T-2748-72
Conrad David (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Montreal, February 17,
18 and 19, and April 25, 1975.
Income tax—Re-assessment—Plaintiff and associates sell
ing shares in pension plan trust to purchasing company—
Claiming ignorance of consequences—Whether deemed divi
dend conferred on plaintiff at time of sale—Whether plain
tiffs company or its pension plan trust conferring benefit on
plaintiff—Income Tax Act, R.S.C. 1952, c. 148, as am., ss.
8(1), 38, 81(1), 137, 138 and 138A.
Plaintiff appeals the adding back of $124,508.72 to his 1965
income as a result of a re-assessment by the Minister on the
basis that it was a deemed dividend under section 81 of the
Income Tax Act, or alternatively, that the Company or its
pension plan trust conferred a benefit on plaintiff within the
meaning of section 137(2) of the Act. Plaintiff, his brothers,
and brother-in-law operated a stone quarry, "C" Company.
The quarry was sold in 1965, and the company became an
investment company. A pension plan was established, and in
December 1965, the "David" group sold their 12,000 shares in
"C" Company to "F" Company, controlled by the "Dunn" group;
they now claim that they were acting on the advice of their
financial adviser, and were ignorant of the purchasers' names at
the time of closing. A condition of sale was that the vendors
would repay advances made to them and buy from the purchas
ers the accounts receivable of "C" Company. Plaintiff contends
that, as a result of the sale, there was no distribution of the
surplus in favour of the David group, nor was there any
winding-up etc., within the meaning of section 81, and further,
that section 137(2) does not apply, since no benefit was con
ferred on the David group, the transaction being an arm's
length sale of capital assets without tax consequences.
Held, dismissing the action, the evidence is not persuasive
that the Dunn group wished to acquire the trust for the benefit
of its own employees, instead of wanting to gain certain benefits
and profits resulting from the tax-free acquisition of the surplus
by the David group. Even if plaintiff did not know what would
subsequently be done in order to obtain the funds to pay for the
shares, his accountant (and agent) did. A taxpayer cannot
avoid the consequences of a scheme proposed for him by
professional advisers. If he adopts it as his own, he is bound,
regardless of his degree of personal knowledge. The David
group had discussed tax consequences with their adviser, and
had cooperated with the as yet unknown purchasers to the
extent of resigning as trustees. It is difficult to believe that the
David group would relinquish control of the trust to a group of
strangers without some knowledge as to the reasons for so
doing. Nor could the David group have been ignorant of the
possible avoidance of taxation on the distribution.
While it was not "on" the discontinuance of "C" Company's
commercial operations that funds were appropriated for the
benefit of the David group, it is evident that the Dunn group
planned to wind up all business immediately. Winding-up was
part of the plan; ignorance cannot be pleaded. Section 81(1) (b)
should be applied, resulting in the allowance of a dividend
credit to each member of the David group, under section 38, for
his portion of the undistributed income on hand deemed includ
ed in the payment to him.
Alternatively, as to applying section 137(2), there is little
doubt that either the company or its pension plan trust con
ferred a benefit on the David group, in that, as a result of the
transactions, they were able to withdraw the undistributed
surplus without paying tax.
Finally, plaintiffs attempt to invoke section 137(3) fails, for,
though dealing at arm's length, the David group cannot, pro
fessing ignorance of subsequent action, claim that the share
purchase was not "as part of any other transaction."
Simard-Beaudry v. M.N.R. [1974] 2 F.C. 131 applied.
Smythe v. M.N.R. [1968] Ex.C.R. 189; [1970] S.C.R. 64;
Merritt v. M.N.R. [1941] Ex.C.R. 175, and Craddock v.
M.N.R. [1969] Ex.C.R. 23; followed.
INCOME tax appeal.
COUNSEL:
M. Paquin, Q.C., and H. P. Lemay, Q.C., for
plaintiff.
A. Garon, Q.C., and W. Lefebvre for
defendant.
SOLICITORS:
Lemay, Paquin & Gilbert, Montreal, for
plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: This case was heard at the same
time as two other cases, those of Fernand David v.
The Queen (T-2747-72) and Raymond Pepin v.
The Queen (T-2749-72), all three cases being
based on the same facts and the evidence being
made common to all three cases. The reasons for
judgment in this case, therefore, will be applicable
to the other two. There was another David brother,
Aimé David, who would have been subject to the
same re-assessment but this was not done, alleged
ly because had made an assignment in bankruptcy;
in any event there are no proceedings before the
Court with respect to the taxation of Aimé David.
Raymond Pepin is the brother-in-law of the David
brothers and it will be convenient in dealing with
these proceedings to simply refer to Conrad David,
Fernand David and Raymond Pepin as the David
group. In each case the sum of $124,508.72 was
added back to the taxpayer's income for the 1965
taxation year as a result of the re-assessment on
the basis that it constituted a dividend received at
the time of the sale of his shares in Carrière
Montréal -Est Ltée, this being one-quarter of the
undistributed income of $498,034.88 according to
the Minister's calculations, which was allegedly
distributed or otherwise appropriated for the ben
efit of the group, the shareholders, at the time of
the winding-up, discontinuance or reorganization
of the company's business. Pursuant to section 81
of the Income Tax Act in effect at the time', the
Minister claims that this was deemed to be a
dividend. Alternatively, the Minister contends that
the company or its pension trust conferred a ben
efit on the group within the meaning of section
137(2) of the Act and that the share of this benefit
of each member of the group amounted to $124,-
508.72. This is an appeal from a re-assessment
dated March 4, 1971 with respect to which a
notice of opposition was filed on May 14, 1971 and
the assessment was confirmed by the Minister on
June 27, 1972.
Plaintiff's declaration sets out that he and his
brothers were brought up on a farm in Montreal
East and that in due course, with their brother-in-
law, Raymond Pepin, they began the commercial
exploitation of a stone quarry on the paternal
property which prospered so that in due course the
business was incorporated as a Quebec company
under the name Carrière Montréal -Est Limitée—
Montreal East Quarries Limited on January 27,
1953. In the year in question, 1965, there were
12,000 common shares outstanding, 3,000 being
held by each member of the group and the other
3,000 by the other brother, Aimé David. On
August 24, 1965, the quarry and its equipment
was sold to Ciment Independent Inc. for the sum
of $3,100,000 cash. Carrière Montréal -Est there
after, according to plaintiffs declaration, became
an investment company as appears by its balance
sheet dated December 21, 1965, which showed
assets of $3,128,286.81 consisting of $2,036,305.40
R.S.C. 1952, c. 148 as amended.
cash, $137,526.41 accounts receivable and $940,-
000 as advances to officers as well as some smaller
amounts which do not concern us for deposits with
Hydro Quebec and deposits on a bid. Liabilities
showed taxes payable of $80,944.10 and earned
surplus of $554,002.33 which, together with capi
tal surplus of $2,481,340.38 made up a total sur
plus of $3,035,342.71.
On January 1, 1964, the company had estab
lished a pension plan which had been accepted for
registration on June 18, 1964 and approved on
behalf of the Minister of National Revenue on
September 14, 1965 permitting deduction by the
company of contributions to it pursuant to section
76 of the Act. On December 30, 1965 the group
sold their 12,000 shares in the company to La
Fiducie du Régime de Retraite Assurance C. W.
Dunn Inc. for the sum of $2,925,000 on the condi
tion that the vendors would, at the time of the sale,
repay the advances of $940,000 made to them and
would buy from the purchasers of the shares the
accounts receivable of Carrière Montréal -Est
Limitée having a face value of $137,526.41 2 .
Plaintiff claims that the group did not know the
actual names of the purchasers until the time of
the closing, having been approached on their
behalf by Robert Faust, an insurance and pension
plans consultant whose advice their accountant,
Jean-Marc Lemieux, had obtained at the time they
set up the company's pension plan. They were
allegedly aware in a general way that a Mr. Dunn
of Sherbrooke, reputed to be a millionaire, was
interested in buying the company's pension plan. It
is plaintiff's contention that at the moment the
David group sold their shares to La Fiducie du
Régime de Retraite Assurance C. W. Dunn Inc.
they received the consideration for same, and the
purchasers, by acquiring the shares, thus indirectly
acquired all the assets and liabilities of the com
pany including its surplus, and that if subsequently
there was a distribution or appropriation of surplus
by the purchasers, this was after the sale and at a
time when the David group no longer owned the
shares and had no further control over the com
pany or its assets. He contends that as a result of
2 Actually the sum paid for the accounts receivable was
$103,526.41 as they had been reduced in the interval.
their sale of their shares there was no distribution
or appropriation of the surplus of the company in
their favour, nor was there any winding-up, discon
tinuance or reorganization of the company's busi
ness to justify the application of section 81 of the
Act. Plaintiff further contends that the sale was
simply the sale of capital assets with no taxation
consequences justifying the application of section
137(2) since no benefit was conferred on the mem
bers of the David group who merely received the
fair price for their shares, the value of which is
indicated by the statements of the company, and
that it is section 137(3) of the Act which applies,
the sale having been made at arm's length in a
bona fide manner and not pursuant to or as part of
any other transaction.
Defendant, however, contends that when the
sale of the shares was made by the David group to
La Fiducie du Régime de Retraite Assurance C.
W. Dunn Inc. this latter was really acting as an
agent for the company's own pension plan trust
which was, moreover, by virtue of the agreement
establishing it, administered by the company
which could take all the decisions and decide all
questions based on the interpretation and applica
tion of the pension plan. The David group, to
gether with Mr. Jean-Marc Lemieux, their
accountant, were the trustees of it but the com
pany could replace one or all of them at a month's
notice. Participation in it was limited to officers of
the company, that is to say the four members of
the David group, and it was on this basis that the
actuarial calculations were made to determine the
number of annual contributions and the amount of
each. While the contributions to this plan by the
company might have been considered at the time
as being deductible under the provisions of section
76 of the Act having been approved by the Minis
ter, recent jurisprudence has definitively estab
lished that this would not be permissible for a plan
set up under the terms and conditions under which
this was established. The issue before the Court in
this case, however, is not the deductibility of con
tributions made by the company to the plan so this
need not be gone into further.
Defendant contends that the David group during
the fiscal year 1965 when they held all the shares
of the company appropriated unto themselves the
major part of its assets, that is to say the amount
of $2,925,000 received from the company's pen
sion plan trust, and that La Fiducie du Régime de
Retraite Assurance C. W. Dunn Inc., which was
the agent of the company's pension plan trust
which, in its turn, was the agent of the company,
by transferring this sum to the group, conferred a
benefit on each of them in the amount of $124,-
508.72 pursuant to the provisions of section 137(2)
of the Act and that since the company had a
surplus in the amount of $498,034.88 and at the
winding-up, discontinuance or reorganization of its
business, distributed $2,925,000 to the group, each
member of it is deemed to have received a dividend
in the amount of $124,508.72 in accordance with
the provisions of section 81 of the Act.
Defendant's contention is that this was accom
plished by the following steps which form part of
the whole transaction on December 30, 1965:
(a) Morgan, Ostiguy, Hudon Ltd., (stockbrokers)
for a fee of $1,440 paid out eight cheques totalling
$2,925,000 payable to the members of the David
group in payment for the purchase of their shares in
the company by La Fiducie du Régime de Retraite
Assurance C. W. Dunn Inc. , acting as agents for the
company's pension trust plan. The members of the
David group undertook to resign as employees of the
company as of January 1, 1966.
(b) The company, allegedly in payment of past
services according to its pension plan, paid the
sum of $318,988.65 to its pension plan trust as
well as the sum of $319,528.50 allegedly as a
dividend to shareholders and the sum of $2,481,-
340.38 representing the capital surplus of the
company.
(c) The company's pension plan trust then paid
to Morgan, Ostiguy, Hudon $2,926,440, as
reimbursement of a temporary loan which had
resulted in the said brokers issuing the cheques
referred to in (a) above. These transactions
allegedly had the effect of enabling the group to
appropriate for their own advantage and benefit
the undistributed surplus of the company.
Defendant further alleges that at a special meeting
of directors of the company on December 22,
1965, the provisions of the company's pension plan
trust were amended so as to provide that the
amount of contributions made to the plan before
December 22, 1965 would be acquired rights of
the members of the plan at that date and become
payable to them in the event of their ceasing to be
employed by the company and that all contribu
tions to the pension fund after December 22, 1965,
whether for past service or current service, would
be vested in the participating members of the plan
after ten years of participation unless the officers
of the company decided otherwise. At a later
meeting the same day the members of the group
and Mr. Lemieux, being all the trustees, resigned
and were replaced as trustees by Messrs. John J.
Dunn, Robert A. Faust, Lucien Dion and Louis
Marc Tanguay, hereinafter referred to as the
Dunn group. It is contended that this was a proce
dure made to facilitate the carrying out of the
subsequent transactions on December 30, 1965. It
is contended that the pension plan trust was noth
ing more than an agent of the company and thus it
never invested money to buy shares of the com
pany itself since indirectly the company's own
funds would serve for the purchase of its own
shares. Defendant states that the company, after
the sale of its assets to Ciment Independent Inc. on
August 24, 1965, limited itself to investments and
collecting the accounts receivable and payment of
expenses incidental to carrying out these activities
and was not conducting a business thereafter and
that it gained no benefit whatsoever for itself as a
result of the various transactions.
At the opening of the hearing an amendment
was made to paragraph 5 of the declaration so as
to specify that on or about December 14, 1955 the
David group bought the paternal land from their
father and did not inherit it as had originally been
stated. Actually, as the evidence disclosed, the
company Carrière Montréal -Est Limitée had
already been incorporated by them and the sale
was actually to the company, the price being
$25,000 cash, with a balance of sale of $248,000
which was subsequently paid.
Conrad David was the only one of the group
who testified. It appears from his evidence and
that of Jean-Marc Lemieux, C.A., who had been
the accountant of the company and who spent ten
or fifteen hours a week writing up the company's
books between 1961 and 1965, that the reason
they agreed to sell the physical assets of the com
pany in August 1965 was that they realized that
the quarry would eventually be exhausted in per
haps ten or twelve more years, that the purchasers
of these assets insisted on purchasing them rather
than the shares of the company, and the price was
negotiated on the basis that they would have to ask
about 3' million dollars to have $2,800,000 after
taxes, which is about what the company's assets
were considered to be worth. Originally they were
offered $3,200,000 but because of the delay in
their reply the purchaser reduced the offer to
$3,100,000 which was the price finally paid. The
company had had a group insurance plan since
1955, sold to them by one Rodolphe Ranger, an
agent with the Excelsior Insurance Company with
whom they were dealing. Mr. Faust of that com
pany had worked together with Ranger and had
submitted the pension plan limited to officers to
them in April 1964. The establishment of this plan
was done on Mr. Lemieux's advice who, in accord
ance with the best traditions of his profession,
apparently gave his clients financial and account
ing advice and did not limit himself to auditing
their books. He was concerned about the high
personal income taxes the David group was now
commencing to pay, and communicated with Mr.
Faust with whom he had had previous dealings
and who was an expert in pension plans and estate
planning. Mr. Faust in turn communicated with
Mr. Claude Couture, Q.C., an expert in tax law,
with whom he had also had previous dealings. Mr.
Couture had no direct dealings with the David
group however and in all cases acted as a legal
adviser to Mr. Faust and later to the Dunn group
of whom Mr. Faust was one at the time of the
purchase of the company's shares by them. Thus
we find Mr. Couture as early as October 8, 1965
writing to the Department of National Revenue
with respect to Carrière Montréal -Est Limitée dis
cussing amendments to their pension plan and
pointing out that since the company had now sold
its main assets and would not be operating in
future, it was contemplated that an amount of
$300,000 should be contributed to the pension
fund trust as terminal funding to enable it to meet
a portion of the obligations of the company as
established by actuarial calculations. In the letter
he goes on to say that the trust funds contributed
under the pension plan will remain in trust until a
later date at which time the pensions will be paid
but that it is proposed that the trust fund be
divided into four trusts, one for each of the partici
pants, and asks if there would be any objection to
subdividing the fund in this way. In his testimony
he stated that this had nothing to do with the
subsequent sale of the shares of the company and
it was not until early December, possibly around
December 10, that he was consulted by Mr. Faust
who discussed with him a memorandum in which
he set out, step by step, a plan which approximated
that which was finally adopted and resulted in the
various transactions which took place toward the
end of December. According to his evidence, at the
time of his letter respecting proposed amendments
to the pension plan, Mr. Faust had acted for the
company and had consulted him because he had
had something to do with the registration of the
plan, whereas in December Mr. Faust was acting
for himself and apparently for the Dunn group, of
whom he was one, in connection with the purchase
of the company's shares.
Mr. Faust testified that after the sale of the
physical assets of the company, Aimé David
merely wanted to get his money out of it and was
no longer interested in remaining in the pension
plan. It occurred to him that something could be
done about this pension plan and he had tried to
see members of the David group between August
and December but Mr. Aimé David was not inter
ested in discussing it. It was on his own initiative
that he asked Mr. Couture to write to the Minister
as to whether the plan could be divided. He did
this without any instructions from the David group
and he does not believe he even discussed this with
Mr. Lemieux. He stated that this was perfectly
proper and usual in his business where it is desir
able to consider in advance and obtain competent
legal advice as to the taxation situation with
respect to insurance and pension plans which he
was attempting to sell to clients, so that he could
be fully informed before dealing with them. In due
course he did make some payments to Mr.
Lemieux but this was not entirely in connection
with the transactions leading to the sale of the
company's shares but was in connection with vari
ous other work which Mr. Lemieux had done for
him during the year 1965 in connection with other
clients as well as the David group. He stated that
it was not unusual for Mr. Lemieux to refer clients
to him and ask for advice in connection with their
insurance problems and he in turn would some
times require Mr. Lemieux to obtain certain infor
mation for him or prepare certain statements
required in connection with the formulation of
plans. While neither witness specifically referred
to it as such, there appears to be an element of
what might be called a "finder's" fee to compen
sate Mr. Lemieux not only for his services but also
for referring clients to Mr. Faust from whom Mr.
Faust could make a profit by selling a group
insurance or pension plan to them. There is noth
ing improper in this nor was there, as I see it, any
conflict of interest on Mr. Lemieux's part as the
advice which he sought from Mr. Faust on behalf
of the David group was clearly in their interest.
The agreement signed on December 30, 1965
respecting the sale of the shares is an interesting
document. Article 4 starts with the preamble stat
ing that the shareholders declare that they do not
know what the purchaser wishes to do with the
company after the execution of the sale, but that
the purchaser undertakes inter alia to see to it that
the new officers adopt the same date a resolution
providing for the return to the shareholders of all
contributions at that time paid by the company
into its pension fund. It has three other significant
clauses requiring the purchasers:
[TRANSLATION] (c) not to distribute the surplus of the com
pany otherwise than in accordance with the provisions of the
federal and provincial income tax laws relating to such
distribution;
(d) not to do anything which could lead to the Minister of
National Revenue using his discretion in accordance with the
provisions of section 138n of the federal Income Tax Act 3 ;
(e) not to do anything which could lead to the application of
section 138 of the law 4 .
This is the dividend stripping section which had been enact
ed in 1963.
4 This is the tax avoidance section.
Plaintiff testified that when the proposed sale was
discussed, Mr. Lemieux had suggested to them
that they consult expert tax lawyers, which they
did, and it was on their advice that these sections
were inserted.
It appears however that although the four mem
bers of the David group are described as parties of
the second part in the agreement and they signed
it first in this capacity, it was not until the actual
time of the closing that the names of the purchas
ers were disclosed and entered into the agreement
as the parties of the first part, being La Fiducie du
Régime de Retraite Assurance C. W. Dunn Inc.,
acting as agents and represented, for the purposes
of the agreement, by the trustees Messrs. John J.
Dunn, Emilien Gauthier and Lucien Dion, C.A.,
hereinafter referred to as "agents". This designa
tion was added in ink at the conclusion of the
agreement and the said three trustees then signed.
Mr. Couture states that it was he who added this
at the time. This therefore corroborates plaintiff's
evidence that the David group did not know the
actual names of the purchasers nor did they care
from whom they received payment. Mr. Lemieux
corroborates this, stating that at the closing the
only thing he checked was whether Morgan,
Ostiguy, Hudon Ltd. had funds on hand to cover
the cheques they had issued in payment. Two
cheques were issued to each of the vendors, one
being in the amount of $495,384.75 and the other
in the amount of $235,000. The four cheques for
$235,000 were to cover the item of $940,000 as
advances to officers which they undertook to repay
at the time of the sale. These cheques were
endorsed by them to the company as proof that the
advances had been repaid in full. Plaintiff stated
that they did not care who they got the money
from as long as they were paid. They also got four
cheques in the amount of $8,304.33 each from the
company's pension fund trust dated December 30,
1965 as provided by a resolution passed at a
meeting on December 22, 1965 to the effect that
contributions to the pension fund prior to Decem-
ber 22, 1965 were acquired rights of the members
of the plan and should be paid to them when their
employment with the company ceased. They paid
tax in the normal way on these cheques and the
amount of them is not in issue. The closing took
about 3 1 / 4 hours in all. Mr. Lemieux was with the
David group and they went to the notary first to
sign the deeds respecting the sale of receivables
and subsequently to the offices of Morgan,
Ostiguy, Hudon Ltd. with their lawyers. Plaintiff
conceded that they had discussed the tax effects of
closing the company previously with Mr. Lemieux
and the disposition of the earned surplus without
coming to any decision. As far as he knows Mr.
Faust was not consulted at that time. As far as he
recalls all documents were signed on December 30
but he does not recall signing the minutes of the
meeting of directors on December 22 at that date.
That was the meeting providing for the amend
ment to the pension plan and the minutes are
signed by Aimé David as President and Conrad
David as Secretary. Moreover, a certified extract
of the resolution indicating that it was adopted at
the meeting on December 22, 1965 was also signed
by Lucien Dion, C.A. as secretary of the company,
Mr. Dion being one of the Dunn group who pur
chased the shares. Minutes of a second meeting
held on the same day, December 22, 1965, also
signed by Aimé David as President and Conrad
David as Secretary, are even more significant in
that at it the four members of the David group and
Mr. Lemieux resigned as trustees of the company's
pension fund trust and were replaced by Mr. John
J. Dunn, Robert A. Faust, Lucien Dion and Louis
Marc Tanguay. If this meeting actually took place
on December 22, and the verbal testimony of
plaintiff and other witnesses who do not recall a
meeting on that date is in my view insufficient to,
and cannot, vary the recording of the meeting as of
that date in the minute books of the company, then
it would appear that the David group was already
prepared to pass over the control of the company's
pension fund trust to a group representing the
eventual purchasers, although they did not actual
ly resign as directors of the company until the sale
of their shares on December 30, 1965, at which
meeting it is recorded that John J. Dunn, Emilien
Gauthier and Lucien Dion, acting as representa
tives of La Fiducie du Régime de Retraite Assur
ance C. W. Dunn Inc. name John J. Dunn, Lucien
Dion C.A., Robert A. Faust and Louis Marc
Tanguay as directors of the company. On Septem-
ber 30, after the sale of the physical assets of the
company, a $2,000,000 certificate had been
bought but it was sold on December 21, 1965 and
deposited in the company's bank account which
would indicate a desire to get all its assets into
liquid form at that time as otherwise there would
be no reason for selling an interest-bearing certifi
cate and depositing it in a current bank account
where it would draw no interest.
Mr. Lemieux testified that he had prepared the
statements of the company to December 21, 1965
in anticipation of the sale but had nothing to do
with the preparation of the sale agreement nor did
he know who was in the purchasing group or even
that Mr. Faust was a member of it but he was
present when clauses 4(c), (d) and (e) (supra)
were inserted in the agreement after a lengthy
discussion. This was long before December 30.
Since he did not know exactly who the purchasers
were he did not wish them to do anything which
might attract taxes to his clients, the vendors. It
was he who, on January 4, 1966, sent to Messrs.
Maheu Noël and Company, attention of Mr.
Lucien Dion who was the purchasers' accountant
and one of the purchasing group, two cheques of
the company, one in the amount of $75,000 pay
able to the Receiver General of Canada, and the
other for $25,000 payable to the Minister of Reve
nue for Quebec. In his statement of December 21,
1965, he had included in "liabilities" the sum of
$80,944.10 as taxes payable but in the "profit and
loss" statement the sum of $180,944.10 had been
shown as provision for taxes. The difference of
$100,000 was represented by these two cheques
but according to the evidence they were never
used. He did not send them directly to the Minis
ters involved as he was no longer acting for the
company. He assumes they were not sent because
the contributions made by the company to the
pension fund reduced the amounts due to the
company in taxes. Like plaintiff, Mr. Lemieux
professed ignorance of various transactions made
by the purchasers after the cheques in payment of
the shares were turned over to the David group.
Mr. Couture testified that the document dated
December 30, 1965 whereby John J. Dunn, Emi-
lien Gauthier and Lucien Dion, C.A., as trustees of
La Fiducie du Régime de Retraite Assurance C.
W. Dunn Inc. were authorized by the trustees of
the pension fund plan of Carrière Montréal -Est
Limitée, John J. Dunn, Robert A. Faust, Lucien
Dion and Louis Marc Tanguay to represent them
as agents in an agreement with the David group
for the purchase of their shares was drawn by him
and signed just before the closing. He does not
recall ever having shown it to the David group.
This agreement further specified that they would
undertake to supply any money necessary for the
payment of the shares, and also to pay all expenses
and a fee of $2,000 for the services of the said
agents. He also testified that the cheque issued to
Morgan, Ostiguy, Hudon Ltd. from the company's
pension fund plan was issued after the departure of
the David group from the meeting. It is of interest
to note that the agreement on December 30, 1965
whereby the members of the Dunn group, acting
as trustees of the company's pension plan trust,
authorized Messrs. Dunn, Gauthier and Dion as
trustees of La Fiducie du Régime de Retraite
Assurance C. W. Dunn Inc. to represent them in
the purchase of the shares of the members of the
David group was, of course, entered into while the
David group were still the shareholders of the
company. Mr. Couture testified, however, that
although the agreement of sale was completed just
prior to the signing of same by adding as purchas
ers La Fiducie du Régime de Retraite Assurance
C. W. Dunn Inc., represented by John J. Dunn,
Emilien Gauthier and Lucien Dion, C.A., as
agents, it did not indicate for whom they were
acting as agents, their agency arising out of the
document to which I have just referred above, and
that this document was never seen by the members
of the David group who did not, of course, have to
sign same. He too was under the impression that
the minutes of the directors' meeting amending the
provisions of the pension fund plan, while dated
December 22, were only signed at the time of the
closing, but he cannot be certain as he did not
prepare these minutes or the resolution adopted at
the meeting. Mr. Faust testified that the resolution
might have been prepared in his office but he
cannot say this definitely and it may also have
been he who asked the members of the David
group to sign it, but whether this was before or at
the time of the closing he cannot say.
In an attempt to explain why the purchasers
wished to acquire shares of the David group which
would result in their gaining control of the pension
fund trust, plaintiff testified that Mr. Lemieux had
told him that Mr. Dunn wanted to acquire the
pension fund as he had 125-150 employees in his
various companies in connection with which it
could be used. There was some slight evidence to
the effect that it was not as easy as it had been to
secure approval of pension funds and that it would
therefore be useful for the purchasers to have
control of such a fund which had already been
approved. I do not find this evidence at all persua
sive. The actuarial calculations of the amount due
for past service contributions which would lead to
a pension of $40,000 at age 55 for each of the four
members of the David group to whom the plan was
limited were, of course, based on their ages. To use
such a plan for a group or various groups of
125-150 persons of different ages, who normally
would not be expected to retire and commence
drawing pension at age 55 and whose pensions
would most likely be much lower, would, of course,
require entirely new actuarial calculations. If such
employees were employed by other companies and
not employed by Carrière Montréal -Est Limitée,
they could not be brought into the plan by merely
extending it to all employees of that company. The
trustees of the pension plan would be different. It
is evident that the bare structure of a pension plan,
all the terms and provisions of which would have
to be changed by the purchasers and which was
completely denuded of its funds at the time of the
purchase by the use of same through a series of
transactions in order to pay for the purchase of the
shares of the company from the David group,
could have had little or no value to the Dunn
Group. Moreover, as soon as they took over control
of the company they immediately, on the after
noon of December 30, 1965, held meetings provid
ing for the liquidation as soon as possible of the
company. In actual fact this did not take place,
and the balance sheet of the company dated
December 31, 1966 was produced indicating that
it was still carrying on business but purely as an
investment company. While plaintiff objected to
reference being made to any actions taken by the
Dunn group after the purchase of the shares of the
David group as being res inter alios acta and that
he is not bound by anything they did after the
purchase of the shares, I believe that this evidence
is admissible as part of the res gestae in indicating
the intentions of the members of the Dunn group
and refuting, by their own conduct, the argument
that they were interested primarily in gaining con
trol of the company's pension fund trust to use
same in connection with some of their own compa
nies instead of being merely interested in gaining
certain incidental benefits, payments and residual
profits resulting from a scheme of which the prime
beneficiaries were the David group, which resulted
in the latter being able to indirectly receive the
surplus of the company without paying income tax
on same.
It is trite law to state that a taxpayer is entitled
to so arrange his affairs as to avoid or minimize
the taxation which he would be called upon to pay
had he proceeded in a different manner and it goes
without saying that the various transactions in the
present case are in no way improper or reprehen
sible. They were, in fact, undertaken with caution
on the advice of an accountant and expert tax
lawyers representing both parties, as well as an
insurance expert in pension plans. Plaintiff's case
on the facts resolves itself to the simple contention
that all the David group did was to sell their shares
and receive payment for them and that the source
of this payment was no concern of theirs. I believe
this is an undue simplification. It may well be that
they did not know, did not want to know, and in
any event were perhaps personally incapable of
comprehending what would be done subsequently
as a result of which the funds would be obtained to
pay for their shares. I cannot believe, however,
that Mr. Lemieux, their accountant and financial
adviser who must be considered as their agent in
his dealings with Mr. Faust who was acting for the
purchasers, was not aware at least in a general
way, if not in full detail, how this would be accom
plished. The fact that he did not know exactly who
were the members of the purchasing group does
not affect this. Plaintiff refers to the case of
Simard-Beaudry Inc. v. M.N.R. s in which my
brother Addy J. stated at page 137:
The law is too clear for any useful purpose to be served by
citing jurisprudence to that effect, that a person may act as an
agent of two people without thereby creating joint responsibili
ty between them for all their actions or for those of the agent.
The fact that Melançon was acting as agent, but for different
objects, for the Simard brothers and their company on the one
part and for Brillant and the appellant on the other part, could
and should in the present circumstances impute a mutual
knowledge of their respective actions but not necessarily a
mutual responsibility as to those actions.
In that case Mr. Melançon was acting as a double
agent both for the vendors and for the purchasers,
unlike Mr. Lemieux in the present case (although
Mr. Lemieux did receive some remuneration from
the purchasers for his services). It is true that Mr.
Lemieux could not control, nor were the David
brothers as his principals responsible for, the
actions taken by the purchasers following the pur
chase, but whether or not they had actual personal
knowledge of the subsequent steps which were
going to be taken they must, in my view, be
deemed to share whatever knowledge their agent
Mr. Lemieux had of the entire dealings. A taxpay
er cannot, by professing ignorance and shutting his
eyes to what is being done on his behalf, avoid
fiscal responsibility for the consequences of what
has been arranged for his advantage by an
accountant or by his lawyers or other professional
advisers. Neither does it matter whether the
scheme is one which has been devised by or on
behalf of the taxpayer, by his advisers, or is one
which has been submitted to him by the advisers of
a third party with whom he is dealing at arm's
length. If he accepts the scheme and adopts it as
his own, whether personally and without full
knowledge or comprehension of all the details
thereof, or through his advisers and agents who are
better informed than he is, the scheme becomes his
own when he accepts it and he is bound by the
consequences thereof. It should be noted that the
[1974] 2 F.C. 131.
Simard-Beaudry Inc. case (supra) differed sub
stantially in its facts from the present one in that
in that case it was the company itself which was
being taxed and not the vendors and it dealt with
the application of section 137(1) of the Act which
is not in issue here. That case found that there was
no question of sham involved in the purchase of
the physical assets of the company even though, as
a result of the manoeuvres, the selling companies
were enabled to deny the taxing authorities income
tax on an accumulated depreciation of $5,406,000
which the shareholders of the companies were able
to extract as a capital gain.
I do not find that there is any sham involved in
the present case either but this does not settle the
question of plaintiffs tax liability. The members of
the David group had admittedly, according to the
evidence of plaintiff, discussed previously with Mr.
Lemieux after the sale of the company's physical
assets, the problems of taxation that would result
from the liquidation of the company and how to
deal with its earned surplus although, as he said,
no decisions were taken. They certainly cooperated
with the purchasers even without knowing at the
time who they actually were, by arranging on
December 21 to convert the company's $2,000,000
investment certificate into a deposit in the compa-
ny's bank account so that the assets of the com
pany could be in an entirely liquid condition as the
purchasers desired. It was essential from the point
of view of the purchasers that they should have
control of the company's pension fund trust so that
they would be assured of having the necessary
funds to guarantee repayment to the stockbrokers
for the sums advanced by them for purchase of the
shares of the David group and this was accom
plished at the meeting on December 22 when the
David group and Mr. Lemieux resigned as trustees
of same to be replaced by the members of the
Dunn group. While it is true that due to the
manner in which the pension fund trust was set up
the company still retained a substantial measure of
control over it and the David group continued to
be the shareholders and officers of the company
until December 30, it is nevertheless indicative of a
considerable degree of trust on their part to turn
over control of the company's pension fund trust to
a group of strangers when their shares had not yet
been sold or paid for. It is difficult to believe that
they did not have some knowledge as to why this
was being done. It is true that they made strenuous
efforts in evidence to dispute that this meeting was
in fact held on December 22 but the books of the
company speak for themselves and the minutes of
the meeting were clearly dated December 22 and
signed by Mr. Aimé David as President and
Conrad David as Secretary, and all four members
of the group signed the waiver of notice of the
meeting to be held on December 22.
While the members of the David group may
therefore have been dealing at arm's length with
the Dunn group, I cannot find that they were
entirely ignorant as to what would be done by that
group following their take-over of the shares of the
company on December 30 to provide the funds to
cover the payment to the David group for those
shares, nor could they have been ignorant that as a
result of selling their shares, they might avoid
taxation on the distribution of the surplus of the
company which they would otherwise have had to
pay had they received it directly as a dividend or
as a distribution of assets on the winding-up of the
company.
It will be convenient at this stage to quote the
sections of the Act on which the parties rely.
Defendant invokes section 137(2) reading as
follows:
137. (2) Where the result of one or more sales, exchanges,
declarations of trust, or other transactions of any kind whatso
ever is that a person confers a benefit on a taxpayer, that
person shall be deemed to have made a payment to the taxpay
er equal to the amount of the benefit conferred notwithstanding
the form or legal effect of the transactions or that one or more
other persons were also parties thereto; and, whether or not
there was an intention to avoid or evade taxes under this Act,
the payment shall, depending upon the circumstances, be
(a) included in computing the taxpayer's income for the
purpose of Part I,
and plaintiff denies that this section is applicable
but states that even if it were the David group
would come within the exception set out in section
137(3) which reads:
137. (3) Where it is established that a sale, exchange or
other transaction was entered into by persons dealing at arm's
length, bona fide and not pursuant to, or as part of, any other
transaction and not to effect payment, in whole or in part, of an
existing or future obligation, no party thereto shall be regarded,
for the purpose of this section, as having conferred a benefit on
a party with whom he was so dealing.
Defendant also invokes section 81(1):
81. (1) Where funds or property of a corporation have, at a
time when the corporation had undistributed income on hand,
been distributed or otherwise appropriated in any manner
whatsoever to or for the benefit of one or more of its sharehold
ers on the winding-up, discontinuance or reorganization of its
business, a dividend shall be deemed to have been received at
that time by each shareholder equal to the lesser of
(a) the amount or value of the funds or property so distribut
ed or appropriated to him, or
(b) his portion of the undistributed income then on hand.
and subsidiarily states that if there was no wind-
ing-up, discontinuance or reorganization of the
business then section 8(1) would apply, which
reads in part as follows:
8. (1) Where, in a taxation year,
(a) a payment has been made by a corporation to a share
holder otherwise than pursuant to a bona fide business
transaction,
(b) funds or property of a corporation have been appropriat
ed in any manner whatsoever to, or for the benefit of, a
shareholder, or
(c) a benefit or advantage has been conferred on a share
holder by a corporation,
otherwise than
(i) on the reduction of capital, the redemption of shares or
the winding-up, discontinuance or reorganization of its
business,
the amount or value thereof shall be included in computing the
income of the shareholder for the year.
Although the facts in no two cases are entirely
similar, the Supreme Court in two cases applied
section 81(1) of the Act so as to find the taxpayer
liable in preference to section 137(2). In the first
of these, Smythe v. M.N.R. 6 , the judgment disa
greed with the statement of Gibson J. in the
Exchequer Court decision of that case 7 at page
253:
6 [1970] S.C.R. 64.
7 [1968] 2 Ex.C.R. 189.
The main issue for decision is whether or not these transac
tions resulted in the conferral of a benefit on the appellants
within the meaning of subsection (2) of section 137 of the
Income Tax Act; and in the event that the decision on the main
issue is in the affirmative, a subsidiary issue for decision is
whether the amount of such benefit should be assessed under
section 8(1) or section 81(1) of the Income Tax Act.
Judson J. stated at pages 70-71 of the Supreme
Court judgment:
With respect, it is unnecessary and undesirable that the issue
should be defined in these terms. I think the case is plainly
covered by s. 81(1) of the Act and that it is unnecessary to
express any opinion on the scope of s. 137(2) of the Act.
There appears to be no doubt that the re-assessments were
made under s. 81(1) of the Act on the basis that there had been
a winding-up, discontinuance or reorganization of the old com
pany. Gibson J. was in doubt on this point although he
expressed the opinion that had he been the assessor, he would
have come to the conclusion that there was no winding-up,
discontinuance or reorganization of the business of the old
company within the meaning of s. 81(1).
With this opinion I do not agree and I would base my
judgment on this section and this section alone. These assess
ments should be made under this section with the necessary
consequences of a tax credit under s. 38(1). This, I understand,
is what the assessor did.
The Exchequer Court leaves the result untouched but bases
its judgment on the application of s. 137(2) and s. 8(1). If these
were applied there would be no dividend tax credit. There is an
inconsistency here in the judgment of the Exchequer Court. I
would hold that there was a winding-up and a discontinuance of
the business of the old company, although it is apparent that
there was no formal liquidation under the Winding-up Act or
the winding-up provisions of the Ontario Companies Act.
He goes on to adopt the words of Maclean J. in
Merritt v. M.N.R. 8 where he stated at pages
181-82:
I entertain no difficulty over the construction to be given the
words "winding-up, discontinuance or reorganization," as used
in s. 19(1) of the Act. In construing those words we must look
at the substance and form of what was done here. In the case In
Re South African Supply and Cold Storage Company [1904] 2
Ch.D., 268, Buckley J. had to consider whether or not there
had been a winding-up "for the purpose of reconstruction or
amalgamation," and he said "that neither the word reconstruc
tion nor the word amalgamation has any definite legal mean
ing. Each is a commercial and not a legal term, and, even as a
commercial term has no exact definite meaning." I think that
would be equally true of the words of s. 19(1) which I have just
e [1941] Ex.C.R. 175.
mentioned. There was no "winding-up" of the Security Com
pany by a liquidator, but there was in fact, I think, a winding-
up of the business of that company and I think the word
"winding-up" may be given that meaning here, although I need
not definitely so decide because, in any event, there was a
"discontinuance" of the business of the Security Company, and
whether that was brought about by a sale to or amalgamation
with the Premier Company is, in my opinion, immaterial. I
therefore think there is no room for any dispute of substance
but that the Security Company discontinued its business in a
real and commercial sense, and that for a consideration it
disposed of all its property and assets, however far that may
carry one in deciding the issues in this case. There is, therefore,
no necessity for attempting any precise definition of the words
"winding-up, discontinuance . or reorganization." What was
done with the business of the Security Company fell somewhere
within the meaning and spirit of those words.
and points out that section 19(1) was the predeces
sor of the present section 81(1) and for the pur
poses of his reasons there is no difference between
the two.
In the second Supreme Court judgment, Crad-
dock v. M.N.R. 9 , the reasons for applying section
81(1) as given in the Smythe case (supra) were
adhered to. In the trial judgment in that case,
Gibson J. had assessed the taxpayers by the
application of section 137(2) holding that it stood
by itself independently of other sections of the Act,
being a charging section, so that it was not neces
sary to assess the benefit arising from it under any
specific provisions of the Act and therefore no
dividend tax credit could be claimed in respect of
the benefits.
In none of these cases was it necessary to consid
er the significance of the word "on" in the phrase
"on the winding-up, discontinuance or reorganiza
tion of its business" in section 81(1) 10 . Plaintiff
contends that section 81(1) is not applicable
because the payment for the David group's shares
was not a distribution or other appropriation of the
funds of the company at a time when it had
undistributed income on hand, nor was it done in
any event "on the winding-up, discontinuance or
9 [1969] Ex.C.R. 23.
"u The French version uses the words "lors de", which is even
more expressive.
reorganization" of the company's business. I have
concluded that although the payment was made to
them in an indirect manner as a result of actions
taken by third parties over whom the David broth
ers had no control, the end result was nevertheless
that it was the funds of the company, including its
undistributed income, which were used to pay for
their shares and that the words "otherwise appro
priated in any manner whatsoever to or for the
benefit of one or more of its shareholders" are
wide enough to cover what took place. I have more
trouble in concluding that this was "on" the wind-
ing-up, discontinuance or reorganization of its
business. It seems to me that if any meaning is to
be given to the word "on" it must at the very least
mean at the "same time as" or possibly "as a
result of" or "consequential to". While the com
pany ceased its commercial operations on disposal
of its physical assets in August, and the statement
of Maclean J. in the Merritt case (supra), which
was approved by the Supreme Court, is broad
enough to apply section 81(1) to a "discontinu-
ance" of the active commercial business even if
there has been no "winding-up", it nevertheless
remains true in the present case that it was not at
the time of or "on" the discontinuance of the
commercial operations of the company in August
that the funds were appropriated for the benefit of
the David group but only five months later. How
ever, it is evident that the Dunn group planned to
wind up not only the commercial but all business
of the company immediately after they took over,
as the minutes of the meetings of December 30,
1965 indicate. While it is true that subsequent
events indicated the winding-up did not take place
at that time but the operations of the company
were continued by them as an investment com
pany, I do not believe this alters the fact that the
winding-up appears to have been part of the plan,
and as I have already indicated, I do not consider
that the David group can successfully plead igno
rance of what was planned even though they may
not have known all of the details nor could they
control the actions of the Dunn group after they
took over. Certainly after the various transactions
were completed on December 30, the company had
very little left in its bank account, the balance
being $1,848.86 as of December 31. This was
insufficient to cover the two cheques for $75,000
and $25,000 made out to the taxing authorities
which the evidence indicated were never forwarded
to them since as a result of the payments into the
pension fund plan the taxation liability of the
company was so reduced that these payments were
not required. For all practical purposes, the com-
pany's business activities were terminated as a
result of the various transactions on December 31.
I believe therefore that section 81(1) (b) of the Act
should be applied, as the re-assessment did, with
the result that a dividend credit would be allowed
by virtue of section 38 of the Act to each of the
members of the David group for his portion of the
undistributed income on hand deemed to have
been included in the payment made to him. On
this interpretation it is not necessary to go into the
application of section 8(1)(b) or (c) which would
be applicable in the event that it was concluded
that there had been no "winding-up, discontinu
ance or reorganization" of the business of the
company. The application of the latter section
would be less favourable to plaintiff since there
would then be no dividend tax credit. While I
agree with the contention of the defendant that if
section 81(1) is not applicable then section 8(1)
would be, I accept defendant's decision to apply
section 81(1).
In view of this conclusion and in the light of the
Supreme Court jurisprudence in the Smythe and
Craddock cases (supra), it is perhaps unnecessary
and superfluous to consider whether section 137(2)
would be applicable, but in the event that there
should be some question as to my finding that
section 81(1) should apply, I will deal briefly with
the alternative possibility of the application of
section 137(2). The words in that section "not-
withstanding the form or legal effect of the trans
actions or that one or more other persons were also
parties thereto" are very broad as are the words
"whether or not there was an intention to avoid or
evade taxes under this Act". There is little doubt
in my mind that as a result of the various transac
tions that took place, either the company or the
company's pension fund trust conferred a benefit
on the David group in that as a result of these
transactions they were able to withdraw the undis-
tributed surplus of the company without paying
taxation thereon. Plaintiffs attempt to invoke sec-
tion 137(3) fails because although the David group
may have been dealing at arm's length with the
purchasers I have concluded that they cannot
plead ignorance as to what the purchasers were
subsequently going to do, and they cannot there
fore claim that the purchase of their shares was
not "as part of any other transaction". For this
reason I believe that plaintiff's appeal would have
failed on this ground also had it been necessary to
rely on this section.
Plaintiff's action is therefore dismissed with
costs and I will make the same finding with respect
to the two other cases, Fernand David, T-2747-72
and Raymond Pepin, T-2749-72.
You are being directed to the most recent version of the statute which may not be the version considered at the time of the judgment.