Quick Read: 2025 Valuation Issues
As we begin 2025, there are two valuation issues that may impact your practice in the coming year, including the following:
1. The (potential) increase in the capital gains inclusion rate from 50% to 66.67%; and
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2. The new exposure draft for CBV Practice Standards regarding draft reports and oral communications.
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Each of these issues is discussed below.
1. (Potential) Increase in the Capital Gains Inclusion Rate
On June 11, 2024, the Federal Government introduced legislation to increase the capital gains inclusion rate from 50% to 66.67% for corporations, trusts and capital gains in excess of $250,000 for individuals. This proposed increase was to become effective on June 25, 2024.
As of now, this proposed legislation has yet to be passed by Parliament, and with the announced plans for the resignation of Mr. Trudeau and the suspension of the Government until March 24, 2025, uncertainties and confusion exist regarding the applicability of this proposed legislation.
On January 7, 2025, it was reported that the Finance Department stated that convention requires that taxation proposals such as the capital gain inclusion rate changes are effective as soon as the Government introduces them in the House of Commons.
The Finance Department further states that CRA-issued forms will be in accordance with the new proposal, although this could change dramatically when parliament resumes if the Government signals that it will no longer proceed with the proposed legislation and/or a new government is formed by the Conservative Party who have indicated their intention to repeal this proposed change.
This uncertainty gives rise to valuation challenges, including how a valuation as at a current date, for example, should consider latent capital gains taxes with respect to the “old inclusion rate” as opposed to the “new inclusion rate”.
It seems that, at least for the moment, the new inclusion rate ought to be utilized, although we may find in the next several months that such an approach turns out to be incorrect. If the inclusion rate increase proposal does not materialize in law, other issues, such as the use of hindsight, will have to be considered.
One valuation alternative might be to reflect two scenarios in cases where the inclusion rate issue is significant.
Discussion with counsel should be undertaken before any valuation report is completed in this current state of uncertainty with respect to this issue.
2. Exposure Draft for CBV Standards for Draft Reports and Oral Communication
On January 8, 2025, the CBV Institute released its latest and final exposure draft of its Practice Standards for valuation reports which are set to be finalized later this year.
The major changes in this exposure draft that we find relevant are as follows:
i. Draft Reports
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“A work product in the process of being complete (i.e. draft or preliminary) is not a Valuation Report provided that it is issued to a client or knowledgeable third party in circumstances where all four of the following conditions are met and explicitly disclosed on the work product:
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a) The work product is clearly marked as being in draft form and may be subject to significant change;
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b) The work product is issued for the purposes of obtaining comment, further instructions or information from the client(s), required to complete the Valuation Report;
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c) The Valuator knows, or reasonably ought to know, that the intended reader(s) does not intend to rely on the work product or distribute the work product to a third party who might rely on such work product; and
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d) The Valuator has a reasonable expectation at the time the work product is issued that the valuation report will be completed and issued in due course.”
This new change is significant because, for the first time, the CBV Institute is specifically addressing draft reports, an issue that has been relevant to business valuators and litigation and family law lawyers for a long time.
In our experience, some valuation firms have prepared preliminary schedules or draft calculations for mediation proceedings or settlement discussions. These types of communications will no longer be permissible under the CBV Practice Standards (if they ever really were).
Because of the uncertainties regarding this issue in the past, it has been our firm’s policy to ensure that draft reports are compliant with CBV standards in all significant ways.
ii. Oral Communications
“In the circumstance where a Valuation Conclusion is communicated orally by a Valuator (without any accompanying written work product), the Valuation Conclusion must still comply with Practice Standards No.100, 120 and 130. The Valuator must document in the working papers the substance of the oral report communicated to the client. In these circumstances, Valuators should verbally disclose the required components of Practice Standard No. 110 to the intended users.”
This is the first instance where the CBV Institute is providing standards for oral communications.
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We have three significant concerns regarding this potential new standard as follows:
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While the standard refers to a “Valuation Conclusion,” it is common for valuators to be consulted verbally about many issues such as general valuation questions such as the applicability of hindsight, the appropriateness of a valuation report in filing a terminal income tax return, the understanding and applicability of various discounts such as minority, liquidity, portfolio, income tax, blockage, etc. We presume that this potential standard does not apply to these oral inquiries.​
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2. In some situations, business valuators are requested by a judge, arbitrator or mediator during proceedings to answer hypothetical questions or consider alternative scenarios which will clearly not be accompanied by the type of working papers anticipated in this exposure draft.
3. This new standard appears nearly impossible to enforce and monitor.
Our firm has made submissions to the CBV Institute in this regard and we will be waiting to see whether any changes might be made to this proposed standard regarding oral communications.
We hope that this discussion of these important valuation issues may be useful and helpful to your practice in the upcoming year. If you have any questions regarding any valuation issues, we would be happy to be of assistance.
For more information, please contact Wayne B. Rudson, CPA, CA·IFA/CBV, ASA, CFE (wrudson@rvg.ca) or Vincent Lam, CBV, MAcc (vlam@rvg.ca) at 416-598-4500.
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Quick Read: Does Family Control Mean No Minority Discounts? Not Necessarily.
One of our earlier e-blasts reviewed the appropriateness of applying discounts to allocable ‘en bloc’ fair market value regarding a non-controlling, minority interest. Such discounts exist to reflect such discounts where actual or theoretical purchasers require a reduction in price to reflect the disadvantages and illiquidity of a non-controlling interest.
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The applicability of a minority or liquidity discount is often negated in cases where minority shareholders are related as a family and can thus exercise “family control” if they were to act in unison or in a generally cooperative manner unlike cases of non familial shareholders.
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The general presumption of family control resulting in non applicability of a minority or liquidity discount, however, is just that. A proposition that is not always the case.
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Ben Rosenhek of our office has provided the following discussion in this area.
Minority Discount - a Brief Refresher
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In valuing a minority interest, several factors are typically considered when arriving at an appropriate discount, such as:
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1. Reduced Managerial Control: Inability to elect the board of directors, dictate dividend or similar payments, authority to determine major asset sales or redevelopment, etc.
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2. Financing Hurdles: Increased difficulty in securing financing for non-controlling ownership interests.
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3. Liquidity Challenges: The inherent difficulty in selling a minority interest to a purchaser who will assume all the disadvantages of being a minority shareholder, including further restrictions in shareholders agreements etc.
Minority Discounts in Cases of Family Control
Family control situations are unique because individual minority shareholders who are related to each other and comprise a “control block” are sometimes presumed to work in concert, and in a manner that considers other family members in a preferential way unlike the case of non-arm’s length minority shareholders.
There is a general presumption that minority discounts are not applicable to minority shareholdings in cases of family control. This presumption is manifested in two authoritative places, as follows:
i. CRA generally does not permit the application of a discount to a minority shareholding in cases of family control as articulated in Information Circular 89-3 which states the following:
“In a situation where the existence of family control is recognized, the Department will employ a rateables valuation for each family group member’s shares.”
ii. In many, if not most cases, of family control it appears the courts are also reluctant to apply a minority discount in the following examples:
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There are, however, exceptions to this presumption of family control and the inappropriateness of minority discounts. In some cases, minority discounts may still be appropriate in cases of family control, particularly if there is evidence of discord amongst the family member. There may be general discontent or discount or, in some cases, actual or threatened litigation negating the presumption of family cooperations.
The family members act as if they are arm’s length individuals and do not act in concert when deciding major operational matters (e.g. renovations, asset sales, expansion decisions, etc.) or dictating dividend/profit distribution policies, etc.
We are aware of certain court cases where minority discounts have been applied in family control situations as summarized in the following figure (this list is not intended to be a complete list of cases and some cases involving minority discounts may not be included):
As we have communicated in previous E-Blasts, the application of a discount in the valuation of a business interest is complicated and can include discounts for not only minority interests, but for inherent income taxes, conglomerate discounts, portfolio discounts etc. The existence of family control in the valuation of a minority interest does not automatically result in the valuation conclusion to be based strictly on applicable shares of en bloc value as there may be circumstances where minority or other discounts may be appropriate, contrary to the presumptive general approach. The facts in each case will assist the business valuator in determining if or what discounts should be applied.
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For more information, please do not hesitate to contact Wayne B. Rudson, CPA, CA·IFA/CBV, ASA, CFE (wrudson@rvg.ca), Vincent Lam, CBV, MAcc (vlam@rvg.ca) at 416-598-4500.
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Quick Read: Four Interesting Considerations From Recent Estate Valuations
As business valuators, we are often retained to complete business valuations, assist in estate planning and in filing terminal income tax returns. In Canada, death triggers a “deemed disposition” of all property (including capital property) and can result in significant taxes owing.
While completing valuations of estates, we have discovered several interesting considerations that may be of interest:
1. Income Taxes
In some cases, the value of an entity must be adjusted (either higher or lower) to reflect tax considerations that could include:
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Loss carryforwards (generally increases value);
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Latent taxes associated with assets (often real estate) whose current value is in excess of its adjusted cost base for tax purposes; and
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Unavailable capital cost allowance on depreciable assets (often buildings) owned by a corporation that cannot be “bumped up” for tax purposes.
2. Minority or Liquidity Discounts
These discounts are typically considered when the ownership interest being valued is less than or equal to 50% of the entity. These discounts reflect the disadvantages associated with not being able to control a business, including:
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The inability to dictate dividend payments, partner distributions or other compensation;
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The inability to make autonomous business decisions including a sale of assets;
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The increased difficulty of obtaining financing on non-controlling ownership interests; and
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The lack of liquidity associated with selling a minority interest.
3. Conglomerate/Portfolio Discounts
Conglomerate/portfolio discounts reflect the reality that potential purchasers of certain entities may desire some of the entity’s assets but not all. This discount has often been studied in publicly traded companies which often trade on the market at a discount to their break-up values.
Another example could be found in certain real estate entities that own dissimilar assets with varied locations and/or types of properties (i.e. residential, commercial, retail, etc.). Finding a buyer for the specific collection of properties could be difficult and a discount may be required to entice a theoretical purchaser to purchase the entire entity.
4. Direct Ownership of Co-tenancies
When individuals and estates own interests in co-tenancies directly (not through a corporation or partnership), slightly different “values” may be needed for income tax purposes.
Generally, when valuing an interest in a business (i.e. corporation or limited corporation), we value the business from the perspective of a theoretical purchaser stepping into the shoes of owner and obtaining their proportionate share of all assets and liabilities.
With directly owned co-tenancies, however, we understand that the “value” that is needed for deemed dispositions and income tax purposes is not the net value of all assets and liabilities. Instead, only the value of taxable capital assets is relevant for income tax purposes. Assets such as cash or accounts receivable are not taxable and are irrelevant in this specific instance. In addition, liabilities such as mortgages are also irrelevant as they are also not subject to tax or cannot reduce taxes that are payable.
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Although the above valuation considerations often arise in our valuations of estates, they are also should be considered when doing valuations for any other purposes such as for family law purposes or litigation and hopefully these considerations are of some interest or help to your own practice.
For more information, please do not hesitate to contact Wayne Rudson, CPA, CA·IFA/CBV, ASA, CFE (wrudson@rvg.ca) or Vincent Lam, CBV, MAcc (vlam@rvg.ca) at 416-598-4500.
Quick Read: 5 Issues to Keep an Eye On With Opposing Expert Reports
When retained to complete a report in business valuation, income assessments or damages quantification, there is almost always an opposing expert report which contains conclusions different from our own.
Over the years, we have noticed five areas of potential review which may help you in reviewing opposing (or your own) expert reports:
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Documents relied upon;
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Assumptions;
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Expertise; and
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Professional standards.
Each of these issues is discussed below.
1. Documents Relied Upon
Every expert report should contain a “Scope of Review” section which indicates the documents and information relied upon. This Scope of Review is often found as a section of an expert report or attached as an appendix or exhibit.
It is important to ensure that all documents and information relied upon by the expert, as indicated in their Scope of Review, have been disclosed and reviewed. It may also be possible to obtain the expert’s entire file which may include items not specifically identified in the Scope of Review (e.g. minutes of meetings, industry research, references or other information that may be inconsistent with the expert’s findings, etc.). We typically ask our counsel to request this information for review so that we can provide appropriate comments/critique when possible.
2. Assumptions
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Every expert report will be based on some, or potentially many, assumptions relied upon in arriving at the experts’ findings. Sometimes these assumptions are specifically summarized in the report but, more frequently, they are scattered throughout the report and the attached exhibits.
Assumptions made by an expert can be based on legal instruction (e.g. valuation date, the time period over which damages may continue into the future, etc.) or the expert’s own analyses (e.g. revenue growth rates, company-specific risk premiums when determining discount rates, etc.).
These assumptions should be identified and then carefully reviewed to ensure that they are reasonable in the circumstances of the particular case.
It may be helpful to review these assumptions with your own expert to consider alternative conclusions based on different assumptions and to assist in cross-examination which can highlight the sensitivity of the expert’s findings to the various assumptions relied upon.
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3. Expertise
It is customary for experts to identify their specific areas of expertise (to allow them to provide opinion evidence) at the beginning of their reports. In some cases, experts may deviate into areas where they are not adequately qualified and, rather than rely upon other experts or make appropriate assumptions, some experts may try to become “experts” in peripheral fields.
In one recent case, a business valuation expert was tasked to value companies that held real estate assets. This expert did not have real estate appraisals but instead attempted to appraise the real estate assets themselves.
Experts should not tread outside of their specific areas of expertise and instructing counsel should be sensitive to such risks when reviewing their own or opposing expert reports.
4. Professional Standards
Experts are often/usually members of professional associations. Business valuators, for example, are generally members of the Chartered Business Valuators Institute (the “CBV Institute”) which provides standards and guidelines, often very specific, regarding valuation reports, other expert reports (e.g. damages or income assessments) and other types of reports (e.g. advisory reports and limited critique reports).
It could be helpful for your expert to advise you if a particular report may not be consistent with the specific practice standards applicable to the expert’s professional accreditations.
Non-compliance with practice standards can have devastating effects on the credibility of an expert report.
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We hope the above five points regarding reviewing reports will be of assistance to you. This list is not comprehensive and we would be happy to consult or help you review expert reports, as long as they are within our area of expertise.
For more information, please contact Wayne B. Rudson, CPA, CA·IFA/CBV, ASA, CFE (wrudson@rvg.ca) or Vincent Lam, CBV, MAcc (vlam@rvg.ca) at 416-598-4500.
Quick Read: Damages – Two Interesting Issues
Our firm provides reports on business valuations and income assessment for family law purposes, business valuations for estate purposes (terminal tax returns) and shareholder disputes, forensic accounting analyses and damages quantifications in commercial disputes.
The purpose of this E-blast is to review two significant issues that can dramatically impact the quantification of damages in employment related cases where an individual or team of individuals (for example in the investment advisory or insurance industries) change their employment resulting in a significant migration of their customers or clients and related books of business to the new employer.
We have been retained to assist in the quantification of damages in these kinds of cases where illegal acts resulted in improper client/book of business migration to the new employer.
Two significant issues that have frequently arisen are as follows:
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How to deal with a plaintiff’s claim that all profits earned by the new employer from the transferred clients comprise damages for several years or even indefinitely?
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How to present value or discount damages that may have occurred over several years to a “lump sum” amount?
Each of these issues is discussed below.
Quantifying Financial Losses
It is common for a plaintiff to calculate lost profits (or an accounting of profits earned by the defendant(s)) based on a global calculation of the profits earned from the transferred clients for a period of several years.
A legal issue exists, however, with respect to this quantification process regarding whether all of the transferred clients reflect damages or whether only the incremental clients that can be attributed to any alleged unlawful act be the subject matter of the damages assessment.
The defendant may attempt to quantify damages, if any, associated only with the incremental migration of business that allegedly occurred unlawfully. This assessment can be difficult in practical terms because it requires a comparison of “typical” client or customer migration absent any unlawful activity to what may have actually happened in a particular situation.
Methods to assess typical client migration absent any claims of illegality can, however, potentially be made from both the plaintiff’s previous experience in similar but non-litigious situations and from the defendant’s similar situations. In some cases, industry data regarding normal migration statistics might also be available.
It is not surprising to observe that defendants who takes the “incremental” approach may have very significant downward adjustments to the Plaintiff’s claims for losses.
Present Values
It is not controversial that damage amounts that occur over several years should be present valued or discounted back to a point in time using a discount rate that appropriately reflects both the time value of money and the uncertainties and risks associated with projected amounts.
A significant issue in this regard relates, however, with respect to what date should be used to present value these damages.
For example, a plaintiff’s calculation of damages may not discount or present value any damages that have been calculated to have occurred up to the point of the damages assessment on the basis that those are “past damages”. A defendant’s calculation of damages, however, might suggest that even damages that have theoretically already occurred in the past should still be discounted back to the date of the allegedly wrongful acts to reflect, at a minimum, the risks and uncertainties inherent in estimating damages over, in some cases, several years.
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Careful consideration of both of these issues can have a significant impact on an assessment of damages.
Both of these issues are legal issues that should be discussed and considered by both instructing counsel and damages experts.
For more information, please do not hesitate to contact Wayne Rudson, CPA, CA·IFA/CBV, ASA, CFE (wrudson@rvg.ca) or Vincent Lam, CBV, MAcc (vlam@rvg.ca) at 416-598-4500.
Quick Read: Expert Evidence – New Developments in “Gatekeeping”
Our firm has provided expert evidence in over 50 trials. In virtually every case, our findings have been challenged by opposing counsel, including challenges to our credentials, expertise and independence.
We understand that these challenges are intended to suggest that our evidence should be considered carefully and critically by the Court.
In no single case, however, were we ever excluded from being permitted to provide our opinion evidence as experts.
In a recent Ontario case, however, an opposing financial expert was precluded from being permitted by the Court to provide his opinion regarding the value of a business in 1990 (the marriage date), and in 2017 (the separation date).
This individual was about to testify when a mid-trial “voir dire” occurred, resulting in the individual not being permitted to provide his evidence in Court.
The Court had several comments regarding this individual as outlined in its 11 page decision released on September 25, 2023 (source: https://canlii.ca/t/k09pc), as follows:
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“16. A court must have confidence in a proposed expert’s qualifications and objectivity. This court does not have confidence in… [the individual]. He is not qualified to provide expert opinion evidence about the value of Ierullo’s business interests.”
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“17.…business valuation… “is a highly specialized area of the accounting profession” and a trial is not an audition”
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“17. Even should this court’s disqualification of [the individual] be in error, he would be disqualified in the exercise of this court’s gatekeeping discretion.”
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In our experience spanning over 30 years, we have never observed a financial expert not being able to testify at a trial. It appears, however, that this issue may become more prevalent in the future.
In the United States, Federal Rule of Evidence 702 pertaining to expert witnesses has been modified with certain significant changes becoming effective as of December 1, 2023. The new proposed wording of this rule is as follows (new changes are underlined):
“A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if the proponent demonstrates to the court that it is more likely than not that:
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the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;
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the testimony is based on sufficient facts or data;
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the testimony is the product of reliable principles and methods; and
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the expert has reliably applied expert’s opinion reflects a reliable application of the principles and methods to the facts of the case.”*
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These rule changes suggest that the ability of an individual to provide expert evidence in the United States is becoming increasingly challenging. In light of the recent Canadian case, and the changing rules in the Untied States, it will be important for financial experts like ourselves and instructing counsel to be increasingly sensitive to the areas of expertise and the credentials of the intended experts well in advance of trial.
We hope that these recent developments are interesting to you and your practices. If you or your colleagues require assistance in the areas of business valuation, damages quantification or family law matters, it would be our pleasure to assist you.
For more information, please do not hesitate to contact Wayne B. Rudson, CPA, CA·IFA/CBV, ASA, CFE (wrudson@rvg.ca), Vincent Lam, CBV, MAcc (vlam@rvg.ca), or Ben Rosenhek (brosenhek@rvg.ca) at 416-598-4500.
* Source: https://businesslawtoday.org/2022/09/rule-702-amendment-process-progression-potential-ramifications/