T-1205-74
Bendix Automotive of Canada Limited (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Montreal, June 25;
Ottawa, July 29, 1975.
Income tax—Valuation of shares—Parent company agree
ing with Control Data Corporation to exchange its shares for
shares of Computing Devices of Canada—Causing plaintiff
(subsidiary) to declare dividend to fulfil agreement—Value of
distributed shares for purposes, of non-resident withholding
tax—Income Tax Act, R.S.C. 1952, c. 148, ss. 106(1a),
139(1)(a).
In August 1969, plaintiff distributed a dividend to Bendix
Corporation, its parent, to fulfil a share exchange agreement
between the parent and Control Data Corporation, on the basis
of one share of Control Data for each 5 shares of Computing
Devices held by plaintiff. Plaintiff contends that the value to be
placed on the shares for 15% withholding tax purposes should
be based on the value of Control Data shares acquired by
parent, Bendix Corporation, taking into account restrictions on
transfer in the offer. Defendant values the shares at the price at
which a block of Computing Devices shares was traded on the
Toronto Exchange in August 1969. Plaintiff maintains that this
valuation reflects the increased value acquired by the shares
since the exchange offer of May 1969 became known.
Held, dismissing the appeal, it would not be a proper inter
pretation of the Act to hold that because the recipient has
entered into an agreement with a third party with whom it is
dealing at arm's length which affects the value to it in money in
the dividend so received, that the Canadian company paying
the dividend should accept the value of same to the recipient as
the basis on•which the 15% withholding tax is to be calculated,
rather than make its own independent valuation on the basis of
evidence available to it of the value in money of the dividend,
without regard to whatever the recipient of the dividend may
have agreed to by way of disposal of same after receipt,
whether for a greater or lesser value.
Untermyer Estate v. Attorney General of British
Columbia [1929] S.C.R. 84; Lawson v. M.N.R. 64 DTC
5147; Crabtree v. Hinchcliffe [1971] 3 All E.R. 967;
Dobieco Limited v. M.N.R. [1963] Ex.C.R. 348; and
Henderson Estate v. M.N.R. 73 DTC 5471, discussed.
Beament Estate v. M.N.R. [1970] S.C.R. 680,
distinguished.
INCOME tax appeal.
COUNSEL:
R. W. Pound and H. Stikeman, Q.C., for
plaintiff.
R. Pyne for defendant.
SOLICITORS:
Stikeman, Elliot, Tamaki, Mercier & Robb,
Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons- for judgment
rendered in English by
WALSH J.: This is an appeal from a notice of
assessment dated May 5, 1972 in respect of 15%
non-resident tax levied under Part III of the
Income Tax Act'. Plaintiff appealed the assess
ment, which related to plaintiffs 1969 taxation
year, to the Tax Review Board and by judgment
dated November 29, 1973, the appeal was
dismissed.
The issue arises out of the valuation placed on
517,313 shares of the common stock of Computing
Devices of Canada, Limited (hereinafter ,referred
to as "CDC") paid by plaintiff as a dividend on
August 7, 1969 to its parent company in the
United States, The Bendix Corporation (herein-
after referred to as "Bendix") which owned 100%
of its shares. Bendix, through its control of plain
tiff, caused this dividend in kind to be declared
and distributed in fulfilment of an agreement
which it had entered into on May 1, 1969 with
Control Data Corporation (hereinafter referred to
as "Control Data") another American corporation
with which it was dealing at arm's length, to
exchange these shares of CDC on the basis of one
share of common stock of Control Data for each
five shares of CDC. Plaintiff contends that the
value to be placed on the shares of CDC so
distributed by plaintiff as a dividend for the pur
pose of calculating the 15% withholding tax pay
able by virtue of the provisions of sections
106(1a)(a) and 139(1)(a) of the Income Tax Act
should be based on the value of the Control Data
shares acquired by Bendix in exchange for the
CDC shares after taking into account the restric
tions on transfer of same incorporated in the
R.S.C. 1952, c. 148.
exchange offer, which value it fixes at $130 U.S.
per share on the basis of expert evidence, or $26
for each share of CDC.
Defendant however based its valuation on the
figure of $31 per share, being the price at which a
block of 50 shares of CDC was traded on the
Toronto Stock Exchange on August 7, 1969.
Defendant submits that plaintiff withheld and
remitted $2,017,030 U.S. or $2,175,126.89 Can. of
withholding tax on the amount of $13,450,060
U.S. at which it valued the shares, but contends
that the value of the shares paid as a dividend was
actually $16,036,703 rather than $14,500,845.94,
the tax on the difference amounting to an addi
tional $230,378.5,6 with interest of $31,101.09 to
May 5, 1972 on which date defendant assessed the
plaintiff for the aforesaid unremitted amount.
There is very little dispute as to the facts. The
exchange offer made on May 1, 1969 by Bendix
with Control Data was dependent on Control
Data's acquiring at least 90% of the outstanding
CDC shares. The 517,313'shares of CDC owned at
the time by plaintiff and subsequently declared as
a dividend and transferred to Bendix represented
approximately 66.75% of the capital stock of CDC
so that, for the exchange offer to take effect, it was
necessary that Control Data also acquire an addi
tional 23.25% of the outstanding CDC shares from
other shareholders, as well as receiving a favour
able ruling from the United States Internal Reve
nue Service. Accordingly, a prospectus and take
over bid circular, dated May 15, 1969, made the
exchange offer of Control Data available to all
shareholders of CDC—that is to say, an exchange
of one share of Control Data for each five shares
of CDC common stock tendered, and by July 31,
1969 the condition of Control Data acquiring 90%
control had been fulfilled so that on August 7
Bendix took the necessary steps to fulfil its part of
the May 1, 1969 agreement by arranging for a
Directors' meeting of plaintiff to declare the divi
dend to it and it then immediately tendered these
shares to Control Data, receiving 103,462 Control
Data shares in exchange. The closing sale price of
shares of Control Data on the New York Stock
Exchange at the close of trading on August 7,
1969 was $149.50 U.S. However, for certain taxa-
tion reasons which need not concern us, Control
Data had insisted as a condition of agreement,
because it wished to adopt pooling of interest
accounting, that Bendix should not sell in excess of
25% of the Control Data shares received by it in
the exchange during the first year after acquiring
them, and not in excess of 50% of such shares prior
to two years from the date of acquisition. While
the other shareholders of CDC who had exchanged
their shares for Control Data shares pursuant to
the exchange offer could dispose of the shares so
received in exchange at any time at the market
price, Bendix was restricted and could only dispose
of 25% immediately and the balance over a period
of two years as indicated. This restriction on the
disposal of these shares reduced their value below
those of unrestricted shares which resulted in
expert opinion giving an average value of $130
U.S. per share for all the shares of Control Data
acquired by Bendix. This actual valuation was
established on the basis of the valuation by three
experts, one of whom, Mr. Madison H. Haythe,
Vice President of the well-known investment firm
of Morgan Stanley & Co., testified in Court. His
affidavit as an expert witness was taken as read,
and the delay for production of same pursuant to
Rule 482(1)(d) was waived by consent. This valua
tion was not disputed. Defendant did not bring any
evidence with respect to the value of Control Data
shares with the said restrictions on transfer as it
contended that the value of Control Data shares is
entirely irrelevant in the determination of the
value of the CDC shares distributed as a dividend
by plaintiff. An objection was made to the intro
duction of Mr. Haythe's evidence, which objection
was taken under reserve as the entire issue hinges
on the question of whether the value of the Control
Data shares received in exchange for the CDC
shares can have any bearing on the valuation of
these shares, declared by plaintiff as a dividend to
Bendix and exchanged by it the same day for the
Control Data shares.
Plaintiff contends that the valuation of the CDC
shares by defendant at $31 a share based on the
sale of 50 shares on August 7, 1969 was attribut
able to the increased value which the shares had
acquired as a result of the exchange offer as they
had risen substantially from the time the exchange
offer became known and the figure of $31 is as a
result of this. Since Control Data by August 7,
1969 had in fact control of 97.9% of the outstand
ing CDC shares as a result of the exchange offer,
the market for any shares which were available for
sale was extremely thin. Plaintiff contends that
this market valuation should not be applied to, the
shares which were received by Bendix as a divi
dend in view of the restrictions on disposal of
Control Data shares received by Bendix in
exchange for same so' that had Bendix wished to
realize the monetary value of its dividend at the
date it was declared, it could not have realized
more than $26 a share U.S. It could not have sold
the CDC shares on the Toronto Stock Exchange
since it had undertaken to exchange them for
Control Data shares.
Defendant on the other hand contends that any
obligation which Bendix may have undertaken to
deal with the subject matter of the dividend in a
certain manner after it was received has no bear
ing on the value of the actual dividend paid by the
plaintiff and in fact represents a transaction sepa
rate and apart from that which must be examined
for the purpose of determining the withholding tax
payable by the plaintiff.
Both parties submitted written notes of argu
ment and while there is some jurisprudence deal
ing with the evaluation of shares for taxation
purposes, which is of some assistance, the facts in
none of them are identical to those encountered in
this somewhat unusual transaction. The relevant
portions ofthe sections of the Act in issue as they
read at the time areas follows:
106. (1a) Every non-resident person
(a) shall pay an income tax of 15% on every amount that a
person resident in Canada ... pays ... to him as ... a
dividend ....
139. (1) In this Act,
(a) j "amount" means money, rights or things expressed in
terms of the amount of money or the value in terms of money
of the right or thing;
Defendant contends that there is no basis upon
which section 106(1a) can be construed so as to
permit the valuation of a dividend in kind by
reference to something other than the subject
matter of the dividend itself. The payment of the
dividend by plaintiff to Bendix -was an entirely
separate transaction to the substitution of the
CDC shares received by Bendix as a dividend for
the Control Data shares, and plaintiff was not
legally a party to the second transaction even
though, as a result of its control by Bendix and the
fact that of its six directors, five are employees of
Bendix as were four of its officers including its
Chief Executive Officer, it was undoubtedly aware
of what was subsequently to be done with the
shares of CDC which it was paying as a dividend
and was, in fact, obliged to declare this dividend
on the instructions of its parent company Bendix in
order to fulfil the latter's contractual obligations to
Control Data. Defendant contends that it would be
absurd if a plaintiff, declaring a dividend in kind
of stock which it owns in another corporation to all
of its shareholders, were obliged to determine what
its non-resident shareholders received subsequently
on disposal of these shares in order to evaluate the
shares for the purposes of the 15% withholding
tax. Defendant contends that except where the
market is "spasmodic of ephemeral" the market
price is the best test of the fair market value.
Evidence was produced showing that CDC shares
traded actively on the Toronto Stock Exchange
between January 1 and August 31, 1969, the
closing prices ranging from a low of 23 1 / 2 on
February 28 to a high of 34 on August 20. Sales
volume was as high as 29,772 shares on January
24 and 36,990 shares on May 24, but the last day
on which there was a substantial volume of shares
traded was July 11, when 3,825 shares were sold.
After that the volume fell substantially often being
no more than 50 or 100 shares a day although 590
were sold on August 1 and 540 on August 5. On
the day in question, August 7, as already stated
there was only one sale of 50 shares at $31. As
already stated the agreement between Bendix and
Control Data was made on May 1 and the pros
pectus to Control Data offering the exchange to all
shareholders of CDC was issued on May 15. CDC
shares closed on May 1 at 29 and on May 15 at
30. Although the market was thin, as has been
pointed out, after July 11, prices continued to rise
even after August 7 and, with a few exceptions,
were above $31 for the sales made during the
balance of the month of August. It must be
remembered, however, that these were for sales by
shareholders who had the right to exchange their
shares for unrestricted shares of Control Data
which was selling at 148 3 / 4 U.S. on August 7.
There was never at any time any restriction on
anyone with respect to the sale of CDC shares, the
only restriction being that on Bendix with respect
to some of the Control Data shares which it
received in exchange for them. Realistically it is,
of course, unlikely that a huge block of 517,313
shares could have been sold at $31 a share on
August 7, 1969 by any owner if they were all
placed on the market on that date. On the other
hand, as Mr. Haythe pointed out, sometimes a
controlling block of shares will command a premi
um price, and he believes this may have been the
case with respect to the CDC shares in view of
their gradual rise in value to approximately one-
fifth of the value of the Control Data shares after
the terms of the exchange offer became known.
While these speculations are of some interest, such
an approach to valuation is too indefinite to enable
any firm conclusion to be reached.
In support of its contention, defendant relies,
among others, on the leading case of Untermyer
Estate v. Attorney-General of British Columbian.
In that decision,, after analyzing various factors
which went into the determination of "fair market
value" -Mignault J. concluded at page 91:
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.
Again at pages 91-92:
1 would not deduct anything from the market value of these
shares on the assumption that the whole of them would be
placed on the market at one and the same time, for I do not
think that any prudent stockholder would pursue a like course.
In the case of Lawson v. M.N.R. 3 Cattanach J.
2 [1929] S.C.R. 84.
3 64 DTC 5147.
rejected the argument that if shares have an intrin
sic value less than the price at which they are
bought on the market it is this figure which should
be used in evaluating them rather than the market
value, being the amount paid by those who buy
and sell at arm's length on the open market.
In the British case of Crabtree v. Hinchcliffe
(Inspector of Taxes) 4 Lord Reid dealt with the
argument that even if directors have confidential
information in their possession which the public is
not aware of, this is a special circumstance justify
ing failure to accept the market value of shares as
being correct, stating:
It must happen every day that directors of many companies
have in their possession confidential information which very
properly they do not make public but which if made public
would lead to a substantial alteration of the quoted prices of
their companies shares. That could not possibly be a "special
circumstance" and in my opinion that is all that happened here.
In the present case there is no suggestion that
there was any confidential information of which
the public was not aware.
In the case of Dobieco Limited v. M.N.R. 5
Cattanach J., referring to the Untermyer case,
again relies on market value as prima facie evi
dence, although not necessarily conclusive if rebut
ted by satisfactory evidence to the contrary. The
headnote reads in part:
3. That market price is the best evidence of fair market value,
the price at which shares sell on the market might be regarded
as prima facie evidence of their fair market value although not
necessarily conclusive if rebutted by satisfactory evidence to the
contrary and the only evidence offered was that of an interested
expert whose figures used to arrive at the amount of the
deduction contained several errors.
In the present case no evidence with respect to the
value of CDC shares themselves, other than the
market value, was submitted by any witnesses.
In the case of Henderson Estate v. M.N.R. and
The Bank of New York v. M.N.R. 6 [appeals dis
missed in both cases: A-158-73 and A-47-74] Cat-
tanach J. again referring to the Untermyer case,
4 [1971] 3 All E.R. 967 at p. 977.
5 [1963] Ex.C.R. 348.
6 73 DTC 5471.
accepted for estate tax purposes the market value
of the shares.
Plaintiff, relying on the definition of the word
"amount" in section 139(1)(a) of the Act (supra)
states that the amount of the dividend is the value
in terms of money of what was received which can
only be measured by what the CDC shares were
able to bring in an arm's length transaction. It
states that had the shares been transferred directly
by plaintiff to Control Data in exchange for Con
trol Data's shares, these latter shares would have
had the same restriction on the immediate disposi
tion of them and the value which plaintiff would
have received in return for its CDC shares would
have had to be calculated on the same basis,
making them worth $26 a share. In this case, of
course, there would have been no declaration of a
dividend nor question of withholding of tax on
same but this method of proceeding was decided
against for taxation reasons on advice of Bendix's
U.S. tax counsel in favour of the procedure by way
of declaration of a dividend by plaintiff to Bendix
and immediate exchange of the shares by Bendix
for Control Data shares with transfer restrictions
on a five for one basis. It insists that once the
terms of the exchange offer were known, the
market on the Toronto Stock Exchange for CDC
shares was merely a reflection of the market price
for unrestricted Control Data shares and was only
available to the very small number of CDC share
holders who had not committed their shares to be
exchanged fdr Control Data stock. It relies on the
case of Beament Estate v. M.N.R. 7 which dealt
with establishing the fair market value of shares of
stock for estate tax purposes. In that case a private
investment holding company had been formed with
Class A and Class B shares. The deceased sub
scribed for the Class B shares and his children for
the Class A shares. The letters patent provided
that on the dissolution of the company, holders of
the Class B shares were limited to receiving the
par value of their shares while the remaining
distributable assets would go to the holders of the
Class A shares. By an agreement the deceased
covenanted with his children to provide jn his will
for the dissolution of the company and distribution
7 [1970] S.C.R. 680.
of its assets in accordance with the provisions of its
letters patent. The issue was whether the property
of Class B shares passed from the deceased to his
estate free from the obligations assumed by him
under this contract in which case their value would
be substantially greater. In rendering judgment,
Cartwright C.J. stated on page 687:
Once it is established (and it has been conceded) that the
contract binding the deceased and his executors to have the
company wound up was valid, the real value of the shares
cannot be more than the amount which their holder would
receive in the winding-up. To suggest that they have in fact any
other value would be altogether unrealistic. When the true
value of the shares in the circumstances which exist is readily
ascertainable, I can find nothing in the Act that requires the
computation of the value they would have had under complete
ly different circumstances followed by an inquiry as to whether
any deductions should be made from that value.
Plaintiff contends that this is a realistic way of
looking at the present case since there was a
binding agreement between Bendix and Control
Data relating to the disposition of the CDC shares.
I believe this judgment can clearly be distin
guished however. It concerned the valuation of
property consisting of shares of the deceased and
found that this valuation was affected by an agree
ment which he had made with beneficiaries under
his will as to the winding-up of the company at his
death and the consequent freezing of the value of
these shares at their par value. In the present case
plaintiff has a separate corporation entity from
Bendix and itself made no agreement with Control
Data as to the disposition of the shares which it
was declaring and paying as a dividend to Bendix.
Plaintiff argues that the tax imposed by section
106(1 a)(a) (supra) is imposed on the non-resident
person, that is Bendix, but it must be pointed out
that by virtue of section 109(1) which reads as
follows:
109. (1) When a person pays or credits or is deemed to have
paid or credited an amount on which an income tax is payable
under this Part, he shall, notwithstanding any agreement or any
law to the contrary, deduct or withhold therefrom the amount
of the tax and forthwith remit that amount to the Receiver
General of Canada on behalf of the non-resident person on
account of the tax and shall submit therewith a statement in
prescribed form.
the obligation to withhold and remit same rests
with the plaintiff which declared, and paid the
dividend. It would not, in my view, be a proper
interpretation of the Act to hold that because the
recipient has entered into an agreement with a
third party with whom it is dealing at arm's length
which affects the value to it in money in the
dividend so received, that the Canadian company
paying the dividend should accept the value of
same to the recipient as the basis on which the
15% withholding tax is to be calculated, rather
than make its own independent determination on
the basis of evidence available to it of the value in
money of the stock dividend, without regard to
whatever the recipient of the dividend may have
agreed to do by way of disposal of same after
receipt whether for a greater or lesser value.
Whether or not Bendix regarded itself as the
beneficial owner at all times of the CDC shares
through its control of plaintiff and could therefore
enforce the payment of the dividend is entirely
irrelevant as is the fact that the financial state
ments of Bendix incorporated the assets, liabilities
and operations of plaintiff.
For the above reasons, plaintiff's appeal must
fail and is dismissed with costs.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.