Ozerdinc; more specifically, it was established that Ms. Grimes and Mr. Ozerdinc did not receive compensation from SPL from March 1, 2010 to the Valuation Date, except for the bonuses.
[42] In my view, it is clear that the amounts forming part of the Shareholders’ Account (or Advances to Directors) in SPL would never be repaid in cash to SPL. As Ms. Grimes explained, this formed part of a long‑standing practice (even if at the beginning of their business operations, they would put money in SPL in order to cover the expenses).
4. Valuation of the Shares.
[43] Various exhibits were filed by the parties in respect of the valuation of the issued and outstanding shares of Holdco.
[44] Exhibit A‑4 includes a copy of a letter dated May 16, 2013 sent by James Craigen of the Regional Valuation Unit of the CRA to Ms. Grimes which purported to establish the fair market value of the Trust’s property as of the Valuation Date at $11,806,268 (the “CRA May Letter”). This letter is a draft proposal as per paragraph 9 of said letter.
[45] Exhibit A‑5 includes a copy of a letter dated July 17, 2013 sent by counsel for the Appellant to James Craigen containing submissions in respect of the CRA May Letter (the “Submissions”).
[46] Exhibit A‑6 includes a copy of a letter dated September 17, 2013 sent by James Craigen to Ms. Grimes establishing “the fair market value of the outstanding Trust units” as of the Valuation Date at $9,498,511. To this letter was also attached the Estimate Valuation Report dated September 3, 2013 (the “Craigen Report”). This last letter completed the work of Mr. Craigen in the Appellant’s file.
[47] I took Exhibit A‑7 under reserve at the hearing. I will allow that exhibit to be entered into evidence as I am of the view that it is relevant to my inquiry.
[48] A critique of the Craigen Report made by MNP was filed as Exhibit A‑9. The Respondent objected to it on the basis of non‑compliance with the Tax Court of Canada Rules (General Procedure) in respect of expert reports. However, at the hearing, I determined that this report was not being offered by the Appellant as an expert report but rather as evidence pertaining to the Appellant’s attack on the assumptions contained in the Reply. As such, I allowed it to be entered into evidence.
[49] Exhibit R‑3 contains a letter from RCGT dated October 5, 2006 (the “RCGT Letter”), purporting to give a valuation of the shares of SPL for the purposes of the reorganisation of the corporate group in 2007. I will discuss the RCGT Letter below.
4.1 Testimony of Mr. Blackman, the MNP Report and the Addendum.
[50] Exhibit A‑10 contains an Estimate Valuation Report on the valuation of Holdco and SPL dated June 19, 2014 and prepared by Richard M. Wise and Mr. Blackman of MNP LLP (the “MNP Report”).
[51] Exhibit A‑11 contains an Addendum to the MNP Report dated October 30, 2014 and prepared by Mr. Wise and Mr. Blackman (the “Addendum”). The Respondent objected to the qualification of the Addendum as an expert report; I will examine that issue below.
[52] Ms. Grimes confirmed in cross‑examination that she did not discuss with Mr. Wise or Mr. Blackman the report filed as Exhibit A‑10. The Addendum was prepared by MNP following a request Ms. Grimes had received from her lawyer in respect of the Civil Litigation; she did not commission the production of the Addendum to bolster her case in this appeal.
[53] The Respondent did not object to the expert status of Mr. Blackman. Given the extensive experience, publications and qualifications of Mr. Blackman on the valuation of shares of private corporations and given the similar and extensive experience and qualifications of Mr. Wise, I have determined that Mr. Blackman is an expert on valuation of shares and of businesses and that the MNP Report is an Expert Report.
[54] MNP was hired to provide an estimate of the fair market value as of the Valuation Date of all of the issued and outstanding shares, viewed en bloc, of the share capital of Holdco, including its 100% holdings of the issued and outstanding shares, viewed en bloc, of SPL.
[55] The MNP Report defines “fair market value” as “the highest price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts” (para. 1.1 of the MNP Report).
[56] According to the MNP Report, the fair market value of all the issued and outstanding shares of Holdco as of the Valuation Date was approximately $3,556,000, allocated as follows:
i) 2,700,000 First Preferred Shares: $2,031,000
ii) 12Fifth Preferred Shares: $190,000
iii) 1ClassA Common Share: $1,335,000
[57] In arriving at this estimate, Mr. Blackman reviewed, inter alia, the Craigen Report, the unaudited financial statements of Holdco for the two fiscal years ended February 28, 2011, as compiled by RCGT (Exhibit AR‑2, tab 1D), the RCGT Statements, the Internal Statements and copies of the CRA May Letter and the Submissions.
[58] According to Mr. Blackman, there are three basic approaches for valuing a business: the Asset‑Based (Cost) Approach, the Income Approach and the Market Approach. In certain cases, a combination of the foregoing approaches may be appropriate.
[59] Mr. Blackman explained to the Court that, in this particular case, the “Asset‑Based Approach” was used as the method to evaluate the fair market value of Holdco and SPL considering, inter alia, that Holdco is “a holding company whose main asset is its 100% interest in SPL and . . . SPL generates all of its revenues through the bidding and tendering process and as such does not have ongoing contracts with its customers, as a result, it has no g