T-2201-72
Charles Perrault (Plaintiff)
v.
The Queen (Defendant)
Trial Division, Walsh J.—Montreal, November 7,
1975; Ottawa, December 24, 1975.
Income tax—Income calculation—Dividends—Defendant
adding $350,005.50 to plaintiff's income as benefit allegedly
paid him by a company of which he was principal and control
ling shareholder—Motive—"Winding-up" exception—Direc-
tion or concurrence—Income Tax Act, R.S.C. 1952, c. 148, ss.
6(1), 8(1), 16(1), 137(2) as am.—Quebec Civil Code, art.
1472—Quebec Companies Act, R.S.Q. 1964, c. 271, s. 68.
Plaintiff owned 273 shares of M Limited, and had agreed
with one N to buy 24 shares. A dividend of $1,813.50 a share
was declared, but was renounced by plaintiff, and was received
only by CMS, holder of 193 shares. Previously, plaintiff had
agreed to buy the 193 shares held by CMS, and the agreement
had been accepted by the R Estate, which controlled CMS. No
one, however, signed for CMS. The dividend was deposited to
the account of R Estate; CMS showed its receipt in its 1965 tax
return. Defendant, relying on sections 6(1), 8(1), 16(1) and
137(2), claims that $350,005.50 was added to plaintiff's income
as a benefit allegedly paid by M of which plaintiff was the
principal and controlling shareholder. Subsidiarily, defendant
argues that, based on section 6(1)(a)(i), plaintiff received a
dividend which should have been included in income because
plaintiff owned the CMS shares when the dividend was
declared. Plaintiff argues the dividend was declared to benefit R
Estate, and that he had no desire to acquire the additional CMS
shares.
Held, the action is dismissed. As to defendant's subsidiary
argument, article 1472 of the Civil Code requires consent of the
parties; CMS never legally consented to the transfer. It was
registered after the dividend was declared. Had it not been,
plaintiff's waiver would have been effective with respect to
those shares also. The dividend was paid to, and declared by,
CMS. It was not deemed to have been paid to plaintiff, nor can
plaintiff's assessment have been based on his waiver. Motive is
irrelevant, and plaintiff must abide by the consequences. Nor is
plaintiff's claim to the winding-up exception in section
8(1)(b)(i)"applicable—the company was still actively operating
when the dividend was declared and paid. As to section 16(1),
clearly plaintiff controlled the company, and was in a position
to give "direction" to the directors. Certainly, the actions were
done with his "concurrence". It makes no difference for whom
the alleged benefit was intended. While section 137(2) might
be applied, section 16(1) is the better. It woud involve a broad
interpretation of section 137(2) to consider the declaration of a
dividend as a "transaction" benefitting plaintiff even though
received by CMS. There is nothing to indicate that plaintiff did
not receive a benefit by acquiring the additional shares without
personally paying for them.
Robwaral Limited v. M.N.R. [1960] C.T.C. 16, con
sidered. M.N.R. v. Merritt Estate [1969] 2 Ex.C.R. 51;
M.N.R. v. Bisson 72 DTC 6374 and M.N.R. v. Dufresne
[1967] 2 Ex.C.R. 128, applied. M.N.R. v. Bronfman
[1966] Ex.C.R. 172, distinguished.
INCOME tax appeal.
COUNSEL:
P. Vineberg for plaintiff.
A. Garon and R. Roy for defendant.
SOLICITORS:
Phillips & Vineberg, Montreal, for plaintiff.
Deputy Attorney General of Canada for
defendant.
The following are the reasons for judgment
rendered in English by
WALSH J.: This is an appeal against an assess
ment by defendant whereby the sum of $350,-
005.50 was added to plaintiff's income for the
taxation year 1965 as a benefit allegedly paid to
him under the provisions of the Income Tax Act in
effect at that time' by a company, Montreal Terra
Cotta Limited, of which he was the principal and
controlling shareholder. At the time of the declara
tion of the dividend on November 15, 1965, he
owned 273 common shares of the said company,
one Oskar Nômm was the owner of 24 such
shares, and Central Motor Sales Ltd., a company
controlled by the Estate of A. H. Rocheleau in
which the plaintiff had no interest whatsoever
owned the remaining 193 shares making a total of
490 shares. Actually on November 11, 1965,
Oskar Nômm had agreed to sell to plaintiff
Charles Perrault his 24 shares for a price of
$50,000 payable with interest over a period of
three years, commencing as of January 1, 1966,
which sum was actually paid in full by a cheque of
Montreal Terra Cotta Limited dated December
R.S.C. 1952, c. 148 as amended.
30, 1965, which was allegedly charged to Mr.
Perrault's account. The transfer of the said shares
had apparently not been recorded in the books of
the company as of November 11, 1965, since the
said Oskar Nômm was present at a meeting of the
directors of the- company on that date, as appears
in the minutes of that meeting. At that meeting, a
dividend of $1,813.50 a share was declared, and
entered in the minutes together with letters from
Messrs. Perrault and Nômm renouncing to the
said dividend with the result that only Central
Motor Sales Ltd. received the dividend on its 193
shares, and the total amount of the dividend so
received was $350,005.50. Peculiarly there was a
second meeting of directors on the same date at
the same time in which it was recorded that Mr.
Nômm having sold his shares to Mr. Perrault was
no longer a shareholder so he was replaced as a
director. Again the dividend was declared and Mr.
Perrault renounced to same. If the minutes of this
meeting apply then his renunciation would cover
both his own shares and those bought from Mr.
Nômm. In any event, it is evident that it was never
intended that Nômm should receive any dividend
a 1 nd that Perrault renounced to any that he would
otherwise be entitled to.
Nearly four months previously, on July 28,
1965, an agreement had been entered into in the
form of an offer made by Mr. Perrault to acquire
the 193 common shares of Montreal Terra Cotta
Limited held by Central Motor Sales Ltd. which
offer read as follows:
[TRANSLATION] I, the undersigned, offer to become the pur
chaser of the 193 shares of Montreal Terra Cotta Limited held
by Central Motor Sales Co. ,Ltd. for one dollar and other
valuable considerations.
As a consideration, if my offer is accepted, I undertake to have
paid to Central Motor Sales Co. Ltd. the sum of $350,000 after
which the 193 shares of Montreal Terra Cotta Limited shall be
delivered to me duly endorsed.
This offer is in effect until August 15, 1965, at noon, being the
final date for the succession to accept by countersigning the
present letter. Following that date, the sum of $350,000 shall
be paid within the delay of 90 days.
As proof of my good faith, I enclose a cheque of $10,000 to the
order of the succession. This cheque shall be returned to me at
the time of the finalization of the transfer.
This offer was accepted on August 12 by the
Estate of A. H. Rocheleau, signed by Mme Ber-
nadette Rocheleau and Lucien H. Bélair, testa
mentary executors, and countersigned and accept
ed by all the heirs of the estate, but it is legally
significant that it was not signed by anyone on
behalf of Central Motor Sales Ltd. whose shares
were being sold, nor was there ever apparently any
meeting of the directors of that company nor any
resolution approving the sale. Mr. Lucien Bélair,
C.A., who had been the auditor of Montreal Terra
Cotta Limited and its predecessor company since
1932 and who was also executor of the Rocheleau
Estate, for all practical purposes ignored the exist
ence of Central Motor Sales Ltd. which had been
dormant for some time. The dividend cheque was
properly made payable to Central Motor Sales
Ltd. however, but was then simply endorsed by
Mr. Bélair as president for deposit to the account
of the estate. Central Motor Sales Ltd. showed the
receipt of the dividend of $350,000 in its tax return
for the year ending December 31, 1965, which
reduced its deficit which was for a greater amount.
This return was not questioned by the Minister.
Mr. Bélair testified that demands for the prod
ucts of Montreal Terra Cotta Limited, which had
plants in both Pointe-Claire and Deschaillons in
the Province of Quebec, began to diminish about
1958 or 1959 and efforts were made to sell the
company. Mr. Rocheleau transferred his shares to
Central Motor Sales Ltd., a company wholly-
owned by him in 1959. He died in January 1962
after having been ill for a year. By 1964 it was
decided to close the Pointe-Claire operations of
Montreal Terra Cotta Limited and sell the prop
erty there. The company was not in a liquid posi
tion as appears by the statement as of February
28, 1965, showing, in round figures, cash $4,500;
accounts receivable of $77,000; finished products
and supplies $382,000; against which there was an
outstanding guaranteed bank loan of $271,000 and
accounts payable of some $60,000. In the autumn
of 1964 they began negotiating for the sale of the
land in Pointe-Claire which was eventually sold on
September 23, 1965, for a total of $900,000 of
which $450,000 was received in cash. This was
done through two deeds negotiated with Elysée
Realties Limited involving the sale of approxi
mately half of the property by it to the Town of
Pointe-Claire. The details of these deeds do not
concern us in this case. They had been under
negotiation for some time, however, and at the
time the plaintiff made his offer to purchase shares
of Montreal Terra Cotta Limited in July he was
undoubtedly aware that Montreal Terra Cotta
Limited anticipated selling its property, and hence
would obtain a substantial amount of cash in the
near future.
Mr. Bélair testified that he did not explain to
Mr. Perrault how he was planning to arrange for
him to pay for the shares which he had agreed to
buy. He had considered the possibility of using the
provisions of the Winding-up Act, which would
have required the consent of the creditors, or of
reducing the capital of Montreal Terra Cotta Lim
ited by supplementary letters patent. Following the
sale of the real estate and some of the stock in
trade, the bank loan was reduced considerably and
no problem was encountered with the bank in
connection with the declaration of the dividend.
He consulted legal counsel who approved the plan
which was adopted. He testified that the
Rocheleau Estate needed the money as it was in a
difficult financial position. He realized that, if a
dividend in a smaller amount had been declared
and accepted by all the shareholders, the plaintiff,
Mr. Perrault, would then have been taxable on the
amount so received by him. He would, of course,
have received the dividend tax credit on same. He
pointed out that Mr. Perrault did not need cash at
the time and that the primary object of the
manner in which they proceeded was to provide
funds for the Rocheleau Estate.
Charles Perrault, the plaintiff, testified, cor
roborating Mr. Bélair's evidence and stating that
he had no interest in acquiring the shares of the
other shareholders in Montreal Terra Cotta Lim
ited. He was aware that money to pay for the
shares which he was buying would come from
Montreal Terra Cotta Limited, however, but he
had complete confidence in Mr. Bélair and under
stood what was being done.
In 1966, Montreal Terra Cotta Limited was
liquidated, being converted into a new company,
and some evidence was adduced as to what Mr.
Perrault received at this time and on the subse
quent liquidation of the shares of the new company
but I do not consider that the subsequent transac
tions are relevant in establishing whether the com
pany conferred a benefit on him as a result of the
dividend declaration to Central Motor Sales Ltd.
which constituted the consideration for the pur-
chase by him of the shares of that company in
Montreal Terra Cotta Limited.
The defendant, in making the assessment, relies
upon sections 6(1), 8(1), 16(1) and 137(2) of the
Income Tax Act (supra). More specifically, it
appears that it is sections 6(1)(a)(i), 8(1)(b) to
gether with the exception thereto (i), 16(1) and
137(2)(a) which are in issue. These sections read
as follows:
6. (1) Without restricting the generality of section 3, there
shall be included in computing the income of a taxpayer for a
taxation year
(a) amounts received in the year as, on account or in lieu of
payment of, or in satisfaction of
(i) dividends,
8. (1) Where, in a taxation year,
(b) funds or property of a corporation have been appropriat
ed in any manner whatsoever to, or for the benefit of, a
shareholder, or
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.
16. (1) A payment or transfer of property made pursuant to
the direction of, or with the concurrence of, a taxpayer to some
other person for the benefit of the taxpayer or as a benefit that
the taxpayer desired to have conferred on the other person shall
be included in computing the taxpayer's income to the extent
that it would be if the payment or transfer had been made to
him.
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.
The subsidiary argument of defendant based on
section 6(1)(a)(i) to the effect that plaintiff
received a dividend in the amount of $350,005.50
which should have been included in computing his
income for his 1965 taxation year can be quickly
disposed of as it is based on the premise that
plaintiff was owner of the shares acquired from
Central Motor Sales Ltd. at the time the dividend
was declared. Reference was made to article 1472
of the Quebec Civil Code which reads as follows:
Art. 1472. Sale is a contract by which one party gives a
thing to the other for a price in money which the latter obliges
himself to pay for it.
It is perfected by the consent alone of the parties, although
the thing sold be not then delivered; subject nevertheless to the
provisions contained in article 1027 and to the special rules
concerning the transfer of registered vessels.
This article requires the consent of the parties and
it is evident that, despite all the signatures on the
document dated July 28, 1965, consent of Central
Motor Sales Ltd. as owner of the shares was never
legally given. The existence of that company
cannot be ignored so the agreement was merely
binding between the Rocheleau Estate and the
plaintiff and constitutes an undertaking by the
Rocheleau Estate to have Central Motor Sales
Ltd. sell its shares in Montreal Terra Cotta Lim
ited for $350,000, which plaintiff Perrault agrees
to have paid to it "after which" (to use the word
ing of the agreement itself) the shares are to be
delivered to him 2 .
Moreover section 68(1) of the Quebec Compa
nies Act 3 reads as follows:
68. (1) No transfer of shares, unless made by sale under
execution or under the decree, order or judgment of a court of
competent jurisdiction, shall be valid for any purpose until
entry thereof is duly made in the register of transfers, except
for the purpose of exhibiting the rights of the parties thereto
towards each other and of rendering the transferee liable in the
meantime, jointly and severally with the transferor, to the
company and its creditors.
There is no proof as to when the entry of transfer
of the shares was made in the register of transfers
of the company but this would certainly have been
2 The same reasoning would not seem to apply to the shares
acquired from Oskar Nômm, whose consent accompanied by
delivery of the shares had apparently been obtained on Novem-
ber 11, 1965, even though payment was to be much later.
3 R.S.Q. 1964, c. 271.
after the declaration of the dividend. Moreover, if
it were to be seriously contended that the plaintiff
had acquired ownership of the Central Motor
Sales Ltd. shares before the declaration of the
dividend, then his renunciation of the dividend
would also . have been effective with . respect to
these shares. It is not disputed that the dividend
was in fact paid to Central Motor Sales Ltd.,
declared by it in its tax return for 1965, and that
the plaintiff did not receive any dividend whatso
ever. Finally, even if by some deeming process this
were considered to ' be a dividend paid to the
plaintiff then, if the assessment were to be con
sistent, he should have been given the dividend tax
credit on same, which was not done in the
assessment.
Neither can plaintiffs assessment have been
based on his waiver of the dividend. In fact the
total amount of the dividend which he waived on
the 273 -common shares which he already owned,
plus possibly the additional 24 shares acquired
from Oskar Nômm, depending on whether this
transfer had been entered in the books of the
company prior to the declaration of the dividend,
would at $1,813.50 a share have amounted to a
great deal more than the amount of $350,005.50
which is assessed. The jurisprudence as well as
departmental practice relating to waiver of divi
dend has established a clear distinction between
the acceptance of a dividend together with the
assigning it to somebody else, in which event the
dividend is taxable in the hands of the initial
recipient, and the simple unconditional waiver of
same whether before or after its declaration. (See,
for example, Simon's Taxes D1.111, Robwaral
Limited v. M.N.R. 4 , and Department of National
Revenue Interpretation Bulletin IT-208, which
latter is admittedly not. binding on defendant.)
With respect to plaintiffs argument that, since
the purpose of the dividend declaration was to
benefit the Rocheleau Estate which was sorely in
need of funds and that, since the plaintiff himself
had no desire to acquire the additional shares of
the company owned by Central Motor Sales Ltd.,
there was not any advantage to him in doing so
and that he therefore should not be taxed on it, I
cannot accept this reasoning. The motive which
induced the plaintiff to complete the agreement of
6 [19661 Ex. C.R. 172.
July 28, 1965, and cause Montreal Terra Cotta
Limited to declare the dividend of $1,813.50 a
share on November 15, 1965, which he renounced,
is irrelevant if in fact he received a benefit as a
result of these series of transactions. Even if the
primary motive of the series of transactions may
have been to benefit the Rocheleau Estate, the
plaintiff must abide by whatever consequences
result from what was done, nor can he plead
ignorance of the method adopted. Mr. Bélair who
devised it primarily on behalf of the Rocheleau
Estate and drew up the agreement of July 28,
1965, had also been for many years the auditor of
Montreal Terra Cotta Limited and was in fact
temporarily a director of the company at the time
the dividend was declared at the directors' meeting
on November 15, 1965, after Mr. Nômm's
replacement as a director. Mr. Perrault in his
evidence expressed complete confidence in Mr.
Bélair. In the case M.N.R. v. Merritt Estates, my
brother Cattanach J. stated at pages 62-63:
In my view, the basic premise on which this analysis is based is
that, where the "mind" by which the bargaining is directed on
behalf of one party to a contract is the same "mind" that
directs the bargaining on behalf of the other party, it cannot be
said that the parties are dealing at arm's length. In other words
where the evidence reveals that the same person was "dictat-
ing" the "terms of the bargain" on behalf of both parties, it
cannot be said that the parties were dealing at arm's length.
and again at page 63:
In my view, it is immaterial that the whole arrangement was
the "brain child" of the professional advisers. It would have
been of no effect if the deceased had not accepted their advice,
made the scheme his own and given instructions that it be
carried out. It is also immaterial whether he ever completely
absorbed the details of the plan. He stipulated the result that he
required from the scheme and, in effect, he instructed the
carrying out of a scheme so devised as to accomplish that
result.
I fully share these views which are equally appli
cable to the present case.
It was suggested by counsel for defendant that,
since the company only had approximately $350,-
000 cash with which to pay dividends, instead of
declaring the dividend of $1,813.50 a share on the
understanding that all of this would be paid to
Central Motor Sales Ltd. as a result of its holding
of 193 shares, a dividend of approximately $715 a
[1969] 2 Ex.C.R. 51.
share could have been declared which all share
holders could have accepted and the plaintiff, as
owner of 273 common shares plus 24 acquired
from Oskar Nômm (if in fact he was the registered
shareholder of these shares before the dividend
declaration), would have received $212,355 and
Central Motor Sales Ltd. would have received
$137,995. Mr. Perrault could then have used the
dividend he received to complete the payment for
the shares he had agreed to purchase, and the
Rocheleau Estate would have ultimately received
approximately the same amount as it did by virtue
of the method adopted. Whether, in this event, the
Minister would ever have attempted to assess the
plaintiff on the basis that the sum $137,995 paid
as a dividend to Central Motor • Sales Ltd. was
considered by the parties to be part payment for
the shares he was buying and therefore constituted
a benefit pro tanto to plaintiff is very doubtful,
since certainly the declaration of a dividend to one
shareholder would normally not be considered as
conferring a benefit on another shareholder even
if, in fact, the proceeds of the dividend are to be
used to pay in whole or in part for the purchase by
the latter of the former shareholder's shares. It
was the waiver of the dividend by the plaintiff,
enabling a much larger dividend to be paid to
Central Motor Sales Ltd. constituting the entire
payment for the shares he was purchasing, which
led to defendant's contention that a benefit was
conferred on him, even though the unconditional
waiver of a dividend by itself does not normally
lead to an assessment of the amount of the divi
dend waived by the taxpayer. There is no doubt,
however, that both Mr. Bélair and Mr. Perrault
were aware that, had a smaller dividend been
declared, enabling him as well as Central Motor
Sales Ltd. to accept it, he would have been taxable
on the dividend so received. The Minister cannot
base an assessment, however, on what might have
been done; both he and the Court must deal with
what actually was done and consider the conse
quences of same on the tax liability of the various
parties involved. It is well established law that a
taxpayer is entitled to so arrange his affairs as not
to attract taxation if he can, within the framework
of the Act, and regulations, adopt a different
manner of proceeding so as to minimize his tax
liability.
Plaintiff argued that in any event, if a benefit
had been conferred upon him as a shareholder, the
exception of section 8(1)(b)(î) would be applicable
as this was done in connection with the "winding-
up, discontinuance or reorganization" of the com-
pany's business. I cannot accept this argument as
Montreal Terra Cotta Limited, although it had
disposed of its Pointe-Claire property, still owned
its property in Deschaillons and was actively oper
ating. It was eventually converted into another
company, Montreal Terra Cotta (1966) Ltd. at the
end of 1966 and, in due course, that company may
have been wound up, and certainly Mr. Perrault
was trying to dispose of its assets with a view to
eventually winding it up, but there was no wind-
ing-up, discontinuance or reorganization of the
business at the time the dividend was declared and
paid. This exception is therefore not applicable to
the facts of the present case.
If defendant is to succeed in having the assess
ment maintained it must be on the basis of either
section 16(1) or 137(2) of the Act. Section 16(1)
is drawn in very broad terms. It would apply
whether the dividend payment were made "pursu-
ant to the direction of' or "with the concurrence
of' the taxpayer. This, I believe, answers the
argument of plaintiff's counsel arising from the
fact that it is the directors of a company which
declare a dividend and not the shareholders. This
question was raised in the case of M.N.R. v.
Bronfman 6 dealing with gifts made by a company
to relatives of the directors, including substantial
cash wedding presents to their children and grand
children. The five directors did not own the con
trolling shares, however, and Dumoulin J. in hold
ing that all the shareholders, and not just the
directors, should share in the tax liability resulting
from the application of section 16(1), said at page
179:
Shareholders possessing voting rights could have, had they so
wished, objected to and voted down at annual or specially
convened meetings their directors' generosities. And, of course,
they also might have resorted to the radical remedy of voting
out of office the entire Board and elected a more thrifty slate of
directors. Their abstention or indifference, unbrokenly main
tained, becomes tantamount to an approval of their administra
tor's gift distributing policies, and they should, with the latter,
6 [1966] Ex.C.R. 172.
have shared proportionately to their individual holdings, the
burden of taxation decreed by s. 16(1).
The facts in the present case are quite different
however. The plaintiff, Charles Perrault, was the
controlling shareholder, with or without the shares
acquired from Oskar Nômm. The only other
shareholder aside from Central Motor Sales Ltd.
was Mr. Raymond Corriveau who held a qualify
ing share only and, after Mr. Nômm's resignation,
apparently Mr. Lucien Bélair who was at the
second meeting of directors on November 15,
1965, stated to be a shareholder and qualified to
be a director to replace him, although there is no
proof of any transfer of a share to him as of any
resolution of Central Motor Sales Ltd. designating
him to represent them as a director. In any event
it is abundantly clear that Mr. Perrault controlled
the company and was in a position to give "direc-
tion" to the directors to declare the dividend
which they did. Certainly it was done with his
"concurrence".
To continue the analysis of section 16(1), it
applies whether payment is made "to some other
person for the benefit of the taxpayer" or "as a
benefit that the taxpayer desired to have conferred
on the other person". It makes no difference there
fore whether the benefit (if in fact there was a
benefit) was for the plaintiff himself or for the
Rocheleau Estate which, as sole shareholder of
Central Motor Sales Ltd., stood to benefit by the
declaration of the dividend received by that com
pany, as appears from the fact that the entire
dividend cheque was then immediately endorsed
over to the Estate.
A somewhat similar situation was dealt with by
Pratte J. in the case of M.N.R. v. Bisson 7 in which
Louis Bisson, one of two equal shareholders of a
bus company, acquired the shares of the other
shareholder, W. T. Thorn, which had been deposit
ed with him as security for a loan. A dispute about
this was settled when Bisson in addition to relin
quishing payment of the loan caused the company
to undertake to employ his former associate Thorn
and pay him for past and future advice to the
company. Pratte J. found that these payments by
7 72 DTC 6374.
the company had the effect of conferring a benefit
on Bisson by virtue of section 16(1) of the Act,
having been made with his consent and for his
benefit. At page 6379 Pratte J. stated:
In my opinion only one inference can be drawn from these
facts; it is that, as the price of waiving his claim against Bisson,
Thorn required that he be paid a sum of money which Hull
City Transport Ltd. in fact paid him. In paying Thorn the sum
of $60,000 stipulated in the contract of May 13, 1953, Hull
City Transport Ltd. thus paid part of the price Thorn was
asking for waiving his claim against Bisson. By so doing the
company made payments for respondent's benefit within the
meaning of s. 16(1), and as these payments were made with
respondent's consent, and would have formed part of his income
if they had been made to him directly, I cannot but conclude
that they should have been included in computing respondent's
income for the years in question.
One other case might be referred to, namely,
that of M.N.R. v. Dufresne 8 in which a family
company of which the respondent was the control
ling shareholder on two occasions granted its
shareholders the right to subscribe for additional
shares at $100 par value when they had a book
value of $1,421 each. Respondent and his wife
refrained from subscribing but their five children
exercised their rights in full. The Minister invoked
section 137(2), assessing the respondent for gift
tax as a result of having conferred benefits on his
children. Respondent argued that the benefit had
been conferred by the company and not by him,
and that in any event it was exempt by section
8 (1) (c) (iii) which provides that no benefit or
advantage is conferred on a shareholder by a
corporation by the conferring on all holders of
common shares in the capital of the corporation a
right to buy additional shares therein. Jackett P. as
he then was held however:
The provisions of section 137(2) had been correctly applied
by the Minister in assessing the respondent to gift tax. It
seemed clear that there was a mutual assumption that a benefit
had been conferred on the children by the transactions in
question; in any event, the respondent did not challenge the
correctness of such assumption. The benefit conferred was an
increase in the proportions of the shareholdings of the children
at the expense of a decrease in the proportion of the sharehold-
ing of the respondent. Such benefit was the "result'' of a
"transaction", and the benefit was conferred on the children by
the respondent. The respondent, as the owner of practically all
8 67 DTC 5105.
the shares of-the company and the head of the family, had the
controlling influence in the determination of the course of
events with which the appeal was concerned. The sequence of
events bore all the earmarks of a series of company transactions
that had been arranged in advance by the respondent with a
view to increasing the children's proportions in the ownership of
the stock of the company. Section 8(1)(c)(iii) did not have the
effect of exempting the respondent from liability to pay gift
tax, even though such liability arose from a series of transac
tions or other events of which the company's granting of rights
to its shareholders was one.
The renunciation to the dividend by plaintiff in
the present case is somewhat analogous to the
failure of Dufresne and his wife to subscribe to the
stock offered by his company at less than book
value. If we look at the result in the present case,
Montreal Terra Cotta Limited conferred a benefit
on plaintiff (if in fact the acquisition of the addi
tional shares constituted a benefit) in the same
manner as payments by a company to third per
sons were found to have conferred a benefit on a
shareholder who caused the company to make
these payments for his benefit in the Bronfman
case (supra).
While section 137(2) might perhaps be applied
and, if it were, the exception of section 137(3) 9
would not be applicable in view of the part played
by Mr. Bélair, acting for all parties, as previously
indicated, and that it was made to effect payment
of an obligation of plaintiff and not of the com
pany. I prefer to base the tax liability of plaintiff
in the present case on section 16(1), as it would
involve a very wide interpretation of section 137(2)
to consider the declaration of a dividend as a
"transaction" benefitting plaintiff even though the
dividend was received by Central Motor Sales Ltd.
The only question remaining to be decided is one
of fact, namely, "Did the series of transactions
which resulted in plaintiff obtaining the 193 shares
of Montreal Terra Cotta Limited owned by Cen
tral Motor Sales Ltd. without paying any of his
own money for same result in a `benefit' to him or,
9 137. (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.
alternatively, to the Rocheleau Estate at the desire
of plaintiff?"
At first sight it would appear that the acquisi
tion of additional shares in a solvent and viable
company without the taxpayer himself paying any
thing for them must be considered as a benefit to
him. This is perhaps an over-simplification how
ever. After the dividend payment and transfer of
the shares to him he now owned all 490 shares as
against 273, plus 24 acquired from Oskar Nômm
previously. However the company's assets had now
been reduced by $350,005.50, the amount of the
dividend. It can readily be seen that, had the
$350,005.50 represented the entire assets, plaintiff
would have been worse off instead of having
received a benefit, for the ownership of 273/490 or
even 297/490 of the shares of a company with
some $350,000 worth of assets would obviously be
better than owning all the shares of a company
with no assets. On the other hand, in this hypo
thetical case, plaintiff, in causing the company to
declare such a dividend and renouncing same so
that it all went to Central Motor Sales Ltd., might
still have been liable under section 16(1) for
having caused a benefit to be conferred indirectly
on the Rocheleau Estate. Some consideration must
therefore be .given to the question of whether, in
fact, any benefit resulted which would render
plaintiff taxable on same under section 16(1) of
the Act. While some slight evidence was adduced
attempting to show what plaintiff actually received
on the conversion of the company to Montreal
Terra Cotta (1966) Ltd. and the eventual winding-
up of same, on a present worth basis, this is going
too far afield. We must look to the value of the
shares he obtained at the date of the acquisition,
without considering fluctuations in the value of
same resulting from subsequent operations of the
company or future property dispositions.
The balance sheet of Montreal Terra Cotta
Limited as of February 28, 1965, showed Share
holders Equity of $967,779.43 which included the
paid up capital of $49,000 and capital surplus of
$100,182.07. The 490 shares therefore had a book
value of somewhat under $2,000 each. Oskar
Nômm was paid $50,000 for the 24 shares which
plaintiff bought from him—a generous payment to
a long-time employee. The amount of $1,813.50
paid by way of a dividend declaration for acquisi
tion by plaintiff of Central Motor Sales Ltd.'s
shares appears to be a fair and realistic price 10 ,
After the dividend declaration and payment the
next balance sheet of the company as of February
28, 1966, shows Shareholders Equity of $1,122,-
912.14. The capital surplus figure has now been
eliminated but accumulated earnings have gone up
from $818,597.36 to $1,073,912.14. It is apparent
that, with plaintiff now being the sole shareholder,
the shareholders' equity, far from being reduced,
has increased.
There is nothing therefore to indicate that plain
tiff did not in fact receive a benefit by acquiring
the additional shares without paying for same
personally.
Plaintiff was therefore properly assessed for his
1965 taxation year under the provisions of the
Income Tax Act in effect at the time, and his
action is dismissed with costs.
10 It is of academic interest to note that plaintiff merely
undertook to "have paid" to Central Motor Sales Ltd. the sum
of $350,000. There is of course nothing in the dividend declara
tion to indicate that this was in fulfilment of plaintiffs obliga
tion, but all parties seem to have assumed that this was the
case. One might wonder what would be the result if Central
Motor Sales Ltd., despite having received the dividend, duly
declared, decided to demand payment from plaintiff for its
shares.
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.