Lauria v. The Queen

Lauria v. The Queen
Court (s) Database
Tax Court of Canada Judgments
Date
2021-10-13
Neutral citation
2021 TCC 66
File numbers
2018-1954(IT)G, 2018-1955(IT)G
Judges and Taxing Officers
Frank J. Pizzitelli
Subjects
Income Tax Act
Decision Content
Docket: 2018-1954(IT)G
BETWEEN:
JOANNE LAURIA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Jeremy Freedman (2018-1955(IT)G) on September 27, 28 and 29 2021,
at Toronto, Ontario
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Matthew G. Williams
E. Rebecca Potter
Counsel for the Respondent:
Iris Kingston
Rebecca L. Louis
JUDGMENT
The appeal of the reassessment made under the Income Tax Act for the 2006 taxation year is allowed, only to the extent as conceded by the Respondent at trial, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the terms of the below Reasons for Judgment, and on the following basis:
The fair market value of Ms. Lauria’s Common Shares in issue is $307,200.00 and the under-reported taxable capital gain was therefore $140,710.00;
The Respondent shall be entitled to costs in this matter. If the parties are unable to agree on the quantum of costs within 60 days of the date of this decision, then the parties shall file costs submissions within 30 days following such 60 day period for my consideration in determining such costs.
Signed at Vancouver, British Columbia, this 13th day of October 2021.
“F.J. Pizzitelli”
Pizzitelli J.
Docket: 2018-1955(IT)G
BETWEEN:
JEREMY FREEDMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Appeal heard on common evidence with the appeal of Joanne Lauria (2018-1954(IT)G) on September 27, 28 and 29, 2021,
at Toronto, Ontario
Before: The Honourable Justice F.J. Pizzitelli
Appearances:
Counsel for the Appellant:
Matthew G. Williams
E. Rebecca Potter
Counsel for the Respondent:
Iris Kingston
Rebecca L. Louis
JUDGMENT
The appeal of the reassessment made under the Income Tax Act for the 2006 taxation year is allowed, only to the extent as conceded by the Respondent at trial, and the reassessment is referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with the terms of the below Reasons for Judgment, and on the following basis:
The Fair market value of Mr. Freedman’s Common Shares in issue is $921,000.00 and the under-reported taxable capital gain was therefore $422,130.00; and
The Respondent shall be entitled to costs in this matter. If the parties are unable to agree on the quantum of costs within 60 days of the date of this decision, then the parties shall file costs submissions within 30 days following such 60 day period for my consideration in determining such costs
Signed at Vancouver, British Columbia, this 13th day of October 2021.
“F.J. Pizzitelli”
Pizzitelli J.
Citation: 2021 TCC 66
Date: 2021 10 13
Docket: 2018-1954(IT)G
BETWEEN:
JOANNE LAURIA,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent,
Docket: 2018-1955(IT)G
AND BETWEEN:
JEREMY FREEDMAN,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Pizzitelli J.
[1] Jeremy Freedman (“Freedman”) and Joanne Lauria (“Lauria”), the Appellants, who were both officers and directors of the wealth management corporation, Gluskin Sheff+Associates Inc. (“GS+A”) at all material times, appeal from reassessments of their 2006 taxation years issued on January 30, 2017 and March 30, 2017 respectively that increased reportable taxable capital gains by $587,730.00 and $195,910.00 respectively. The transactions which gave rise to the aforesaid taxable capital gains occurred on April 1, 2006 when each of the Appellants sold part of their Common Shares in GS+A to their non-arm’s length family trusts shortly before GS+A was reorganized and then went public with an Initial Public Offering(“IPO”) effected on May 26, 2006.
[2] The Respondent conceded at the beginning of this trial that the underreported taxable capital gains of Freedman was reduced to $422,130.00 and that of Lauria to $140,710.00 in lieu of the above reassessed amounts, based on the fair market value of the above transacted shares now assumed by the Minister. The Minister amended the Replies to the Notices of Appeal for each Appellant accordingly without objection.
[3] The Appellants appeal the Minister’s right to reassess their 2006 tax returns almost 10 years beyond the normal assessment periods pursuant to subsection 152(4) of the Income Tax Act (“ITA”) as well as the fair market value reassessment of the share transaction in issue.
[4] These matters were heard at the same time and on common evidence and the parties filed a Partial Agreed Statement of Facts at the onset of this trial.
I. Issues
[5] There are two main issues to be decided in this appeal:
Whether the Minister is statute barred from reassessing the Appellants under paragraph 154(2)(a); which in essence requires the Court to decide whether the Appellants made a misrepresentation in filing their 2006 tax returns attributable to neglect, carelessness or willful default; and if so,
Whether the fair market value ultimately reassessed and reduced by concession at trial represents the fair market value of the shares in issue at the time of the transfer of shares by the Appellants to their non-arm’s length trusts on April 1, 2006.
[6] While I will address the first issue first, the determination of the second issue is relevant and crucial to the determination of the first, particularly in determining whether there has been a misrepresentation in filing the 2006 tax return, which is assumed to be the inaccurate reporting of the fair market value of the shares in issue. Accordingly, I will address the fair market value issue at the time and in the context of determining whether there has been a misrepresentation and then deal with the issue of whether same would amount to neglect, carelessness or wilful default afterwards.
II. Position of Parties
[7] The Appellants’ position is that they reported the transaction in their 2006 tax return filing and set out proceeds of disposition based on a Valuation Formula (later described) utilized by GS+A for all prior transactions and which they argue represents the fair market value of the shares in issue in the circumstances and so made no misrepresentation in the filing of such returns.
[8] The Respondent takes the position that the Appellants made a misrepresentation attributable to neglect and carelessness in their 2006 tax return by substantially underreporting the fair market value of the shares disposed of by relying on the Valuation Formula which did not take into account the possibility of a liquidity event, the IPO, taking place and that the failure of the Appellants to seek independent verification of the fair market value of the shares in issue in such circumstances did not demonstrate the reasonable care expected of a wise and prudent person in the same circumstances. The Respondent concedes there was no fraud.
[9] I intend to first set out the factual context of this appeal followed by the legal context, setting out both the general applicable principles and then specific jurisprudence in the follow-up analyses undertaken.
III. Facts
[10] The following are the facts agreed upon or established by the evidence at trial that are not in dispute.
[11] GS+A was an independent wealth management firm founded in 1984 by Ira Gluskin and Gerald Scheff (collectively the “Founders”) that managed investment portfolios for high net worth clients and various institutional investors.
[12] The Appellant Freedman is a well-educated man having graduated from Queen’s University with a law degree in 1982 and from Harvard Business School with a Master’s degree in Business Administration in 1986. Freedman then practiced law for 14 years with the well-known law firm of Davies Ward and Beck as it was then known until the end of March, 2000 as a mainly corporate and commercial litigator although he had appeared before this court on a few occasions. Freedman left his law practice to join GS+A as Vice-President of Client Services and remained with GS+A until June, 2016 as it’s Executive Vice-President and Chief Operating Officer, managing the day to day operations of GS+A.
[13] The Appellant Lauria is a high school graduate who joined the work force as a secretary and eventually met Gerald Scheff while working for Cadillac Fairview and followed him, after the division they worked in was discontinued, to join GS+A at its inception in 1984. At GS+A she worked her way up, so to speak, from a secretary and office manager, performing multiple services including trades while the firm was small to eventually serving as Vice-President Client Support Services responsible for coordinating the opening of client accounts and providing ongoing information to the firm’s clients. Lauria learned and grew in position from actual work experience with GS+A.
[14] Both Appellants were vice-presidents and directors of GS+A at all material times.
[15] When Freedman joined GS+A, his offer of employment dated Febraury 9, 2000 provided that GS+A would be providing him with an opportunity to become a partner of the firm effective July 1, 2000. Freedman testified he understood that to mean he would have an equity or ownership stake in GS+A, a requirement that was important to him as he had been a partner of his former law firm and wanted to participate in ownership. On April 12, 2001 Freedman signed a letter agreement with the Founders, pursuant to which he was given the right to purchase a 10% equity interest in GS+A, either from the Founders or their holding companies. He was required to purchase a minimum of 2.5% of the Common Shares (25% of the stake offered to him) effective July 1, 2001 and the balance over the next four calendar years during the month of July pursuant to an Option agreement he signed on July 1, 2001 when he purchased such initial shares.
[16] Lauria also signed an almost identical letter agreement on the same date, April 12, 2001 with the Founders and their holding companies pursuant to which she was given the right to purchase a 2.5% equity interest in GS+A and under which she was required to purchase a minimum of 25% of such 2.5% of the Common Shares effective July 1, 2001 and the balance over the next four calendar years during any July pursuant to the Option agreement she also signed on July 1, 2001. She testified she was offered an equity stake, asked for more, but accepted what was offered to her without negotiation or investigation as to the value of such stake.
[17] On July 1, 2001 Freedman entered into two identical Share Purchase Agreements, save that one was with Ira Gluskin and the other with Gerald Sheff as respective Vendors, pursuant to which he purchased a total of 25,000 Common Shares for a total purchase price of $370,000.00. Likewise, Lauria entered into like agreements under which she purchased a total of 6,250 Common Shares for a total purchase price of $92,671.00. Under each of the applicable Share Purchase Agreements the purchase price was calculated pursuant to article 2.2 of the agreement that provided it was the amount determined by the formula set out in Paragraph A of Schedule A ( the “Valuation Formula”).
[18] Paragraph A of Schedule A provides that the purchase price shall be determined by multiplying:
(a) The number of Shares to be purchased and sold divided by the number of outstanding Shares as at the relevant date; by
(b) The aggregate of:
(I) 1/2 of the Formula Revenue for the immediately preceding twelve(12)
month period;
(II) 1/3 of the Formula Revenue for the twelve (12) month period immediately preceding the twelve month period referred to in (i) above; and
(III) 1/6 of the Formula Revenue for the twelve (12) month period immediately preceding the twelve(12) month period referred to in (ii) above.
[19] The definition of the Formula Revenue referred to above is found in paragraph 1.1(k) of each agreement and reads as follows:
(k)“Formula Revenue” means the aggregate of all management fees earned by GS+A from accounts managed by GS+A which, for greater certainty, shall not include any performance fees or performance related fees earned by GS+A on such accounts, multiplied by one(1.0), all as determined by the Chief Financial Officer of GS+A.
[20] Freedman described the formula for calculating the purchase price as the weighted average of the last 3 years of earned management or fixed fees earned by GS+A while ignoring the other income stream of GS+A which were performance fees that were bonused to all employees of the firm each year in the discretion of the Founders. In fact, Freedman’s employment agreement, letter of offer of employment and those of Lauria all reference bonuses as part of the remuneration to be received by them.
[21] As mentioned above, each of Freedman and Lauria executed almost identical Option Agreements on July 1, 2001 pursuant to which Freedman was given an option to purchase up to 75,000 Common Shares and Lauria was given an option to purchase up to 18,750 Common Shares, representing the balance of the shares they could have but did not purchase on July 1, 2001, at a price based on the Valuation Formula calculated on July 1, 2001 but increased by 10% year over year for the next four years. In fact, each of the Option Agreements already set out that any shares purchased in July, 2002 would be at $16.31 per share, any shares purchased in July , 2003 at $17.94, any shares purchased in July, 2004 at $19.74 and any shares purchased in July, 2005 at $21.71, thus incorporating the 10% cumulative increase mentioned.
[22] Each of Freedman and Lauria exercised their option to purchase the remainder of their shares on July 1, 2004 at $19.74 per share, or $1,480,500.00 in total for Freedman and $370,126.00 in total for Lauria, which were effected pursuant to almost identical Share Purchase Agreements as in the past, with multiple vendors, either being a Founder or their respective holding corporation.
[23] It should be noted that each share certificate issued to Freedman or Lauria pursuant to any of the above transactions had notations on the face of the certificate advising they were subject to transfer restrictions and a reference was printed on the reverse side thereof advising the shares were subject to the restrictions contained in the Share Purchase Agreements entered into by them with the Founders, their respective holding corporations and GS+A.
[24] The restrictions contained in the Share Purchase Agreements included the following:
Article 5.1 prohibits any Purchaser from transferring or encumbering their Common Shares without the prior consent of the Board of Directors, unless otherwise specified; such as in Article 5.3 which allows transfers by the Purchaser to a corporation, partnership or trust beneficially owned by him if advance notice is given and such entity executes an agreement satisfactory to GS+A to be bound by the Share Purchase Agreement;
Article 6.1 requires any existing or new spouse to sign an agreement agreeing to waive any right or entitlement to the Common Shares;
Article 5.6 requires any Purchaser to sell all or part of his shares to any current or prospective officers or employees if the Board of Directors determines it is desirable at the Valuation Formula price determined with adjustments to the date of closing;
Article 4.2 requires a purchaser whose employment is terminated with GS+A by either party or for any reason to sell all of his Common Shares beneficially owned or over which he has control, to GS+A or such directors, officers or employees of GS+A as the board of directors may designate at the Valuation Formula price.
[25] Freedman testified that these restrictions, together with fact the Founders’ shares had 100 votes per share instead of 1 vote per common share, meant that there was no market for the Common Shares other than as the controlling shareholders, being the Founders, might direct; a sentiment echoed by Lauria. This is not disputed by the Respondent for the time period prior to the disclosure by the Founders to the Appellants and others that they decided to pursue going public.
[26] In February of 2006, Freedman testified that to his surprise and out of the blue the Founders decided to pursue a public offering of the shares of GS+A (the “IPO”) and hired an underwriter for that purpose. Lauria also expressed like sentiment in her testimony. The underwriter was formally engaged on March 2, 2006 and Freedman testified he was charged with explaining the business and its operations to the underwriter and to assist him in putting together a preliminary prospectus, which was filed on April 18, 2006. Lauria does not appear to have had any role in assisting the underwriter in preparation for the IPO.
[27] Following the news that the Founders wished to issue an IPO, Freedman testified that he was advised by Mr. Bernstein, the then Chief Financial Officer or Bruce Leboff, a fellow executive, that all the common shareholders should do some estate planning and arranged for the same law firm representing GS+A on the IPO, Goodman’s LLP, to advise all of them. Such law firm advised that a family trust be settled for the benefit of their children or spouses and that some portion of their shares be transferred to it. Freedman testified he does not remember ever meeting the estate planning lawyer from said law firm but testified the decision to go public and the price information from the underwriter got him thinking of estate planning while Lauria testified that the partners met and were advised to go the trust route which she agreed to because all the other partners she considered more expert also went along.
[28] On March 31, 2006 each of Freedman and Lauria, and it appears all the other executives with Common Shares, executed an agreement that settled a family and/or a spousal trust and on April 1, 2006, the same date, the directors of GS+A, which included Freedman and Lauria, executed a Resolution approving the transfer by the Appellants and 4 other of the said executive employees of some of their Common Shares to their respective trust or trusts. Freedman transferred 3,000 Common Shares to the JMF Children’s Trust 2006 at a price of $77,340.00 and Lauria transferred 1,000 of her Common Shares to the Lauria Family Trust at a price of $25,780.00 and each filed a T1 General Tax Return in a timely manner reporting the capital gain from such transaction that is in issue here.
[29] Each of the Agreements between Freedman and Lauria and their respective family trust, all prepared by the same law firm, contains the following provisions:
1.02 Purchase Price: The purchase price for the Transferred Shares shall be the fair market value as of the date hereof which has been computed to be the sum of $77,340.00.
4.01. Fair Market Value: The parties hereby acknowledge and confirm that they have reasonably and in good faith determined that the fair market value of the Transferred Shares is equal to the Purchase Price.
A price adjustment clause is included in case of reassessment after a finding by a competent tribunal if there is no agreement on the issue.
[30] It should be noted that there were no similar restrictions contained in the aforesaid Purchase and Sale Agreements with the trusts as in past Share Purchase Agreements and no evidence that the Directors of GS+A required the trusts to execute an agreement to be bound by such restrictions, although both Freedman and Lauria testified they believed the intention was that the Trusts would be bound by the restrictions.
[31] On April 18, 2006, six weeks after the above transfer of Common Shares by the executives to their trusts, the preliminary Prospectus was filed.
[32] In contemplation of the IPO, GS+A was reorganized. Articles of Amendment were filed on May 25, 2006 creating three classes of shares;
(a) Multiple Voting Shares;
(b) Subordinate Voting Shares; and
(c) Preferred Shares;
as referenced in the Prospectus.
According to the Articles of Amendment the outstanding 560,000 Founders Shares and the outstanding 440,000 Common Shares were converted into Multiple Voting Shares in the same ratio of 28.8 Multiple Voting Shares issued for each Founders Share and Common Share. The Articles contained another provision however that automatically converted any Multiple Voting Shares not held by defined Founders or Non-founders groups into Subordinate Voting Shares with the effect that all the shares held by the Trusts were converted automatically into Subordinate Voting Shares.
[33] There was also another conversion clause that allowed holders of Multiple Voting Shares to convert into Subordinate Voting Shares the result of which allowed the Founders holding companies and the Appellants and other executives to have converted between 13% and 26% of their Multiple Voting Shares into Subordinate Voting Shares as well, presumably allowing the partners of GS+A to cash out some of their equity stake in the IPO as well.
[34] The Reorganization was approved by the Board of Directors, which included the Appellants, on the same date. The result is that the 3,000 Common Shares transferred to the JMF Children’s Trust were converted into 86,400 Voting Subordinate Shares and the 1,000 Common Shares transferred to the Lauria Family Trust were converted into 28,800 Voting Convertible Shares.
[35] Pursuant to the terms of the Prospectus, the Trusts were obligated to sell their Subordinate Voting Shares when the IPO occurred.
[36] The IPO was completed on May 26, 2006, a day after the reorganization described above. As a result, the JMF Children’s Trust sold its 86,400 Subordinate Voting Shares for $$1,598,000.00 and the Lauria Family Trust sold its 28,800 Subordinate Voting Shares for $495,418.00 while the Appellants and the other partners of GS+A also sold the shares they had converted in Subordinate Voting Shares as well, while retaining the majority of their Multiple Voting Shares. The sale price in all cases was the issue price of $18.50 per such converted share. Working backwards and for comparison purposes, based on the 28.8 to 1 conversion ratio above referenced, each Subordinate Voting Share would have had an initial flow through value of $0.895 per share based on the Common Share sale price of $25.78 to the trusts before the IPO occurred.
[37] As mentioned, each of the Appellants filed their 2006 tax returns on time in 2007 and reported the taxable capital gain from the April 1, 2006 sale of their shares to their respective trusts based on proceeds of disposition of $77,340.00 for Freedman’s 3,000 Common Shares and $25,780.00 for Lauria’s 1,000 Common Shares, being $25.78. per common share as determined by Mr. Bernstein, the Chief Financial Officer of GS+A pursuant to the Valuation Formula.
[38] The tax returns were initially assessed as filed, but about 8 years later, audits for the Appellants’ 2006 taxation years were commenced within a few months of one another, resulting in the ultimate reassessments issued in 2017, beyond the normal assessment period whereby Freedman’s taxable capital gain was increased by $587,730.00 and Lauria’s taxable capital gain was increased by $195,910.00 as referenced at the outset.
[39] The above reassessments resulted from an internal valuation report issued by the Canada Revenue Agency (“CRA”) that found the 3,000 Common Shares sold by Freedman to his trust were valued at $1,252,800.00 and the 1,000 Common Shares sold by Lauria to her trust were valued at $417,600.00; or $417.00 per Common Share. The valuator used a market approach comparing share prices for similar businesses that were public companies and applied a discount for size.
[40] At the commencement of this hearing the Respondent conceded that the fair market value of the 3,000 Common Shares sold by Freedman to his trust was $921,600.00 and that the fair market value of the 1,000 Common Shares sold by Lauria to her trust was $307,200.00, all based on a share price of $307.20, that reduced the alleged underreported taxable capital gains to $422,130.00 and $140,710.00 respectively. This concession was based on a second valuation report prepared by an expert witness, who testified at this trial, and who relied on an Income Approach to valuing the business of GS+A en bloc and applied a 40% marketability discount.
[41] The CRA reassessed the Appellants almost 10 years beyond the normal reassessment period on the basis the non-arm’s length share transfers did not occur at fair market value subject to the aforesaid concession.
IV. The Law
[42] The parties agree that the transactions in issue were on a non-arm’s length basis and accordingly if found the Appellants transferred their Common Shares to their respective trusts for proceeds less than fair market value, subparagraph 69(1)(b)(i) deems the taxpayer to have received proceeds equal to fair market value. There is no dispute on this issue.
[43] Subsection 152(3.1) of the ITA sets out the normal periods for reassessing. There is no dispute that the reassessments of the Appellants occurred outside such normal assessment periods so it is not necessary to delve into the detail of such provision.
[44] Subsection 152(4) contains provisions that allow the Minister to reassess a taxpayer’s return outside the normal assessment period and the part relevant to theses appeals, paragraph (a) reads as follows:
(4)Assessment and reassessment: The Minister may at any time make an assessment, reassessment or additional assessment of tax for a taxation year, interest or penalties, if any, payable under this Part by a taxpayer or notify in writing any person by whom in a return of income for a taxation year has been filed that no tax is payable for the year, except that an assessment, reassessment or additional assessment may be made after the taxpayer’s normal reassessment period in respect of the year only if
(a)The taxpayer or person filing the return
(i) has made any misrepresentation that is attributable to neglect, carelessness or wilful default or has committed any fraud in filing the return or in supplying any information under this Act, or
(ii) has filed with the Minister a waiver in prescribed form within the normal reassessment period for the taxpayer in respect of the year;
[45] The parties agree there has been no fraud committed and there was no waiver filed with the Minister.
[46] As counsel for the Appellants has argued, the purpose of a statutory limitation period is to give some certainty to the tax system as stated in Tingley v Canada, [1999] 1 CTC 2177(TCC) at paragraph17:
17. The very purpose of the limitation period is to provide a window during which the Minister may review and make such re-assessment and yet provide the taxpayer who has not made misrepresentations some certainty in their tax affairs.
[47] Clearly, the goal of certainty expressed above is dependent on the taxpayer not having made any misrepresentations. Where a misrepresentation is made, subsection 152(4) allows the Minister to reassess beyond the normal assessment period. As pointed out by counsel to the Appellants, the Minister cannot reassess a taxpayer simply because it becomes aware of it having lost an opportunity to collect more revenue and relies on the Federal Court of Appeal’s statement in Canada v Regina Shoppers Mall Ltd., [1991] 1 CTC 297(FCA) at paragraph 21:
The mere fact that a taxpayer may ultimately benefit from a failure of the taxing authority to properly reassess obviously does not constitute authority for reassessment which is not found in the legislation itself. There is no rule of equity or of common law which may somehow assist the taxing authority to obtain revenue which it has lost solely and entirely through its own negligence or failure to exercise the powers granted to it by the Act.
[48] I agree and do not believe there is any dispute that where the authority to reassess is found in the legislation, in this case under subparagraph 152(4)(a)(i) where there is a misrepresentation, the Minister has the legislative authority to pursue that lost revenue. In Jencik v The Queen, 2004 TCC 295, also relied upon by the Appellants, Bonner J stated this premise clearly at paragraph 5:
The Minister’s right to reassess for 1994 to 1998 [the “statute barred years”] was therefore dependent on the Appellant having made misrepresentations attributable to neglect, carelessness or wilful default or having committed fraud as set out in subparagraph 152(4)(a)(i) of the Act.
[49] There is also no dispute that the onus is on the Minister to establish that the misrepresentations were made. This is well settled law recited in Jencik above also at paragraph 5, but also recently by the Federal Court of Appeal in Deyab v Canada, 2020 FCA 222 at paragraph 40:
40 … the onus was on the Minister to establish the facts that would justify the reassessments issued for the statute barred years.
[50] In fact, in Vine Estate v R, 2015 FCA 125 ,Webb JA described the onus in a two step process as follows at paragraph 24:
24. In this case, there is no allegation of any fraud. Therefore, the onus is on the Minister to prove, on a balance of probabilities, that the taxpayer or the person filing the return:
(a) has made a misrepresentation; and
(b) such misrepresentation is attributable to neglect, carelessness or wilful default.
Webb JA further stated at paragraph 25:
As in any civil case, if a person has the onus of proof for particular facts, the question for the trier of fact is whether, based on all of the evidence admitted during the hearing, that person has proven, on a balance of probabilities, that such facts exist. There is no shifting onus.
I will consider the jurisprudence on the above steps during my analysis thereof to come.
[51] Finally, with respect to this provision, it must be noted that the time for determining the misrepresentation is at the time of filing the tax return and that it remains a misrepresentation even if the Minister could have ascertained the true facts prior to the expiration of the limitation period. In Vine supra at paragraph 33, Webb JA confirmed and adopted the principles set out by Stayer JA in the 1996 Federal Court of Canada-Appeal division decision in John G. Nesbitt v Her Majesty the Queen, 96 DTC 6588 at paragraphs 8 and 9:
33. The principles as set out by this Court in Nesbitt are also applicable:
8. … It appears to me that one purpose of subsection 152(4) is to promote careful and accurate completion of income tax returns. Whether or not there is a misrepresentation through neglect or carelessness in the completion of a return is determinable at the time the return is filed. A misrepresentation has occurred if there is an incorrect statement on the return form, at least one that is material to the purposes of the return and to any future reassessment. It remains a misrepresentation even if the Minister could or does, by a careful analysis of the supporting material, perceive the error on the return form. It would undermine the self-reporting nature of the tax system if taxpayers could be careless in the completion of returns while providing accurate basic data in working papers, on the chance that the Minister would not find the error but, if he did within four years, the worst consequence would be a correct reassessment at that time.
9. Thus it is irrelevant that the Minister might, despite the misrepresentation on the return form, have ascertained the true facts prior to the expiry of the limitation period. The faulty return was when submitted, and remained, a misrepresentation within the meaning of subparagraph 152(4)(a)(i) of the Act.
[52] Finally, as a last general principle of law, there is no dispute that the ITA does not define Fair Market Value. However, there was also no dispute that the well accepted definition of fair market value in the jurisprudence is that set out in Nash v. Canada, 2005 FCA 386 at paragraph 8, citing Justice Cattanach of the Federal Court:
8. The well-accepted definition of fair market value is found in the decision of Cattanach J. in Henderson Estate and Bank of New York v Minister of National Revenue (1973),73 D.T.C. 5471(Fed.T.D.),at 5476:
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 that 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.
[53] Since the misrepresentation alleged by the Minister were the reported values of the share proceeds of the Common Shares sold to their trusts by the Appellants, it follows that the Minister has first the onus of proving the fair market value of such shares was higher in order to engage the provisions of paragraph 69(2)(b) above and secondly that such misrepresentation was attributable to neglect, carelessness or wilful default. I will address these issues in order.
V. Analysis
1. Has there been a Misrepresentation?
[54] As stated in Vine and Nesbitt above, “a misrepresentation has occurred if there is an incorrect statement in the return form, at least one that is material to the purposes of the return and to any future reassessment.”
[55] In order to determine whether the fair market value reported in Freedman’s and Lauria’s 2006 tax return is incorrect, I must examine the evidence during trial, which essentially consisted of the oral testimony of the Appellants and the expert witness testimony of Mr. David Feher, the CRA valuator together with the documentary evidence tendered into evidence. Since the onus is on the Respondent to prove the reported proceeds was not the fair market value of the shares in issue, I will address its evidence first.
VI. Expert Witness
[56] Mr David Feher, a certified public accountant and certified business valuator, prepared an expert report dated March 26, 2021 to value the 3,000 Common Shares of Freedman and 1,000 Common Shares of Lauria transferred to their respective trusts as at April 1, 2006 (the “Valuation Date”). Mr Feher’s qualifications were not questioned and his report was admitted as Exhibit R-1 at trial with the consent of the Appellants. While not necessary to delve into his impressive qualifications found in the report, it is important to note that I found his qualifications very impressive; including his 22 years experience as a valuator, his role in teaching and lecturing on business valuations at McGill University and his experience in high complexity valuations including valuing private Company minority shares.
[57] In the report summary found in paragraph 17 of the report, Mr. Feher concludes that the fair market value of each share as at the Valuation Date should be the midpoint of the range of share prices he calculated equal to $307.20 per common share. This would value Freedman’s 3,000 Common Shares at $921,600.00 and Lauria’s 1,000 Common Shares at $307,200.00, the amounts conceded by the Respondent at the beginning of this trial. Recall that the price per share used by the Appellants was $25.78 in the transactions in question.
[58] Mr. Feher adopted the accepted standard definition of “Fair Market Value” referenced in Nash supra, found in paragraph 18 of the Report:
18. For the purposes of this report, the term Fair Market Value is defined as the highest price available in an open and unrestricted market, between informed and prudent parties acting at arm’s length and under no compulsion to transact, expressed in terms of money or money’s worth.
[59] In arriving at such valuation Mr. Feher assumed certain facts that are mainly what I would term boiler plate except for the following:
9. There are no documents, relevant to the valuation, which have not been provided to us except as set out in this report.
10. The interim financial statements as at February 28, 2006 reasonably reflect the financial position of the Company as at that date.
15 The Shareholders had prior knowledge of the intention of the Company to proceed with an initial public offering (“IPO”) and secondary offering of shares as at the Valuation Date.
16. The IPO process was already underway on the Valuation Date.
[60] With respect to assumption 9 above, there is no dispute that the expert witness reviewed essentially all the documents put into evidence pertaining to the transactions in issue. While the expert witness agreed under cross-examination that he never interviewed any of the Appellants or other officers or representatives of GS+A, I cannot find that anything could have been added based on the testimony of the Appellants that would have materially affected his assumptions or report.
[61] I see no reason to question the interim financial statements prepared by the Company nor the facts and information contained in the IPO prospectus that Freedman helped create and issued by GS+A and no specific issue has been raised with respect to same.
[62] As for the assumptions in paragraph 15 and 16 above, I have found, based on the evidence earlier cited, including the admissions of both Freedman and Lauria, that all the Shareholders were aware of the intention of the Company to proceed with an initial public offering and that the process started in February of 2006, almost two months before the Valuation Date. The underwriter had been hired under contract on March 2, 2006, almost a full month before.
[63] I also felt Mr. Feher’s analysis of GS+A business operations to be more detailed than the evidence on same the Appellants gave at trial, including the fact that it had approximately $3.75 billion of assets under management and that it served high net worth individuals who accounted for 83% of its assets under management while 17% came from institutional investors, many clients of which have been long term. Mr. Feher described the firms two main sources of revenue, base fees and performance fees based on 25% of the returns generated in excess of targets reached, certainly consistent in general with the evidence of the Appellants, and analysed the firms strong investment performance and high standards of personalized services as its strengths to continue growing in a highly competitive market that is experiencing high growth due to aging populations increasing their savings and pension assets putting larger assets under management. Mr. Feher also described the strong Canadian Economy in 2006 fueled by strong demand in housing and the strong or record performance of major stock market indexes and high market indicators. The Appellants took no issue with the contextual market described by this witness.
[64] In valuing the shares, Mr Fehrer first valued the Company en bloc and then the individual minority shares.
[65] Mr. Feher described the 3 main methodologies used in valuing a business, the Asset Approach, the Income Approach and the Market Approach and determined the Income Approach was the most appropriate method. The Appellants have not disputed this so I will not delve into the relative strengths and w