A J Frost:—This is an appeal from an income tax reassessment in respect of the appellant’s 1965 taxation year. It was originally heard by J O Weldon, Esq, QC on January 18, 1971 at the City of Toronto, Province of Ontario at a sitting of the Tax Appeal Board as it was then constituted. As judgment was not delivered before Mr Weldon’s term of office with the Board expired, the parties agreed in writing that the case should be decided by a member of the Tax Review Board on the basis of the transcript of evidence and re-argument which came on before me at Toronto on September 22, 1972.
The appellant is a company incorporated under the laws of the Province of Ontario carrying on the business of a broker-dealer. Its registration was suspended by the Ontario Securities Commission on November 3, 1965 for a period of six months which later was reduced to two months. On January 3, 1966 the appellant was permitted to resume its business of underwriting and distributing securities. The appellant’s 1965 taxation year ended on November 30, 1965 which date fell within the two-months suspension period.
On September 25, 1964 the appellant entered into an underwriting agreement with Marvel Minerals Limited (hereinafter referred to as “Marvel”), whereby the appellant purchased 200,000 shares of Marvel at 10$ per share and acquired certain options on further shares for distribution purposes to the public. On October 15, 1965 the appellant agreed to purchase 150,000 shares of Marvel from Mr John Harper Scott at 30$ per share and took delivery as follows:
| October 22, 1965 | 50,000 shares |
| November 12, 1965 | 50,000 shares |
| November 26, 1965 | 50,000 shares |
The sales of Marvel were traded in the over-the-counter market and had a fairly wide distribution for speculative security. Sales were as follows:
| Selling | Total Total | ||
| Shares | Price Per | Market | |
| Month | Sold Sold | Share | Value Value |
| 1965 | |||
| June | 34,700 | 43¢ | $ 14,921.00 |
| July | 48,300 | 45¢ | 21,735.00 |
| August | 23,550 | 450 | 10,597.50 |
| September | 37,650 | 450 | 16,942.50 |
| October | 34,100 | 450 | 15,345.00 |
| November | 6,450 | 450 | 2,902.50 |
(Trading suspended Nov 3, 1965 to Jan 3, 1966)
| 1966 | |||
| January | 4,000 | 450 | 1,800.00 |
| February | 56,500 | 450 | 25,425.00 |
| March | 92,600 | 470 | 43,522.00 |
| 337,850 | $153,190.50 | ||
Sales prior to suspension exhausted the appellant’s underwriting supply which it had acquired at 10¢ per share. At its year-end, the appellant held in its inventory 150,600 shares, details of which are as follows:
| Price | ||||
| Per | ||||
| Shares | Purchased From | Share | Share Cost | Cost |
| 150,000 | John Harper Scott | 30¢ | $45,000.00 | |
| 600 | Market Trading | 350 | 210.00 | |
| 150,600 | $45,210.00 | |||
Counsel for the respondent in his argument contended that the sales pattern before and after the suspension by the Ontario Securities Commission indicated that the appellant’s inventory of shares of Marvel had a market value to the appellant in excess of cost, and as the basis of valuation of an inventory of securities under subsection 14(2) of the Income Tax Act is lower of cost or market value the Minister had properly reassessed the appellant.
Counsel for the appellant contended that the shares of Marvel were worthless during the period of suspension as the appellant was not in a position to make a market and that after the suspension a new market was created. Marvel, counsel submitted, only had a value to the extent that the appellant made the market and that at the year-end, on November 30, 1965, the shares were virtually a worthless piece of paper.
On the evidence, it is apparent that the appellant supported the market or made a market, as brokers frequently do in the normal course of raising new capital for a client or when a market is rigged for personal gain. In this case, the appellant acquired 200,000 shares at 10* per share pursuant to an underwriting agreement and then resold the shares to the public at approximately 45¢ per share. The second purchase of 150,000 shares was from a private individual at 30¢ per share indicating that the initial underwriting had been successful and the shares had increased in value. Three weeks after the purchase of the 150,000 shares from Mr Scott, the appellant was suspended.
What is the fair market value of Marvel shares? Look at the question in issue logically: Marvel is a penny stock sold over-the-counter in a rigged market. The appellant through market letters and bulletins and over-the-telephone contacts gave the stock an artificial price. The appellant maintained a market at the price it set for the stock. When the appellant’s registration was cancelled, promotion ceased and no further trades were apparently executed. There is no evidence acceptable to the Board that Marvel had gone off the counter or was a worthless piece of paper marketwise. Market value was not proved or even closely indicated. The shares already distributed by the appellant might have been sold at a price although we don’t know this, but the odds would seem to favour it. We do know however, that as soon as the suspension was lifted active trading immediately commenced at the same level as before suspension, indicating a potential source of profit. The shares of Marvel had a realizable value but not an immediate realizable value in so far as the inventory of shares held by the appellant was concerned as these shares were under a no-trading ban. If the free shares of Marvel had had a reported market value, that price would have established a value for inventory purposes. This wasn’t the case however as the market was inactive.
There is another aspect to this case which seems to be of some importance and that is: there is no sound morphological reason for concluding that the statutory use of the word “market” applies to the kind of market created by the appellant. No market really existed in the sense that a market usually exists for, say, a listed stock traded over an exchange where prices are determined by auction. This is a rigged market pure and simple not the type of market Parliament had in mind when subsection 14(2) of the Income Tax Act was enacted. Under these circumstances, I see no reason why the Minister of National Revenue or his servants should be obliged to concern themselves with “fair market value”. There was no market in the true sense of the word. This being the case the Minister is entitled to rely on historical cost as the only possible and statutorily permissible basis of valuation unless a write-off is clearly indicated. In determining facts pertinent to the measurement of income, the Minister, in my opinion, may have regard for prices obtained after the date of valuation.
Appeal dismissed.