Joseph Cowan Adam v. Minister of National Revenue, [1952] CTC 400

ANGERS, J.:—In his statement of claim the appellant asks that his appeal be allowed and that the assessment made by the respondent under the provisions of the Dominion Succession Duty Act (4-5 Geo. VI, Chap. 14), be varied by reducing the value of the shares of Grampian Corporation Limited to $822.26 a share, or alternatively, that the said assessment be referred back to the respondent to re-assess on the basis that the said shares did not have a value in excess of $822.26 each. He relates:

Margaret Hannah Adam died in the City of Vancouver, B.C., on or about March 23, 1949, and by her testament appointed her son, the appellant, to be the sole executor and trustee;

probate of the said testament was granted by the Supreme Court of British Columbia on January 23, 1950;

by her said will Margaret Hannah Adam devised all her residuary estate as to 30% thereof to the appellant, as to a further 30 % thereof to her daughter-in-law, Wilda Jeanette Adam, wife of the appellant, and as to the balance of 40% thereof to such of the children of the appellant as should be living at the death of the said Margaret Hannah Adam;

at the death of the latter there were living five children of the appellant: Joseph William Adam, aged eighteen, Barbara Jean Adam, aged fourteen, Margaret Jeanette Adam, aged thirteen, Jessica Jill Mary Adam, aged eleven, and Jean Elizabeth Adam, aged five ;

on January 16, 1950, the appellant, as executor, filed a statement as required under the provisions of the Dominion Succession Duty Act and therein disclosed an estate of a gross value of $595,150.95 and debts of $198,868.15, leaving a net estate of $396,282.80 ;

the principal asset of the estate was seven hundred and twenty (720) shares of Grampian Corporation Limited valued by the appellant at $822.66 each or a total value of $592,315.20;

by a notice of assessment dated November 8, 1950, purporting to be issued under the provisions of the Dominion Succession Duty Act, duties were assessed upon the successions derived from the said Margaret Hannah Adam by the persons mentioned in paragraphs 3 and 4 hereof in a total amount of $283,243.64, as follows :

the said value of $1,175,169.60 as fixed by the respondent for 720 shares of Grampian Corporation Limited was arrived at as follows:

the appellant accepts the valuation of sterling securities as of March 23, 1949, as set out in paragraph 8 hereof at $156,614.34 and agrees that the gross value of the estate as shown im S.D. 1 should be increased by the sum of $6,675.97 ;

the appellant agrees to an increase in the value of Canadian securities as of March 23, 1949, as set out in paragraph 8 hereof, from $232,749.90 to $236,820.90, but not to $238,937.12, and agrees that the gross value of the estate as shown in S.D. 1 should be increased by the sum of $4,071.00;

the debts of the estate in the sum of $196,565.17 should be increased to the sum of $196,695.56 as agreed by the respondent in his decision herein given under the provisions of Section 37 of the said Act under date of September 21, 1951 ;

the promissory notes of Adam & Co. Ine. as referred to in paragraph 8 hereof consist of six promissory notes each for $100,000.00 and one promissory note for $75,000.00, all dated September 13, 1944, and made payable, by Adam & Co. Inc. to Grampian Corporation Limited only, fifteen years after date, in Canadian funds, with interest at one per cent (1%) per annum payable annually ;

Adam & Co. Ine. is a body corporate under the laws of the State of Washington, United States of America, and carries on business in the City of Seattle, in the said State of Washington ;

Grampian Corporation Limited holds no security for payment of the said notes;

Adam & Co. Ine. is a private, industrial, financing corporation and its ability to pay the said notes will depend upon the market value of its holdings and collectability of its loans and accounts at maturity of the notes;

Adam & Co. Ine. is unable to set aside any funds as a reserve to meet the payment of the said notes at maturity, since it is compelled by United States law to pay its total annual profits before the end of each year as dividends;

the said notes are payable to Grampian Corporation Limited only and are not assignable or transferable;

the respondent arrived at the sum of $420,000.00 as shown in paragraph 8 hereof as follows:

the said sum of $420,000.00 was included in arriving at the value of each of the said successions ;

for the years 1940 to 1949 inclusive, Grampian Corporation Limited had a net income of $252,495.92, or an average income of $25,249.50 a year;

under the provisions of the Domimon Succession Duty Act the initial rate levied on each succession is in respect to the aggregate net value that is the fair market value, as of the date of death of the said Margaret Hannah Adam of all the property of the latter, less authorized deductions ;

under the provisions of the Dominion Succession Duty Act the additional rate levied on each succession is in respect to the dutiable value that is the fair market value as of the date of death of the said Margaret Hannah Adam of all property included in a succession from her less authorized deductions ;

in arriving at a value of $1,632.18 per share as of March 23, 1949, for the said 720 shares of Grampian Corporation Limited,

(a) the respondent did not value the said shares at their fair market value;

(b) the respondent valued the said shares on an improper basis;

(c) the respondent did not take into consideration all relevant and proper factors;

(d) the respondent should have placed no value on the said promissory notes or alternatively no value in excess of $25,000.00 ;

by notice of appeal dated November 24, 1950, the appellant appealed against the said assessment as executor and trustee and on behalf of himself and his said wife and children as successors as aforesaid ;

under date of September 21, 1951, the respondent issued his decision amending the said assessment by accepting a value of $196,695.56 for debts in substitution for the sum of $196,565.17 previously determined, but otherwise affirmed the said assessment;

the appellant was dissatisfied with the respondent’s decision and by a notice of dissatisfaction dated October 17, 1951, stated that he desired his appeal to be set down for trial;

within one month of the mailing of the said notice of dissatisfaction the appellant gave security for the costs of the appeal, to the satisfaction of the respondent, in the sum of $400.00 ;

on December 4, 1951, the respondent issued his reply affirming the said assessment ;

the appellant appeals as executor and trustee under the will of the said Margaret Hannah Adam and also on behalf of himself, his wife and children as successors as aforesaid;

wherefor the appellant claims:

1. that the said appeal be allowed and that the assessment be varied by reducing the value of the said shares to $822.26 each, or alternatively, that the said assessment be referred back to the respondent to re-assess on the basis that the said shares did not have a value in excess of $822.26 each;

2. the costs of the appeal.

In his statement of defence the respondent alleges :

he admits the facts mentioned in paragraphs 1, 2, 3 and 4 of the statement of claim;

he admits that form S.D. 1 referred to in paragraph 5 was completed and filed as alleged, but denies the said form 8.D. 1 was a proper statement in accordance with the provisions of the Dominion Succession Duty Act; the respondent further denies that the valuation of 720 shares of Grampian Corporation Limited at $822.66 per share or a total valuation of $592,315.20, as declared in the said form, is a proper valuation thereof for succession duty purposes;

he admits the allegations contained in paragraph 6 and says that the assessment referred to therein, dated November 3, 1950, was properly made in accordance with the provisions of the Dominion Succession Duty Act ;

he admits the allegations contained in paragraphs 7 and 8;

as to paragraph 9 the respondent says that the valuation of the sterling securities of Grampian Corporation Limited as of March 23, 1949, was properly determined by him to be $156,614.34 ;

as to paragraph 10 the respondent says that the valuation of the Canadian Securities of Grampian Corporation Limited as of March 23, 1949, was properly determined by him to be $238,937.12;

as to paragraph 11 the respondent says that he has agreed to amend the assessment as made and dated November 3, 1950, by accepting the value of $196,695.56 for debts of the estate of the deceased in substitution for the value of $196,565.17 previously determined and the appellant was notified accordingly by the respondent in his decision dated September 21, 1951 ;

he admits the facts contained in paragraphs 12 and 13 ;

he does not admit the allegation contained in paragraph 14 ;

he admits the allegations contained in paragraph 15 ;

he denies the allegations contained in paragraphs 16 and 17 ;

he admits the allegations contained in paragraph 18 and says that the promissory notes of Adam & Co. Inc. held by Grampian Corporation Limited were valued as at the date of death of the deceased on March 23, 1949, at $420,000.00, being on a discount basis of 6% compounded annually and being a discount of $255,000.00 from their face or maturity value of $675,000.00 ;

he admits the allegations contained in paragraphs 19 and 20;

with reference to paragraphs 21 and 22 he says that the provisions of the Dominion Succession Duty Act will speak for themselves ;

he denies the allegations contained in paragraph 23 and says that the fair market value for succession duty purposes of 720 shares of Grampian Corporation Limited has been properly determined to be $1,632.18 per share or a total value of $1,175,169.60; the respondent further says that in arriving at the said valuation of $1,175,169.60 the value of the promissory notes of Adam & Co. Ine. held by Grampian Corporation Limited and being the promissory notes referred to in paragraphs 8 and 12 of the statement of claim was properly determined to be $420,000.00 ;

he admits the allegations contained in paragraph 24 ;

he admits the allegations contained in paragraph 25, except that the respondent says that in his decision dated September 21, 1951, he agreed to amend the assessment as made and dated November 3, 1950, by accepting a value of $196,695.56 for debts of the estate in substitution for the sum of $196,565.17 previously determined ;

he admits the allegations contained in paragraphs 26, 27, 28 and 29.

A recapitulation of the evidence seems apposite.

The appellant, a resident of Vancouver for 30 years, testified that he is the sole executor of the estate of his mother, Margaret Hannah Adam, and a director of Grampian Corporation Limited.

He produced as exhibit 1 seven promissory notes, six for $100,000.00 and one for $75,000.00, totalling $675,000.00, all dated at Seattle on September 9, 1934, and payable nine years after date to Grampian Corporation Limited, with interest at 1% per annum payable annually after as well as before maturity.

Adam declared that, while Grampian Corporation Limited and its shareholders receive 1% income on these notes, the Minister has taxed them as if the income received was 5%. He pointed out that there are taxes on an income of 4% on $675,000.00 which they never received.

Adam stated that he owns about 99% of the shares of Adam & Co. Inc.; he agreed that these shares are owned through the Kintyre Corporation, adding, however, that the Kintyre Corporation is owned by him.

He declared that another company, namely the Angus Corporation, comes into this collection of companies and that it was incorporated in the State of Washington. He admitted that he and his associates own the Angus Corporation.

He said that at the time the loan was made to Adam & Co. Ine. for which the latter gave the notes to Grampian Corporation for $675,000.00 a loan was made of this money by Adam & Co. Inc. to Angus Corporation. He added that notes were given in the same way by Angus Corporation to Adam & Co. Ine.

Adam acknowledged that the transaction in question took place in 1944, but he specified that the original loan was made before the war started in 1939.

Dealing with the war and the foreign exchange regulations in Canada, Adam made these comments (p. 12):

"We had just got word that war was starting and it was very self-evident that we were going to have foreign exchange regulations in Canada. ‘‘

Adam asserted that he had some experience in the previous war, having heard his father talk about it. He said he anticipated foreign exchange control regulations.

Speaking of the balance of the money which Adam & Co. Inc. had in Seattle if controlled by a Canadian under those regulations, he declared that it would have to be brought back into Canada. He admitted that he wished to carry on his operations with the finances available in the United States and that to do this he put the control of the money in Angus Corporation, which was a Washington corporation.

Adam filed as exhibit 3 the balance sheets of Adam & Co. Ine. for the years 1945 to 1949 inclusive.

Requested to explain what was the position of Adam & Co. Inc. in each of the years 1945 to 1949, Adam stated that the balance sheets do not give a true picture, adding, however, that they show the company’s financial position.

Relating in detail the debit balance of the company for the years in question, Adam supplied the following information (p. 14):

"A. Take 1949, it shows a debit balance of $4,130.63 as at

February 28th, 1949.

Q. Now go back to each year. What does it show in 1948?

A. At February 28th, 1948, it showed a debit balance of $4,133.00.

Q. And what about the other years?

A. 1947, a debit balance of $4,122.77 ; 1946, a debit balance of $4,118.44; 1945, a debit balance of $3,904.60.” On counsel’s suggestion, Adam made these observations regarding the balance sheet of Adam & Co. Ine. (p. 15) :

"‘A. My Lord, this is a balance sheet as prepared from the

books, but as the balance sheets don’t show the network of the corporation I would like to add supplementary notes. I have got a small thing here, and maybe if you could get a copy of this you would be able to follow it easier.

Q. It is called, ‘Share equity Adam & Co. Inc.’? A. Yes.”

Further on Adam added (ibid.) :

"Q. The books showed a deficit of $4,130.63 ?

A. Yes. So we deduct that, which reduces the net worth to $45,869.37. However, if we refer to the market value which these shares are carried at, you will notice that the marketable shares are carried at $25,830.00, whereas these shares are actually worth $21,075.00. So there was a loss of $4,755.00. We have also an exchange membership which was carried at $5,000.00, which in point of fact was only worth $1,500.00.

Q. Why do you say that?

A. It fluctuates all the time. The grain business was very bad in 1949. So we add $4,755.00 and $3,500.00, which are apparently assets that don’t exist, and we deduct the total of $8,255.00 from the $45,869.32, which reduces it to $37,614.32. Now, we have a balance sheet of Angus Corporation.”

Adam filed as exhibit 5 the balance sheets of Angus Corporation for the years 1948 and 1949.

Asked if he considered the asset, appearing in Adam & Co. Inc., of the notes of Angus Corporation, Adam replied negatively and supplied this information (p. 16):

" " A. Adam & Co. Inc. own 9,000 dollars worth of shares in

Angus Corporation. On August 31, 1949, Angus Corporation had a deficit of $1,352.46, and furthermore the securities they own were higher than the excess cost over the market of $9,978.79. In other words, their investment was wiped out and Angus was in the hole for $1,352.46. So I took all $11,331.25 from the $37,614.37 which reduces the share equity or the network of Adam and Co. to $28,383.12. However, on their balance sheet they have got a liability of $875,000.00 which is payable only in Canadian funds. This liability is carried in their books at $802,804.00. On March 23, 1949, the mean price of foreign exchange was approximately .94. In other words, there was a concealed liability in the books of Adam & Co. Ine. to the extent of the difference between $822,500.00 and $802,304.00, which is $20,196.00. So we deduct the liability from the $26,383.12 and get a share equity or net worth in Adam & Co. of $6,087.12.’’

In cross-examination Adam stated that Grampian Corporation was incorporated in Prince Edward Island in 1936, that it was his mother’s personal corporation and that its object was to hold everything his mother owned.

Adam said that the directors of Grampian Corporation were his mother, his wife and himself. He specified that his mother held all the shares, except two.

He declared that Adam & Co. Inc. was incorporated in Seattle around 1932 and that, until his mother’s death in 1949, he was president of the company and still is.

According to him, there were 500 shares of $100.00 each issued, which are held by Kintyre Corporation. Adam believed that Kintyre Corporation was incorporated in 1936 and Angus Corporation in September, 1939.

He specified that in 1939 Adam & Co. Ine. owned 900 common shares of no par value, that 900 preferred shares were owned by one George Henry White and 100 preferred shares by Kerwin

S. Shank. He concluded that there were issued 900 common shares and 1,000 preferred, this being the structure of the company today. He specified that the capitalization was changed about a year ago and that George Henry White and Kerwin S. Shank now held the working power. He asserted that he had no shares in his name but that Adam & Co. Inc. held 900 common shares.

Adam stated that George Henry White was his associate in Seattle for many years and that he is now dead. He added that Shank is an attorney now retired; he thought he is also dead.

He admitted that he owns and controls Kintyre and Adam & Co. Inc. He said, however, that he does not control Angus Corporation.

He explained that Adam & Co. Inc. owns 900 common shares of Angus Corporation. As to the 1,000 preferred shares Adam declared that 900 of them are owned by Clifford Hoof, one of his associates in Seattle.

He repeated that Grampian advanced the sum of $675,000.00 to him against promissory notes payable in Canadian funds as to principal and interest, ten years from their date, which would be 1949. According to him, the notes were signed on behalf of Adam & Co. Ine. by George Henry White.

Adam said that in 1944 these notes were renewed. He explained that was because Adam & Co. Inc. found it advantageous to go into some business that would require the money to be tied up longer.

Adam asserted that he had the entire control of Adam & Co. Inc. and that he was accordingly entitled to carry on the arrangement aforesaid.

He added that Grampian Corporation surrendered the old 1939 notes to Adam & Co. Ine. and that he drew the seven notes exhibit 1.

At counsel’s request, Adam explained why the notes were made payable in 15 years; I do not think that his explanation offers any interest.

He said that, when in 1939 Adam & Co. Inc. got the money, it was lent to Angus Corporation.

Adam declared that the loan was stationary all the time; it may be apposite to quote an extract from the deposition (p. 24) :

«Q. Was it $710,000.00?

A. No.

Q. $715,000.00 ?

A. No; a little bit more. The Kintyre lent money at the Same time.

Q. Was it $5,000.00?

A. No, $200,000.00, which in turn was lent to Angus.

Q. And notes taken the same way?

A. Yes.

Q. Fifteen years ?

A. Fifteen years at one percent, Canadian funds.”’

Adam said that he had not the profit and loss accounts of Adam & Co. Inc. from 1945 to 1949 ; he guessed, however, that he could find them. To the question as to whether he had them available, Adam answered that they are in Seattle.

To counsel’s intimation that he will have his profit and loss statements with a balance sheet, Adam replied (p. 26) :

"‘It doesn’t mean anything anyway, because all the interest is paid out, they can’t retain any surplus. All revenues of Adam & Co. are required to be paid out, otherwise the United States takes it all in tax. That is United States Federal Income Tax law. It has to be paid out before the end of the financial year, not afterwards.’’

Adam said that Adam & Co. Inc. is not defined as a personal holding corporation under the American law. He thought that it came under that category from 1939 onwards.

To counsel’s question as to whether he suggests that the notes of Adam & Co. Ine. are not worth anything Adam answered affirmatively, adding that they are worth very little.

Adam declared that the balance sheet of February 28, 1949, reflects the financial status of Adam & Co. Inc. at his mother’s death.

Asked where are the promissory notes receivable, Adam replied that one of his associates has them.

Adam asserted that the notes in question are worth what is carried on in the books.

Regarding the mortgage of $25,000.00, Adam declared that it is a mortgage on the Saudi Arabian plant, of Seattle, which operates part-time. He stated that the borrower is paying interest at 4% once a year. According to him, the security for this mortgage is the building of the company, on which he could not place a value.

To counsel’s intimation that it was a free loan Adam answered negatively, explaining that it was part of the deal into which he had entered.

He swore that he did not draw a salary; he admitted, however, that Adam & Co. Inc. owns shares in the company.

Regarding the liabilities which he carries ($25,000.00), Adam said that it is fairly good.

Adam believed that the financial situation of the Angus Corporation as it existed in March, 1949, is fairly precise and that there has been no substantial change since it was made up.

The balance of the cross-examination of Adam is unduly protracted ; I do not deem it apposite to waste more time concerning it.

Harold Frank Summers, banker for 33 years and presently assistant manager at the Bank of Nova Scotia in Vancouver, asked if he could place a value on the seven promissory notes amounting to $675,000.00 given by Adam & Co. Inc. to Grampian Corporation, answered that, in his opinion, these notes have no market value as an investment but that they might possibly have a value as a speculation of around $25,000.00. He declared that there are several reasons in support of his opinion. He said that in the first place the notes are not secured and that a purchaser would be very hard to put to estimate his chances of receiving payment at security approximately ten years after the date indicated. He intimated that the rate of interest (1%) is not attractive, that Adam & Co. Inc. carries on business in the United States and that consideration must be given of the possibility of adverse fluctuation in the rate of exchange, which might substantially increase the amount of the debt payable in terms of United States dollars. He added that fluctuations have already occurred and concluded his comments thus (p. 44) :

"‘I understand that under United States tax laws all profits of Adam & Co. Ine. must be distributed each year or they are taken in taxes. It is then a one-way gamble, in that the assets may depreciate but cannot increase in value. I understand, too, that the effect of Canadian Income Tax is to create a loss of over $10,000.00 each year. That must be taken into consideration in arriving at value. So that any purchaser buying the notes at $25,000.00 would have to figure on at least a further $100,000.00 to be paid to the Government in income taxes, which would substantially increase his cost of the notes.’’

In cross-examination, Summers declared that as a banker he would not purchase these shares nor recommend them as an investment.

Summers admitted that he had looked over the balance sheet of Adam & Co. Ine. and that it showed some liquid assets.

Further on he declared (p. 45) :

"I have the balance sheet of February 28, 1949, before me, and the liquid assets there in my opinion consist of cash, $25,564.00, and notes receivable $7,500.00 and the mortgage of $25,000.00 is possibly liquid.”

Summers did not consider the loan of $715,000.00 to Angus Corporation as a liquid asset.

He agreed that one has to look at the financial situation of the debtor to value the notes of $715,000.00.

He admitted that Angus Corporation has very substantial assets but observed that the claim against the latter will not mature for ten years and that nobody is in a position to indicate what the assets will then be. He declared that, if the assets are controlled by a competent man as Adam, it is reasonable to assume that they will be well safeguarded in the interval. To counsel’s observation that there is no guarantee that management will remain in Adam’s hands Summers retorted that there is no guarantee of anything but that, since we are in the realm of speculation, one has to speculate that Adam is going to live and things are going to be as they are.

Asked to give the market value in the open market, Summers put it at $25,000.00; explaining his valuation, he pointed out that the notes are unsecured and that there is no indication what the value of the assets may be when the notes fall due in 1959. He observed that the earnings of Adam & Co. Ine. cannot appreciate because they must all be disbursed from year to year.

Summers agreed that he knew the valuation put by the respondent on these notes and had heard that it is $421,000.00. He added that he did not think that this is the market value. He declared that, if he was asked if it would be a good investment for Adam to buy the promissory notes for $425,000.00, he would say no.

Summers stated that he is not giving evidence as to what Adam might value the notes, but to indicate what he believed to be the market value. He repeated that, in his opinion, the notes have no market value as an investment and that he did not think one could find an investor who would put out any substantial amount to purchase an unsecured obligation, payable 10 years in advance, with interest at 1% per annum, and with a possible loss of $10,000.00 a year in income taxes and other contingencies. He explained that, if the investments comprising the Angus Corporation were behind the loan, that might alter his opinion.

Requested to explain how he had arrived at the figure of $25,000.00, Summers answered that it was by no mathematical computation other than it would be an outright speculation.

He agreed that the notes might have a particular value to the members of the Adam family, particularly the appellant. He observed that there is one peculiar condition on these notes, Viz.: that they are payable to Grampian Corporation only and are not negotiable. According to him, this condition impairs their worth and it would seem that they were drawn so that they could only be used by Grampian Corporation Limited.

Reginald Balfour Ross, President of Columbia Securities Limited and Ross Financial Company Limited, whose business is discounting agreements of sale, mortgages, notes and general financing, engaged in this business in the City of Vancouver for 25 years, testified that the notes exhibit 1 are worthless, because no collateral security is attached to them and because they only bear interest at 1%, which is far below the usual rate on a transaction of that kind. He added as a third reason that the notes were given to an American firm and that there is nothing to stop Adam & Co. Inc. from dissipating all its assets between now and 1959. Ross agreed that he was speaking of these notes as an investment. Asked if he considered they had a speculative value, he stated that, if he was a professional gambler who could afford to gamble $100,000.00, he might take a flyer.

He admitted that he heard the evidence that under the Income Tax Act taxation is levied as if those notes paid 5 % rather than 1% and that this affected his opinion.

In cross-examination, Ross declared that as part of his business he is buying and selling agreements of sale on automobiles and houses and that he also advances money unsecured, but not in the United States.

Asked if he had investigated the responsibility of the maker of the notes in question, Ross replied affirmatively, adding he thought that Adam is fairly well known in Vancouver, that he is not a personal friend of his but that he went to the trouble to check up on him personally.

Requested to say if he thought the notes would be paid, Ross answered that it all depends, seeing that they will only mature in seven years from now. He added that there is nothing to tell that Adam will be here seven years from now.

Reginald Murry Brink, of Vancouver, dealer in securities, testified that he is connected with Pemberton Securities, which have been in business since 1867, and that he has been vice- chairman for British Columbia and the Yukon of the National War Finance Committee for a period of seven years.

Shown the notes exhibit 1 and asked if he had given consideration to their market value as of the date of Mrs. Adam’s death in 1949, Brink replied affirmatively, saying he had given consideration to the market value of the notes at the time of Mrs. Adam’s death in 1949. He declared that he found it very difficult to put a value on these notes, explaining that he approached it from various angles, because his testimony can only be what a possible purchaser or a client might pay for them. He pointed out that he had to be prepared to pay $100,000.00 on income not received. According to him, a sum of $100,000.00 puts a person in a big income tax bracket, if one can speculate to that extent. He repeated that there are very few customers who would buy this security from him.

He admitted that, when talking of a $100,000.00 tax, he realized that would be on the basis that this was the only income on which the appellant was paying taxes. He said that in all probability the appellant would have other income as well, which would increase the amount of $100,000.00; I deem it expedient to reproduce a passage of the witness’ testimony (p. 56) :

" Having decided that there were few buyers and they were going to look on this as a speculation, I then examined the Crown’s estimate of the worth in which, as I understand it, they took a sum which invested at 6% would in ten years accumulate to $675,000.00, giving credit, of course, to the one percent interest which is being paid, and I say such a valuation is very remote from any valuation I would put on it, because to me these notes at best have to be compared not to listed securities, bonds, stocks, and so on, but to things like agreements of sale, automobile financing and the like, and even there, in agreements for sale, the purchasers themselves have a piece of property.

So I started at 15%, worked out the formula that I am not acquainted with, the Makeham one, and in as much as the Crown use that formula, I thought it was appropriate to use it, and I came to a valuation that an amount at the time of Mrs. Adam’s death to be invested to yield 15% would amount to $192,927.83.”

Further on Brink continues thus (p. 56) :

“Then I looked at that figure and had certain qualms about it and wondered if it shouldn’t be 20%, and so for exercise we worked out 20% and that totalled, $150,859.38. Now, Mr. Farris, those amounts, as I understand it, are the figures which invested at 15% or 20% will accumulate from, in approximately ten years, the amount of $675,000.00, but unfortunately in this particular case the purchaser has to add to those amounts the amount of income tax he pays on money which he doesn’t receive. That roughly is $10,000.00 a year, ten years. To be fair I said, what is the present worth of 10,000 a year for ten years, and the figure is just over $70, 000.00 on a present worth basis.

So to be fair, I believe that the value of these notes on a 15% or 20% basis you have to deduct from the figures I gave you approximately $7 0,000.00 ‘ ‘

Asked to what total that would bring it up, Brink answered (p. 57) :

"A. . .—I don’t think this can be an exact science—I added the two together to come to a mean and deducted the $70,000.00 and that, I believe, comes to approximately $87,372.69. Again I have some reservations. I don’t like to give anybody the impression that I can value a thing like this down to the last cent even if we have used cent figures.

The difficulty arises from this, that I have assumed in these figures that in 1949 there was nearly 100 cents on the dollar support for these notes. In this case it was about 105%; but they are not due in 1949, or they are not due in 1952, they are due in 1959.”

The cross-examination offers very little, if any, interest.

John Gustav Larson, accountant and assistant manager of Ernst & Ernst, certified public accountants, for 34 years, presently assistant manager in the Seattle office, asked to describe his experience, declared (p. 60) :

"While in Denver our office would be concerned with the preparation of various Federal State Inheritance and Gift Tax returns and in conferences with the tax representatives of the State and the Federal government and assisting in the settlement and determination of those values, and since coming to Seattle a substantial part of my time has been incident to what is termed estate planning, which involves the determination of estimates of present values of living estates, primarily growing businesses, for the purpose of developing plans of perpetuating the public entity and also for the protection of heirs.”

To the question as to what investigation he made and on what basis he supports it, Larson expressed the following opinion (p. 61):

"A. In connection with the determination, of course, of the value of any shares of a corporation it is necessary to first know the subject of the valuation. If the corporation is to be liquidated and assets realized upon and the capital stock retired and liquidated and the moneys disbursed, then the shares have only a valuation based on the liquidation which to a certain extent involves a forced sale of the assets, and then the retirement of the debts and the payment of expenses on liquidation and winding up the affairs of the corporation, the balance going to the stockholders.

So on an out and out liquidation basis you may have one conception of valuation. The other conception of value is going concern. If a corporation is to be a continuing entity, continue to remain in business, then you have another approach, which approach is the one described in the brochure of Canada relative to the valuation, as they term it, of inactive stocks or stock of closely held corporations, in which the brochure states that the valuation should be predicated upon the company’s net worth, which is the assets, its earnings, its dividends and all other relevant factors.’’

Asked if he is referring to the explanatory brochure issued by the Department of National Revenue, Taxation Division, a copy whereof was filed as exhibit E, Larson answered affirmatively.

He pointed out that there are two references on page 28, one at the top of the page, reading thus:

"‘Inactive stock and stock in a close corporation is valued on the basis of the company’s net worth, earning and dividend paying capacity, and other relevant factors bearing on the value of the stock.”

Further on, to counsel’s observation that he spoke of a going concern, Larson declared (p. 63) :

‘ " If the shares were not traded in—and obviously that is the case here—and no offers, then, as indicated in the brochure, by considering the factors enumerated, what you come up with is the construction of a hypothetical fair market value.”

To the question as to whether his opinion supports the statement contained in the brochure Larson replied affirmatively, adding (ibid.) :

"‘Yes, because it is exactly the experience over these many years with the United States estate tax law as well as the State Inheritance Tax Laws of all the States in the United States. This is the uniform method of evaluation when it comes to shares of inactive or closely held corporations; the same approach is used. So for that reason the fact that this is in Canada and I am from the States doesn’t present any special problem or any new problem. The Department, as I understand it, purported to value the Grampian shares by including the $675,000.00 of unsecured notes of Adam & Co. to September, 1949, payable Canadian funds, bearing one percent interest, at an amount of $420,000.00 and that is the value of March 28rd, 1949, assuming six percent is the approximate rate of return for these notes and that the entire principal will be paid at the maturity date.’’

Larson stated that, since Grampian is a personal corporation under the Canadian laws, the earnings are taxed in the hands of the individual members. From this he drew the conclusion that the earnings are synonymous with dividends and that the shareholders are primarily concerned with two factors, namely, the income derived from the shares and the underlying value of the assets.

Further on Larson added (p. 64) that "‘in general the broad experience is that dealing with the agents of various departmental bodies and from reading the decisions in equal courts substantially equal recognition is given to the two factors, to wit : income and underlying value.’’

Larson explained that this approach is used because it meets quite uniformly the tests applied. He continued in saying that the other factor is the dividend paying capacity, but observed that in this case dividends and earnings are synonymous, qualifying his version thus (ibid.) :

"The money must be in large corporations where they may not have any quoted market but where you determine the value of your underlying assets you determine your earnings and the dividend policy has been a reasonable one and not controlled by a small group who desired to retain the earnings but who followed a liberal and reasonable policy, then frequently the taxing agency and the courts will give equal weight to the three factors with the result that the underlying value of assets has only one third weight, earnings one third and dividends one third, which means in effect that the earning phase generally is accorded two-thirds weight and underlying assets only one third on the basis that a person lives on his dividends and he can’t pay any grocery bills with underlying values; you can’t do much about it to live on. The department has revised the network of 720 shares of Grampian Corporation to the figure of $1,175,172.30, and in so doing has included the notes of Adam & Co. at $420,000.00 and this amount was based on taxing the notes to allow for a six percent return. That return in my opinion is not applicable in the light of the following relevant factors and to an extent this is largely duplication of what has been said already.’’

Requested to explain this in his own words, Larson declared (p. 65):

"‘Because of the absence of security or endorsement, the extremely small amount of common stock equity in Adam & Co. Inc., there is no likelihood of Adam & Co.-increasing its common stock equity because of the personal holding company status under the Internal Revenue code of the United States.’’

Larson asserted that he was familiar with the law and observed (p. 66):

"‘A. In the first place both Adam & Co. Inc. and Angus Corporation

have been classed as personal holding companies under Section 501 of the Internal Revenue Code.

A. It means that where five or more individuals and each individual including the entire family or a company where roughly 50% or more income is derived from interest dividends and investment sources that it becomes in effect an incorporated pocketbook and is akin to individual holdings or investments of that person or small group of persons, and to discourage that set-up where incomes might be regained or accumulated in a group and not disbursed as dividends, the United States government imposed this personal holding company tax. The personal holding company tax is 75% on the first $2,000.00 and 85% on the entire amount in excess of $2,000.00 which obviously becomes a penalty prohibitive. The tax applies to the undistributed income.”

Larson declared that, if a company wishes to escape the tax of 75% or 85%, as the case may be, it must distribute all its income in the year in which it comes in. He admitted that there is a variation in the case of capital gains: the personal holding company tax rates do not apply but only the regular corporation rates. He observed, however, that in the case of the company involved, only the latter rates apply, but that, in the case of both the companies involved, since they are dealing with investments, it is quite obvious that the nature of those investments are all stock-in-trade and, therefore, the income is ‘‘ordinary income” and not “capital gain’’.

He added that one has this amelioratory provision that, if within the year the dividends have not been sufficient to fully absorb the earnings, the company must, within two and a half months, pay an additional dividend and have it count, but that this additional dividend, in order to apply, cannot exceed 10% of the dividends already paid within the year. He concluded that it gives a very narrow margin within which to avoid the payment of the personal holding company taxes.

He admitted that from the information given in Court both Angus Corporation and Adam & Co. Inc. come within the provisions of Section 501 and that, accordingly, they have, in order to avoid the payment of these taxes, paid each year dividends, before the end of the year, in amounts which have been as close to the expected earnings but slightly exceeding them, so that no amount would be subject to even the minimum 75% rate.

Larson agreed with the statement of a previous witness that a company of this kind may have its assets reduced but that, in the normal course of events, it cannot increase them.

He said that the other factor was that the Canadian funds, when the loan was made, averaged 91.7 and that the payment is required at par, which may cost more than 91.7, since on March 23, 1949, the rate was 94, adding that what the rate may be in 1959 is anybody’s guess.

Asked if it is his opinion that the prospective purchaser of the shares in question in 1949 would take into consideration the possibilities indicated, Larson answered (p. 69) :

"‘I would say that would be obvious in that the small equity behind Adam & Co. Inc. would preclude the accumulation of a so-called surplus reserve, or whatever term you want to use, which would be necessary if exchange goes back to par. There is roughly an eight point spread and on $675,000.00 that is something over $50,000.00. They would need to have accumulated 50,000 dollars surplus in order to make payment at par if exchange was at par in 1959, but under the Federal personal holding company tax law there is no way of ever accumulating that, because 75% of that or 85% of that accumulation would have to be paid in taxes.”

To the question as to whether an American investor in 1949 would consider the possibility that it could go the other way, as it went when the exchange is 4% against the United States, and that might be construed as indicative of the direction, Larson replied affirmatively.

Asked if, supposing he was advising an investor in 1949, he would consider these eventualities as something the latter ought to take into account, Larson answered that, as an accountant, he would recommend to go to someone more versed in financial matters than he is personally.

He added that these are some of the risks to be weighed and, to meet them, they should return a rate of substantially in excess of 6%. Further on the witness added (p. 70) :

"‘These are some the risks to be consider and to meet the risk should return a rate of—substantially in excess of 6%. I am not placing myself in the position of saying what that should be, but going on information that had been indicated by Mr. Brink that he would consider that, based on the nature of that investment 15% would be the minimum return, I have used a 15% factor in lieu of the six, and have substituted $193,000.00 as the amount in lieu of the $420,000.00, and making no other change in the department’s figure of $1,175,172.00, it produces $948,172.30 as being the fair amount for Grampian’s net worth applicable to the 720 shares. That is the conclusion of the asset or net worth discussion. ’ ’

Larson declared that, from 1940 to 1949, the net income of Grampian Corporation was fairly uniform, ranging from a low of $21,900.00 to a high of $27,700.00 and averaging $25,249.59. He added that this amount of $25,249.59, being the average earnings of Grampian Corporation for the previous ten years, may be considered as a reasonable basis for computing the income in the future.

Larson said that then the point comes up about Section 19(1) of the Income Tax Act and the fact that the Income Tax Department has applied that section in revising the income of Grampian to include $27,000.00, which is 4% on the $675,000.00, thus increasing Grampian’s income, since the latter, as a personal corporation, has spread the total income thereof to the shareholders and thereby imposed the tax to the individuals on the $27,000.00 so called interest but not received. Larson estimated that this has a material bearing on the earnings a shareholder will receive on any investment in Grampian. He added that it relates of course not only to the present shareholders but to any outside purchaser of the shares, because it applies to Grampian so long as any of the obligations come and notes are outstanding.

Larson here concluded that anyone who is a shareholder in Grampian has his income increased by $27,000.00 or such portion thereof as is applicable to the shares which he holds. He added that, on the basis of a single shareholder in Grampian who has no outside income, the effect is that the $25,249.59 average earnings is increased by $27,000.00, to a total of $52,249.59, and the applicable tax rates to a single shareholder in 1949, under Section 31(1), totals $22,897,06, which, deducted from the actual income of Grampian of $25,249.59, leaves a net earning, after payment of taxes, of $2,352.53. He stated that this is all which would be left to live on if a person’s entire income was derived from the ownership of Grampian shares,

Larson declared that, if the same amount of income, to wit, $25,249.59, were derived, and if the sum of $27,000.00 was not added to taxable income, the tax would be $8,784.60 and that the tax that would be paid of $22,800.00 plus and $8,700.00 plus represents the difference of $14,112.46 which is the additional tax due to the inclusion of $27,000.00 in income, which $27,000.00 is not received, and that, therefore, under those suppositions that $14,000.00 plus would have to be deducted from the Grampian earnings, leaving a net earning of $11,137.13 a year for the purpose of valuating the shares based on earnings.

Larson further stated that applying to this realistic earning of $11,137.00 a 6% return as a basis for the capitalization of earnings, to arrive at the value of a company based on earnings, could produce a valuation of $185,116.83.

The witness observed that, as previously stated, it is appropriate in a going concern to give equal weight to the two factors of net worth and earnings. He concluded that the figures developed so far is a net worth or asset value of $948,182.30, a valuation based on earnings of $185,618.83, or an average value of $566,895.57 or a per share value of $787.35.

He further asserted that a valuation based on earnings is not as simple as stated here, because the impact of Section 19(1) is greater than is indicated and this presupposes that one individual owns all Grampian shares and that it is the only income he has.

He summed up his version in saying that, in other words, the taxpayer started with no income or that he had income before which was based on assets of which he disposed and had used the proceeds to buy Grampian Corporation shares.

According to him this produced only $2,353. a year on which to live after payment of taxes, which, in his opinion, is insufficient to provide a living.

He reached the conclusion that anyone who owns Grampian shares would have to derive a substantial amount of income from other sources.

The balance of the main examination is unfortunately, in my opinion, mostly, if not only, argument instead of a mere recital of the facts ; I do not feel inclined to deal with it any more.

In cross-examination, asked if the shareholders must accept the dividends, Larson replied (p. 77) :

"A. Under the consent dividend route it is possible to leave

the money in the company, not pay the dividend, but our experience has been so far that we do not recall of a single instance where a company has used the consent dividend route because in practice it isn’t workable because if you consent to leave your money in the business and wish to keep in the personal tax rate of 60% or 70% you are responsible to pay the taxes unless you actually get the dividend. So the practical answer is that while you have an out you can use you have to have the money in order to pay the tax and therefore you have to pay the dividend.

Q. But it is optional, it isn’t compulsory ?

A. That is correct. It is for that reason we say the practical effect due to an 85% tax is that you pay the dividend— and you don’t even go the consent dividend route because if you do you usually can’t pay the tax unless you get it.

(Witness aside).”

Lionel Pelham Kent, chartered accountant, of Vancouver, associated with Riddell, Stead, Graham & Hutchison for a period of some 21 years, testified that he had not investigated the affairs of Grampian Corporation, but that he had seen the balance sheets of the Company and of Argus Corporation for the three years ending August 31, 1948 and 1949. He declared that he had, from time to time, during his professional practice, been called upon to value the shares of closely held corporations.

He said that he had not had occasion to value promissory notes otherwise than to consider their worth from the point of view of inclusion in the balance sheet of going concerns, such as banks, trust companies and financial companies.

Counsel here intimated that this brings us to the question of valuation of the notes exhibit 1, signed by Adam & Co. Inc., and asked the witness how he would proceed to appraise them ; Kent answered thus (p. 79) :

"A. I would consider first the financial position of the maker

of the notes and from a study of the financial position of the maker of the notes determine the present position of their ability to pay.

Q. The basis of our valuation must be, as you know, the date of Mrs. Adam’s death, March 23rd, 1949? A. Yes.

Q. In order to evaluate those notes as of that date what do you require and on what would you base your valuation? A. I would consider the financial position of the maker of the notes as at the date of death. ’ ’

Kent admitted that he had before him the balance sheets of Adam & Co. Inc. for the periods ending February 28, 1945, February 28, 1946, February 28, 1947, February 28, 1948, and February 28, 1949 ; according to him all these documents are included in exhibit 3.

After examining these balance sheets, Kent stated that they all represent a very similar financial position, that the deficit as it appeared on February 28, 1945, in the amount of $3,904.60, had increased by a slight amount from 1945 to 1948, this amount being something over $200.00 in 1946, and that, for this reason, he was told that Adam & Co. Ine. found it advisable to pay out the largest portion of its earnings during that period, adding that in fact it slightly exceeded the payment in dividends of its earnings.

Again looking at the balance sheet, Kent pointed out that the assets represented therein as at February 28, 1948, do not materially differ from the assets of the balance sheet as at February 28, 1945. According to him the investment had gone up slightly and cash in the bank was correspondingly lower.

Kent went on to say that, turning his attention principally to the balance sheet as at February 28, 1949, and analyzing it in some particularity one finds cash balances on hand and at bankers $25,564.41, a small item of prepaid rent $79.40, promissory notes receivable $7,500.00, long term loans, unsecured, $715,000.00, mortgage $25,000.00, investments at cost of which $25,830.00 represented marketable investments, which at that time had a value of $21,075.00, and other investments with no quoted market value of $59,390.61, making a total investment of $85,220.61. He also mentioned furniture at $538.65 and an estimated value of exchange memberships of $1,500.00, presumably at cost of $5,000.00.

Counsel’s conclusion was that there was one asset in that balance sheet the soundness whereof is very material in any assessment of the financial position of Adam & Co. Ine. He observed that of course the cash in the bank speaks for itself, which, I may say, seems elementary. He added that the promissory notes receivable, according to the evidence, were considered good and that the mortgage was considered well secured.

He observed that there is a diminution of approximately $4,665.00 between the cost of the marketable investments and the quoted market value at that time. He said he could not form an opinion as to the value of an investment, of no quoted value, of $59,396.61, but that, in relation to the sum total of the assets amounting to $863,000.00, it is not sufficiently material to have a bearing.

He concluded in saying that the whole question is wrapped up in whether the long-term loan, unsecured, of $715,000.00 is considered good. Kent agreed that this is the indebtedness of Angus Corporation.

He noted that he had two balance sheets of Angus Corporation marked as exhibit 5, one as at August 31, 1948, and the other as at August 31,1949. He pointed out that the position reflected by those balance sheets is not materially different, that the deficit as at August 31, 1948, amounted to $813.80 and the deficit as at August 31, 1949, to $1,352.46, to wit : an increase in the deficit in a sum slightly in excess of $500.00.

He observed that Adam declared at the morning session that the position as at the date of death would be approximately that represented by the balance sheet as of August 31, 1949, or August 31, 1948, or midway between the two. Kent stated that there is not anything of material difference in the two balance sheets and that, accordingly, he will proceed to devote his attention to the ‘balance sheet of August 31, 1949. He noted that, in this balance sheet, there is cash on hand and at bankers of $253,300.06 and that there are investments at cost of marketable securities of $442,717.29, on which the quoted market value at August 31, 1949, amounted to $482,738.50. At this point Kent declared that he would like to lay stress on one factor, which, he noticed, was quite a material difference in the quoted market value of securities as at August 31,1948, because of investments of $442,169.69, which is almost the same figure as the investments at cost on August 31, 1949, had at that time a quoted market value of $447,853.00, which was in excess of cost indicated on the balance sheet of August 31, 1948.

Kent concluded that, without a detailed listing of these marketable securities, it would not be possible to say whether as at February 28, 1949, the quoted market value of those "‘self-same securities’’ would have been above or below the cost. He continued in saying that, as he had pointed out, the securities in question were above cost on August 31, 1948, and their market value was the low cost in 1949.

Concluding his hypothetical evidence Kent made the following observations (p. 84) :

" . . . So that having in mind the fluctuation in value shown by the two balance sheets it might be reasonable to assume that their value as at February 28, 1949, could be taken at cost and the fluctuation one way or the other would be comparatively small. The accounts receivable amount to $4,748.50, which I think we were told in evidence this morning was considered collectable, and the prepaid interest $381.94. Turning to the other side of the balance sheet of Angus Corporation the only liability outside the long term loans were Federal taxes estimated at $512.11. Reviewing that balance sheet I couldn’t by the widest. exercise of discretion term the Angus Corporation as being insolvent. They had on hand $253,000.00 to meet current liabilities of $512.00; and as I understand the word insolvency, it is that a corporation hasn’t sufficient funds to meet its debts. So that I couldn’t describe the Angus Corporation as being insolvent as at August 31, 1949. My analysis would lead me to the conclusion that the Angus Corporation as at that date stood possessed of assets of sufficient value to meet its liabilities. So, therefore, reverting back to the balance sheet of Adam & Co. Inc., I would consider the asset of $715,000.00 owed to Adam & Co. Inc. by Angus Corporation as being a sound asset as at that date.”

Requested to reiterate his opinion regarding the value of the notes, Kent expressed himself thus (p. 85) :

"‘I have been discussing the notes from Angus Corporation, payable to Adam & Co. Inc., and my opinion would be that as at February 28, 1949, the loan of Adam & Co. Inc., was owed by a company that had the resources at that time to meet the indebtedness.”

Kent noted that, at the time of the adjournment on the previous day, he was discussing the financial position of Angus Corporation as shown in the balance sheet of August 31, 1949, and that he had expressed the opinion that at the date of the latter Angus Corporation was in a position to meet its obligations, both current and at long-term.

Kent added that this brought him back to the consideration of the balance sheet of Adam & Co. Inc., because it was only necessary to refer to the balance sheet of Angus Corporation for the purpose of forming an opinion as to whether the $715,000.00 loan shown on the balance sheet of Adam & Co. Ine. as of February 28, 1949, represented an asset backed with sufficient securities.

Kent expressed the opinion that the long-term loan of $715,000.00 appearing in the balance sheet of Adam & Co. Ine. as at February 28,1949, ws at that time unimpaired. He claimed that it was necessary to consider the ability of Adam & Co. Ine. to meet its liability as at February 28, 1949, and arrived at the conclusion that the current liabilities amount to $15,729.00 and that there is more than sufficient cash on hand to pay them.

The next question which Kent thought fit to consider was the ability of Adam & Co. Inc. to meet its long-term liabilities of $802,304.00. He believed that as at February 28, 1949, Adam would have had sufficient assets to meet the long-term liabilities ($802,304.00).

He said that the notes payable on February 28, 1949, totalled $802,000.00 and concluded that on this basis only a further sum of $10,000.00 would have to be realized from the investments of no quoted market value.

Kent naturally concluded that, presuming that at least $10,000.00 would be realized from the investments of no quoted market value, there were sufficient assets on hand as at February 28, 1949, to meet the long-term liabilities.

Kent summed up his testimony by saying that the balance sheet as at February 28, 1949, reflected a position of unimpaired credit and that, if he was considering the value thereof, he would place those notes on the balance sheet at the quoted cost figure and that he would not consider it necessary to make a provision as at that date for any loss that might be occasioned upon their realization.

Requested by counsel for appellant to repeat what he had said, Kent naturally reiterated his statement (p. 103) :

"‘I said, Mr. Farris, that if I was considering those notes as at February 28, 1949, in the balance sheet of a company based on the facts and figures that I have just recounted, I would not have considered it necessary to make any provision for prospective loss on realization of those notes. ‘ ‘

Kent declared that he had no further comments to make on the balance sheet and that what he had said was his assessment of the financial position reflected by Adam & Co. Ine. as at February 28, 1949, and its ability to meet the notes payable on that date.

He pointed out that the notes payable to Grampian Corporation amount to $675,000.00 in Canadian funds and that it is obvious from the balance sheet that $200,000.00 were owing to some other person, namely Kintyre Corporation. According to Kent, the balance sheet exhibit 4 reveals the impairment of share equity of Adam & Co. Inc.

Kent agreed that exhibit 4, headed "‘Share equity of Adam & Co. Inc.”, is a statement made by Adam.

He said that the share equity is reduced by a sum of $9,978.79, which represents a decrease in market value, as compared with cost as at August 31, 1949, of Angus Corporation.

Kent declared that he referred to the balance as at August 31, 1949, which shows the market value of the investments in August as being in excess of the costs as reflected by the balance sheet. He added that, even taking the statement of the share equity of Adam & Co. Inc. at its face value, it still does not represent an exhaustion of the share equities in Adam & Co. Ine. His conclusion is that, even taking the statement on its face value, these companies had sufficient assets on that date to meet their liabilities.

Kent stated that he has in front of him copy of an Act respecting the control of the acquisition and disposition of foreign currency and that of transactions involving foreign currency for non-residents. He acknowledged that, according to the evidence he heard, Adam & Co. Ine. is a company incorporated in the State of Washington, in the United States of America. To the question as to whether Adam & Co. Ine. would be a nonresident, Kent answered (p. 107) :

Prima facie, yes, Mr. Long. There may be certain peculiar circumstances of which I am not aware which would make such a company classified not as non-resident. But I am not aware of any such qualification existing.’’

Referring to 10 George VI, c. 53, Section 33, Kent read an extract thereof as follows (ibid.) :

.‘Without restricting the generality of any other provisions of this Act, no resident shall, except in accordance with a permit, either in Canada or elsewhere,’ do any of the following things. There is (a), (b) and the particularly pertinent clauses are

‘(c) Release or fail to take reasonable steps to acquire or

recover from a non-resident any property or any right, title or interest in or to any property to which the resident is or may be entitled’; and

‘(d) Grant an unreasonable extension of time for payment

of any debt owing by or any claim upon a non-resident or fail to take reasonable steps to collect any such debt or to prosecute any such claim’; and

(f) Accept satisfaction of all or any part of any debt, claim or other obligation owing to the resident by a nonresident or of any other claim by a resident upon a non-resident otherwise than in the currency in which such debt, claim or obligation is expressed or was incurred’.”

In cross-examination Kent stated that Adam was wrong in his statement insofar as the Act provided that a transaction of that nature could only be carried out under a permit issued by the Foreign Exchange Control Board. He explained that he is relying as his authority on the Statute of 1946 which forms the regulations introduced in war measures No. 2. According to him, they were first enacted in 1939, very substantially in the same form as the Statute.

Kent admitted that, on the previous day, he heard Adam stating that the Foreign Exchange Control Board asked for and received each year copies of the profit and loss account and the balance sheet of Adam & Co. Ine. He said he knew of no steps taken by the Control Board inconsistent with what Adam did.

He admitted that the only item which he challenged was $69,978.00 and that Adam did not know the nature of these marketable securities.

To counsel ‘s intimation that his evidence is entirely one of conjectures, based on the balance sheets of August 31, 1948, and August 31, 1949, and the comparative positions shown therein, Kent answered (p. 110):

"‘They were predicated, as I stated, sir, on the basis of the balance sheet and on the basis of Mr. Adam’s evidence, where he stated that the position would not have materially differed as at that time, February 28, 1949, from the position as shown on those balance sheets.”

Kent owned that all his testimony has been confined to the solvency of the said companies at the date of the balance sheets in 1949.

Regarding the prospective financial position of these companies in ten years Kent admitted that he had offered no opinion.

Asked if there is a direct relationship in business circles in regard to investments between the amount or the prospective amount of the return of the hazard involved, Kent answered that, as a general statement of theory and practice, he agreed with counsel.

As to the answer he gave regarding Angus Corporation about the $9,998.00, that there was a minority interest involved, Kent observed that, while voting, the minority interest had a control insofar as the ownership interest was very small, being one to nine.

Kent agreed that the minority interest consisted of preferred stock and that it was governed by the terms of issue of the preferred stock. He explained that sometimes they are preferred to dividends and sometimes to capital, adding that usually they are preferred to capital in any distribution.

Joseph Collin Adam, recalled for further cross-examination and asked if he had the Angus Corporation balance sheets of 1949 in front of him, answered affirmatively and specified that, in the liability column, there is a long-term loan of $710,837.50, which he believed was owing to Adam & Co. Inc. He said he thought that this amount represented the loan from Adam & Co. Inc. to Angus Corporation and that the sum of $710,838.50 was the total loan from Adam & Co. Inc. to Angus Corporation, but admitted that he could not swear to that. Later on Adam added that he was not sure whether it was $715,000.00 or $710,000.00.

The witness specified that he believed that Adam & Co. Ine. had left some money to another concern. The evidence of Adam in this connection was vague and lacking in precision; I consider it advantageous to cite a few extracts. On page 114 of his deposition we find, among others, these statements:

"‘Q. In their ‘assets’ column, ‘long-term loans—unsecured— $715,000.00’?

A. Yes.

Q. How much of that was left to Angus and represented there on that $710,000.00 ?

A. I could not swear to that but I think—

Q. And that was lent contemporaneously with the advance received from Grampian?

A. Yes, from other people from time to time.

Q. Yet Grampian paid to Angus; Angus paid to Adam? A. Not necessarily.

Q. Paid as a contemporaneous loan?

A. Somewhat, yes.

Q. What do you mean?

A. Adam & Co. probably lent money to other people, too.

Q. Yes, but the $675,000.00 that was lent by Grampian to Adam was immediately turned over to Angus? A. That was part of the loan to Angus.

Q. Yes, at the same time?

A. Part of it, yes.

Q. $675,000.00 ?

A. I could not swear to the exact figure.’’

Adam repeated that the directors of Adam & Co. Inc. in 1949 were himself, W. Spence and Clifford Hoof and that they are still directors. According to him, Hoof and Spence are also directors of Angus Corporation but not of Grampian Corporation and Kintyre Corporation.

Adam admitted having discussed with George Ovens the statement of Kintyre Corporation, which is his own business. He acknowledged that he had to distribute all the earnings of Adam & Co. Ine. each year, less their expenses.

He supplemented his answer by saying that the net dividends had to be paid after payment of 15% tax and that the Foreign Exchange Control Board looks after this.

Adam agreed that the dividends of Adam & Co. Inc. amounted to $3,168.37.

He summed up his testimony by saying that Adam & Co. Inc. paid Kintyre Corporation $3,168.37 in dividends and $2,000.00 interest, totalling $5,168.37.

Adam asserted that the item of $2,000.00 is not a dividend but that it is interest. He specified that the net dividend is $3,062.76 in American funds. I deem it convenient to quote an extract of Adam’s testimony (p. 118) :

"‘Q. Asking the same questions for the year ending January

31, 1947, Kintyre received interest of $2,000.00 from Adam & Co. Inc.?

A. That is right.

Q. And net dividend of $4,921.55?

A. That is right.

Q. And the succeeding year, ending January 31, 1948, Kintyre Corporation received interest, $2,000.00? A. That is right.

Q. And net dividends of $6,547.98?

A. That is correct.

Q. And for the year ending January 31, 1949, Kintyre received loan interest of $2,000.00 and net dividends from Adam & Co. Inc. of $7,942.06?

A. That is correct.’’

Adam stated that he had not the incorporation papers of Angus Corporation and that he was unable to tell the exact date of its incorporation. He believed, however, that it was either in August or September, 1939. It may be convenient to quote a passage from his re-examination by counsel for appellant (p. 120) :

"‘Q. Mr. Adam, some evidence has been brought out; so

we might as well clear it up in full, about the loans from Kintyre.

A. Yes.

Q. And Adam?

A. That is right.

Q. Just tell us what that transaction was. There was $200,000.00—was it?

A. Yes. It was a loan on the same terms to Adams & Co. Ine. as Grampian loaned the Money to Adam & Co. Ine. One was exactly the same as the other.

Q. Yes. In the one case the loans were— A. from my personal company.

Q. —from your mother’s company, and the other was from your compan ?

A. That is correct.’’

George Ovens, chief valuator for the Department of National Revenue, Succession Duties Branch, since February 1945, testified that he is a certified public accountant in the Province of Ontario.

He said that he has been with the Department of National Revenue as a valuator since February 1945, continuously, except for a period of a few months, while he was an auditor for another Government department.

He stated that he supervises the valuation of all securities, particularly private company succession duties for Dominion succession duty purposes, adding that within this scope are included bonds and stocks, notes and shares.

Ovens declared that the valuation of the Grampian Corporation shares was made by Allison under his personal supervision, that he checked all important phases thereof and kept very close contact with it from the very first day it came into his office.

Ovens said that he had a copy of the brochure referred to on the previous day and thought that at page 28 appears the portion thereof mentioned by Larson; he believed that the latter suggested to average the book and earning values, summing up his version thus (p. 124) :

"‘Q. Now, will you look at that brochure that was read by

my learned friend Mr. Farris to the court. Have you it in front of you there?

A. Yes, I have, the explanatory brochure of the Dominion Succession Duty Act, the following lines read, ‘Inactive stock and stock in a close corporation is valued on the basis of the company’s net worth, earning and dividend paying capacity, and other relevant factors bearing on the value of the stock’. I would like to emphasize, ‘and other relevant factors bearing on the value of the stock’.”

Further on Ovens added (ibid.) :

‘*. .. I would like to point out that in considering the relevant factors as related to the valuation of shares in Grampian Corporation Ltd. the predominant factor seemed to be that we were dealing with a controlling interest.

Q. Yes?

A. A controlling interest, and where a controlling interest is being valued, where the owner of the controlling interest has the right to wind up, the predominant factor in valuation is the company’s net worth, because the company’s net worth or the revised net worth can be obtained at will.

Q. The power to liquidate?

A. The power to liquidate.”

On counsel’s intimation that Ovens should come directly to the valuation of the Grampian shares the witness made these comments (p. 125) :

66 Well, as I stated earlier in my testimony, my duties required me to supervise the valuation of 720 no par value shares in the Grampian Corporation, owned by the deceased person, Margaret Hannah Adam. Now, the basis of the evaluation required under the Dominion Succession Duty Act is fair market value. It was therefore necessary for me to establish the fair market value of the shares, the controlling shares of Grampian Corporation held by the deceased. Now, the shares of this company are not listed on any stock exchange nor regularly quoted in an established market. It was therefore necessary for me to use our usual methods, that is, the department’s usual methods of valuing shares of a private company for which no quoted market price exists.’’

Ovens then expressed the following opinion (p. 126):

"‘Q. . . . Now, the company Grampian, if I may use the word

Grampian to save time.

A. Describes itself in its income tax returns as an investment holding company. I made an analysis of its financial statements for a number of years, and I was convinced that this in fact was the case. The company’s income was derived mainly from interest and dividends on investments. It did not appear to be in the business of trading investments. Only occasional purchases and sales of securities were made. In view of the nature of the company and its operations I used a revised book valuation basis of calculation in making my fair market value calculation. That is to say, the fair assets of the company were valued at their fair—. The separate and individual assets of the company Grampian were valued at fair market value, and the resultant revised book values were used in calculating the fair market value. And the resultant revised book values were used in calculating the fair market value of the shares of Grampian Corporation Ltd. Have you got that all, sir?

Q. Yes.

A. Now, I may say that this is the method consistently adopted by the Department and to my knowledge by other taxation jurisdictions in Canada in valuing shares of private investment holding companies when control of the company is being valued. To the best of my knowledge as the result of my observation over a number of years it is used consistently by other estate representatives when calculating the value to be placed on the shares of a company of this nature. I have never used any other method in such a valuation, nor have I seen any other method when the entire controlling block of shares is being valued.’’

After some discussion between counsel and witness the balance sheet of Grampian Corporation Limited, in connection with the latter’s book value on March 23, 1949, showing a value per N.P.V. share of $1,632.18, was produced as exhibit A.

Asked to proceed, Ovens made this statement (p. 129) :

"‘The estate representatives submitted to the Department a revised balance sheet of Grampian Corporation Ltd. as at the date of death, and comparing my valuation of the individual assets of Grampian Corporation Ltd. with the valuation of the individual assets on the statement filed by the estate representatives, I find a certain amount of agreement and I find a certain amount of disagreement.”

Regarding the cash in bank Ovens declared (ibid.) :

“. . . I accepted that at the value suggested by the estate itself, and the Bank of Montreal is $2,899.75; the Bank of Nova Scotia current $22,003.14. I agree with the Estate. Bank of Nova Scotia savings $2,414.48, again in complete agreement. National Bank of Scotland current expenses $5,547.02. National Bank of Scotland blocked expenses $2,981.27. In other words there was complete agreement between the estate representatives and myself in the valuation of the cash in banks.

Well, to proceed from the cash to accounts receivable, the next asset of Grampian Corporation Ltd. was a small account receivable in the amount of $3,534.00, owing by Adam & Co. Inc., Seattle. Again complete agreement between the Department and the estate representative of the valuation of that account receivable.

The next account receivable, a substantial item, $198,868.15, owing to Grampian Corporation Ltd. by the deceased person, Margaret Hannah Adam. The estate in their valuation filed and submitted that at full value in which I agree also, as that amount was declared as a liability of the estate, and obviously if there was any change in the valuation amongst the assets of the deceased, it would also have to be changed in the liabilities of the estate. So there was complete agreement in that valuation, my lord.’’

Ovens admitted that, to proceed from accounts receivable, he took all the items enumerated out of the balance sheet of Grampian Corporation and he said that, among the remaining assets, he had a certain amount of dispute, describing it as follows (p. 131) :

‘Sterling securities’ were declared by the estate to have a value of $149,938.37. The department revised that valuation to $156,614.34. And after some representations between the department and the taxpayer’s representatives agreement was reached that the department valuation was acceptable.’’

The witness then added:

1 " Next, what the estate representatives have termed ‘Canadian securities’ and declared to that a value of $232,749.90. That declared valuation was revised by the Department on the basis of market quotations to $238,937.12. That increased valuation of the department remained under dispute for some time, but it is my present understanding that it is not under any issue and that the department’s increase is acceptable.??

Dealing with a small item of accrued interest of $3,402.47, Ovens stated that it coincides exactly with the estate’s valuation and sundry loans of $121,920.00, in which the Department of National Revenue agrees with the estate’s representatives, the only individual asset remaining in the collective assets of Grampian Corporation being the loans with the principal value of $675,000.00 owing to Grampian Corporation by Adam & Co. Ine.

Ovens added that it is his understanding that this is, in relation to the individual item, the only outstanding dispute and that, needless to say, he thinks it is the major item in dispute.

As to how the notes in dispute came into existence, Ovens gave this explanation (p. 132) :

“In the year ending the 31st of January, 1940, the Grampian Corporation Ltd. loaned to Adam & Co. Ine. an amount of $675,000.00. This loan was apparently made in cash; since Grampian had cash on hand and in the bank as at the 31st of January, 1939, amounting to $839,030.28; whereas at the 31st of January, 1940, cash on hand and in the bank amounted to only $78,610.25.

I don’t know what security, if any, was taken at the time this loan was made. The loan apparently remained outstanding for some considerable time ; then, on the 13th of September, 1934, Adam & Co. Ine. signed seven promissory notes totalling $675,000.00 in favour of Grampian Corporation Ltd. The notes were payable 15 years after date and bore interest at 1% per annum. These are the notes, the valuation of which is one of the main points at issue in this appeal.”

Ovens declared that in computing the present value of the notes he used the Makeham formula referred to in Brink’s testimony. He considered the Makeham formula the recognized standard form adopted by the Department of National Revenue, because, to the best of his knowledge, it is the most accurate one.

Ovens stated that the Makeham formula is used for calculating the present value of a sum of money receivable in the future. He added that he checked it with more simple methods and that it was confirmed within reasonable amounts.

According to him the main factor affecting the market value of a note is the amount of security it involves. He added that the notes of Adam & Co. Inc. have no specific security behind them, but that in the general relationship of creditor and debtor the holder would have, along with others, a general claim on all the assets of the company. This declaration, I may say, seems to me fair and reasonable.

To the question as to what are the assets on which these notes will have a claim Ovens answered, inter alia (p. 134) :

66 An examination of the balance sheets of Adam & Co. Ine. dated February 28, 1949, in my opinion indicates there was adequate equity for the face value of the notes, and more than ample equity for the department’s valuation of $420,000.00. The assets of Adam & Co. Ine. as at the 28th of February, 1949, according to the balance sheet of that date, were as follows—and I might say that rather than taking exact figures down to a few cents, I brought it to the nearest round amount, which is easier to talk about and deal with. The assets were of Adam & Co. Inc. at the 28th of February, 1949, cash of $25,500.00—if there is any dispute as to the relativeness of my accounts, please let me know—promissory note $7,500.00; a long-term loan unsecured, $715,000.00; a mortgage $25,000.00; marketable securities at the stated market value from the balance sheet $21,000.00; unenlisted securities with a book value of $59,400.00 ; New York memberships, estimated value, $1,500.00.”

Ovens added that he asked one of the estate’s representatives to furnish him with a list of the marketable securities and of the unlisted ones, but to no avail.

Oven believed that Adam & Co. Inc. owns 810 out of 900 of the issued shares of Angus Corporation, explaining that he obtained this information in a letter received from one of the representatives of the estate. He added that he also had conversations with the latter’s representative.

Ovens observed that, since the major asset of Adam & Co. Inc. consists of long-term loans owing by Angus Corporation, one must give consideration to the balance sheet of the latter. He continued thus (p. 136) :

According to the balance sheet dated 31st of August, 1949, and which I understand would not be substantially different from the same company’s balance sheet at the date of death, the assets of the latter company at that date were as follows, again the figures in round amounts: cash on hand and in bank $253,300.00 ; marketable securities at the state of market value, $432,700.00; unlisted securities, book value, $18,850.00; accounts receivable, $4,478.50. Thus with the exception of a small amount, it can be seen that the assets of Angus consisted of cash or the equivalent of cash; so that I think it is safe to say that the notes owing by Adam & Co. Inc. are represented to almost 100% of face value by cash or marketable securities held either by Adam or Angus and certainly our valuation, the department’s valuation of $420,000.00 is represented by more than 100%, to more than 100% by cash or the equivalent of cash.

I therefore submit that the notes owing by Adam & Co. Inc. are fully represented by good assets, and that consequently there is no need of a discount from face value because of the reason only of a lack of security.”’

Ovens explained that he would like to emphasize that point and that he thinks there is no discount of the face value of the notes because of the lack of security. He added that the other main factors to be considered in the valuation of notes such as the ones in question are: 1° the yield rate to be realized by the investor of any money; 2° the period to run to maturity.

He pointed out that the period of maturity being known as from Margaret Hannah Adam’s death—a period of ten and a half years—that factor was simple to obtain. He said he had more difficulty in getting an appropriate yield rate or discount rate to complete the computation of the discount value. He asserted that he gave considerable thought to that question and that, having selected a rate, he had to test it so as to determine whether it was a fair one.

He noted that the maximum rate of discount in virtue of the Bank Act is 6%. He said that, as he did not like to leave it at that, he decided to look for some public test. He observed that there is no open market for notes and that he had to find an appropriate yield based on companies he could locate as similar as the ones involved herein. Asked if he had prepared a statement, Ovens replied affirmatively. Counsel for appellant submitted that this evidence—a list of Dominion Securities Corporation Limited showing the price and the yield of Canadian preferred stocks as at March 31, 1949—is immaterial. I allowed the production of this document under reserve of the objection; it was filed as exhibit B. Ovens was thereupon requested to proceed with his testimony; it may be convenient to quote an extract of the deposition (p. 139) :

"" A. In the normal course of events, say in liquidation, notes

would take precedence to deferred shares in winding up. By so choosing yield rates or discount rates which are based on the selling price of preferred shares, I thought I was being very generous. In other words I thought that obtaining a yield from a security which is in the normal course of events junior to a note, and using that, that I was certainly reflecting a very fair rate of discount. I found initially that a very large list of preferred shares were selling at or very close to the date of death at prices which indicated yields or discount rates, if you wish, of 4.62%. However, I didn’t like to use that 4.62%. I felt that to be absolutely fair I would have to make a comparison from the securities or preferred shares issued by financial institutions and investment trusts. Investment trusts particularly carry maximum securities, which to the best of my knowledge would generally be comparable to the securities held by Adam and Angus. At any rate the yield or discount rate indicated—I should, to give it its proper term, say yield to maturity rate—indicated by examination of a selected list of financial institutions and investment trusts came to 5.37%. The higher you get the discount rate, the lower is the valuation; so I ignored the 4.62% to which I have previously referred; and thus the 5.37%. I might have used that, but I felt, to eliminate minor differences, miscalculations, and to be as generous as possible, to raise the rate to 6%.

Q. Which you did?

A. Which I did. Why, then, after due consideration, it was my opinion and still is that if the notes of Adam & Co. Inc. which are owned by Grampian Corporation were discounted at 6%, a very fair figure for Succession Duties would result.”

Further on Ovens added (p. 140) :

4 " Well, I had my three factors for the fomula: I had the amount due, had the maturity date, and I had the period to lend. I had what is in my opinion a fair discount rate, because you will see that I dod not consider the 1% that the notes were bearing, a fair rate to use, I increased that to 6% to get a fair rate. It was simply a matter of putting those three factors into Makeham’s formula, and the result was a valuation of $420,000.00, which is under dispute.’’

Ovens observed that the Makeham formula is set out in the appellant’s statement of claim and that he considered it fair.

Ovens declared that he was not absolutely satisfied that it was a fair rate and that later on he would endeavour to prove that it is fair in another way.

He stated that, to give the Makeham formula a general test in a simpler fashion, he used a book entitled Modern Bond Values Table, issued by A. E. Ames & Co. Limited, a large Canadian underwriting concern. He added that he found this table is in use by several trust companies and by numerous estate representatives; the book was produced as exhibit C.

Ovens specified that he had ascertained that the security yielding of 1% on the face value, due 10 years later, or, in the future, to yield its purchaser 6% compound interest to maturity, would come to $61.46 per $100.00. He continued by saying that, using that $61.46 per $100.00 would set a total value of $414,855.00. He added that he had decided to continue to use the sum of $420,000.00 because he considered it the most accurate formula.

Regarding the Makeham formula, counsel asked Ovens if it was accurately set out in the statement of claim and if it is the calculation he referred to; Ovens replied affirmatively. He was requested to file it as exhibit D, which he did.

Ovens observed that there is another very important factor to be considered when attempting to determine the value of the notes of Grampian Corporation for succession duty purposes, viz., that Grampian was wholly owned by the deceased, that Adam & Co. Inc. was wholly owned by the deceased’s son or his dependents and that, therefore, dealings between these companies would never be considered in the light of true arm’s length transactions. In his opinion this accounts for the fact that the notes bear interest at only 1% per annum. He added that, in his opinion, it is extremely unlikely that the deceased would have loaned $625,000.00 to a stranger at the rate of 1%. He believed that, in view of the arm’s length nature of the transaction, the Department would have been justified to value the notes at par, as they are carried on the books of Grampian Corporation Limited.

Ovens observed that Grampian Corporation has discounted the notes in its books either before or after the death of Margaret Hannah Adam and that the non-arm’s length nature of the relationship between Grampian Corporation and Adam & Co. Ine. creates a very circumstantial situation and a special market for the notes of Adam & Co. Ine. He believed that the latter will be forced to pay the full value of the notes at maturity regardless of whether they are held by the original payees or by another holder for value.

To the question as to whether the estate’s representatives would sell the notes for $25,000.00 Ovens expressed this opinion (p. 144):

"I submit in my opinion they most definitely would not. The shareholders of Adam & Co. Ine. are the beneficiaries of Grampian Corporation shares; therefore they are vitally interested at all times in the sale of any of the assets of Grampian Corporation. I my opinion they would certainly take steps to see that no assets of Grampian Corporation were sold to a stranger at ridiculously low values. I believe that to avoid this they would step in and purchase the assets themselves.’’

For these reasons Ovens believed that there is a special market for the notes, which exists in Adam & Co. Inc. itself, and that this company would be willing, in that event, to pay a minimum price of $420,000.00 for them.

He further submitted that all the assets of Grampian Corporation were properly valued in accordance with the usual method of the Department for Dominion Succession Duty purposes and that in particular the notes of Adam & Co. Ine. had a minimum value of $420,000.00 for Dominion Succession Duty purposes on March 23, 1949.

He asserted that his valuation of $1,632.18 for the shares of Grampian Corporation represents a fair and reasonable value for Succession Duty purposes on March 23, 1949.

Ovens produced as exhibit E an explanatory brochure, revised in March, 1947, of the Dominion Succession Duty Act and reference was made particularly to the item, on page 28, indicated in the margin as ‘‘Promissory notes and book debts’’, reading as follows:

"‘The value of promissory notes and book debts is presumed to be the amount of unpaid principal plus accruied interest, if any, to the date of death, unless it is established that the actual value is less. In practice, a certain discount or percentage proportion is allowed in respect of bad debts, to the extent to which it is shown that the allowance claimed is reasonable.’’

Ovens admitted that, when he initially made the first calculation of the valuation, he was not aware of Section 19 of the Act and that he became aware of it on June 11, 1951. He acknowledged that June 11, 1951, was several months before the decision of the Minister was issued on the appeal on the share valuation of Grampian Corporation Limited.

He stated that, if he had wished to revise his valuation due to the implication of that section, he could have done so. He declared that he did not change his opinion because, as he had attempted to explain in his testimony, of the fact that he had to deal with a controlling block of shares in Grampian Corporation. According to him, the controlling block in question was estimated on a revised book value basis. He summed up his Opinion in saying that, in other words, to the best of his knowledge, what would have been done had the company wound up and the assets all—that power was with the deceased and is presently with the estate.

He added that valuing on a winding-up basis would mean that the separate and individual assets of Grampian Corpora- tion could be distributed or sold and that, being so, the implication of the income tax section would no longer apply, the section applying only if the interest or the deficiency in interest is due to a corporation.

He concluded that there is no need for Grampian Corporation to be continued indefinitely and that the power to wind it up rests with the deceased or her estate.

To the question as to whether he had the occasion to make similar valuation as the present one Ovens replied affirmatively, stating (p. 148) :

‘“, . . we have ample opportunity to study the valuation of various kinds of securities in different countries, including promissory notes, and to study not only our own methods of valuation, but the methods of valuation suggested by trust companies and estate representatives, and I have on a few occasions come across situations not quite the exact parallel, but almost the exact parallel to the situation we are dealing with here.’’

Here an objection was made by counsel for the appellant based on the immaterialism of the evidence herein; after weighing the objection carefully, I have reached the conclusion that it is well founded.

Ovens declared that the significant point about anybody loaning a large sum of money ($675,000.00) to somebody else at 1% would suggest to him that the person loaning the money had implicit faith in the borrower and was satisfied because of the great security of the debtor to accept a less than normal return of interest.

Ovens admitted that he had heard the suggestion that 15% or 20% of these notes should be discounted, but he added that he could not agree with this statement, explaining that he could not believe that these shares would be sold to a stranger at that low figure of $25,000.00. He added that he believed there is a special market in vitally interested parties.

Asked what would be his valuation of the Grampian Corporation shares if he were to assume that the notes were valueless, Ovens declared that his total valuation for the 720 shares of Grampian Corporation amounted to $1,175,172.00 and that, if he were to accept the suggestion that the notes have no value, he would have to deduct $420,000.00 from $1,175,172.00, leaving a net value of $755,172.00, obtainable on the other assets, which were available to the deceased and are no longer in dispute.

Ovens added that his understanding is that all the assets of Grampian Corporation had been valued and that the Depart- ment of National Revenue’s valuation has been accepted on these individual assets, with the exception of the notes.

Ovens concluded that, supposing for a moment that the Adam notes were valueless, then his valuation would be $755,172.00, which is far from the valuation of $396,277.80 declared to the Department of National Revenue in the estate’s return.

Ovens owned that, if the transaction between the deceased, who loaned the money, and the borrower was bona fide, he can only say that the interest of 1% must have been accepted because of the great security.

Regarding the Adam & Co. Inc. Ovens declared that he had examined its balance sheet and also the Kintyre statements and that, judging from that, on the evidence submitted to the Department of National Revenue and before the Court, the entire earnings of Adam & Co. Inc. had been distributed annually.

Ovens admitted that this was under the United States income tax law, specifying that he was interested to find out if all the earnings had been distributed and, if so, what was the amount thereof. Ovens gave the following details (p. 151):

"‘A. . . . I found that in the year 1945 the net dividend

received by Kintyre Corporation representing all the earnings on the shares of Adam & Co. Ine. amounted to $3,485.21.

Q. Yes.

A. In 1946 $3,369.04.

Q. Yes.

A. In 1947 $5,187.55.

Q. Yes.

A. In 1948 $6,547.98; and in 1949 $7,942.06. That is a total of $26,531.84. Although it could be said that in the five years ending in 1949 the average annual net dividend was $5,306.37. Now, from that point I made another calculation : I have just stated that the annual average dividend was $5,306.87. Now, that money is paid out by Adam & Co. Inc. In addition to that, let us be very generous in this computation, increasing the average from $5,306.30.”

Ovens added that, as he was going to use the result of this calculation against the Department of National Revenue, he wanted the computation to be as generous as possible. He said that he increased the annual average to an estimated amount of $5,306.37. He pointed out that in addition Adam & Co. Inc. paid 1% on the $675,000.00 notes owing to Grampian Corpora- tion. He said that thereafter the interest payment to Grampian Corporation was $6,750.00 and that also, during this period of five years, the company paid 1% interest to Kintyre Corporation for a loan advanced by it to Adam & Co. Inc. He stated that 1% on the Kintyre loan represents $2,000.00, making annual average payments of $14,500.00. He changed his figure—likely with a view of more precision—to $14,056. Further on he added that, during his negotiations with the estate’s representatives, the valuation of $420,000.00 fixed by the Department of National Revenue, for the $675,000.00 face value 1% notes due ten and a half years after death, was consistently rejected on the grounds that no one would pay $420,000.00 to purchase these shares.

Ovens contended that the financial statement of Grampian Corporation disclosed that the company owned assets, at the time of Margaret Hannah Adam’s death, at or almost 100% of the face value of practically all the outstanding notes, which is greatly in excess of the Department of National Revenue’s discounted value of the same.

Further on Ovens stated that the Department of National Revenue has discounted the notes at 6%, to wit, much in excess of the 1% annual rate of interest which the deceased was satisfied to accept for any risks involved in making the loan to her son’s company.

As to the statement "‘that Adam & Co. Inc. paid out its annual earnings appears to be the case”, Ovens said he could give the reason for that. He added, however, that the company paid everything that was earned, as it had a small capital deficit. He claimed that he also found that the net dividends paid to the shareholders of Adam & Co. Inc. averaged $5,306.37. He concluded that this amount of capital, with the interest paid on the two notes outstanding, indicates a return of capital employed of less than 2% per annum, which he calculated at $614,056.37. According to him this was on a capital of $850,000.00 in United States funds, which would show that the return of all capital employed is less than 2% per annum.

Ovens repeated that Adam & Co. Inc. would get a return of less than 2 % of all capital employed in the company. He added that surely a chance to invest interest notes at a yield maturity of 6% would be an attractive investment. According to him, the company or its controlled subsidiary, Angus Corporation, has ample funds for investment and he said he knew of no reason to prevent it from buying in its own notes for cancellation.

He concluded that, if Adam & Co. Inc. continues to yield only 2% on capital employed, the benefit of the company, and ulti- mately to its shareholders, in purchasing its own notes for cancellation out of its available assets at a discount rate of 6%, is in excess of $185,000.00 before United States capital gains tax.

Ovens said that the market is of mutual advantage to both the noteholders and the shareholders and that he can assume that the notes were made payable to the Grampian Corporation only and were never intended for public offering. Ovens then explained his statement as follows (p. 155) :

" " It is of advantage to the noteholder . . . the deceased or her estate because it has been suggested to the Department that the notes were only worth $25,000.00. If it is true that the notes were only worth $25,000.00 in the open market, it would be to her advantage to seek a market where should could get around $420,000.00. It is also of advantage on the other hand to the shareholders because the shareholders have been realizing only 2% on their capital employed ; so the chance to buy in their own notes or make an investment at 6% is of advantage to them, as I have said, to the extent of $185,000.00 before United States capital gain taxes.’’

Ovens admitted that he was not familiar enough with the United States law to bring this sum of $185,000.00 to a net figure after the capital gain taxes, summing up his remarks thus (p. 156) :

“We simply assume that the deceased and the shareholders at the date of death would have been no necessity for the notes to be liquidated ; that they would act as good business people would, at arms-length, despite the fact that the main interested parties were the deceased and her son.

There is no need to go beyond the date of death at all, to the special situation concerning the value of the note from the date of death onwards in the hands of the heirs. But this fact should also be considered.’’

The examination of Ovens then continues, but nothing material was thereby disclosed.

Justin Martin, public accountant, of Seattle, declared that his practice and training qualify him to testify on a question of taxation as might apply to Adam & Co. Inc., if it bought the notes in question at a discount.

Martin denied having been present in Court during the morning session.

To counsel for appellant’s observation that the likely purchaser of the notes is Adam & Co. Inc., who would buy and pay them at the suggested price in 1949 of $420,000.00, the notes being of the face value of $675,000.00 and representing the amount of money, subject to exchange, that Adam & Co. Inc. had actually received at the time these notes were given, and to the question as to what would be, to his knowledge of the tax laws in the United States, the result of such a transaction, counsel for respondent entered an objection, as he did not think that this was proper rebuttal; I reserved the objection and permitted the introduction of the evidence. Thereupon Martin supplied this information (p. 179) :

"Where a debtor in the United States buys in its or his notes at less than face value and thereby realized income, it is not capital gain under United States capital code, because it is not capital. It is not capital gain transaction. It results in ordinary income in this instance to Adam & Co. Inc. Under these circumstances it would mean that Adam & Co. Inc. in the first instance would be subject to a tax of 52% on all its income over $25,000.00 and effective right up to that point. It is 52% under present law. The rates have varied slightly in prior period.

Beyond that point the question would arise as to whether this income that was realized by Adam & Co. Inc. would constitute personal holding company income. If it did constitute personal holding company income, the company would continue to be a personal holding company and a distribution of this income would be required on the part of the shareholders to vote a personal 85% surtax. In the alternative if this income is not construed to be personal holding company income, a company under present law would be subject to excess profit taxes, which at the present time amount to 30%, in addition to regular taxes. There is a credit for excess profit taxes which can be based upon income or upon the actual investment capital. In this particular case it would be based on invested capital, but it would still be a small amount.”

The balance of the deposition does not seem to me material.

After reading and annotating the evidence and carefully perusing the able and exhaustive argument of counsel, I have reached the conclusion that the respondent’s assessment is exaggerated and that in fixing it at the sum of $40,000.00 I will be rendering justice to both parties.

The appellant will be entitled to its costs against the respondent, the said costs to be taxed in the usual way.

Judgment accordingly.