A-17-76
Charles Perrault (Appellant)
v.
The Queen (Respondent)
Court of Appeal, Pratte and Le Dain JJ. and Hyde
D.J.—Montreal, March 15; Ottawa, April 24,
1978.
Income tax — Income calculation — Dividends —
Respondent adding $350,005.50 to appellant's income as ben
efit allegedly paid him by a company of which he was princi
pal and controlling shareholder — Whether or not payment
should not give rise to taxability as dividend and benefit —
Whether or not winding-up provisions applicable — Whether
or not dividend tax credit should apply — Whether or not
transfer of property within s. 16(1) — Income Tax Act, R.S.C.
1952, c. 148, ss. 8(1)(b),(c), 16(1), 137(2).
This is an appeal from a judgment of the Trial Division
dismissing an appeal from a decision of the Tax Review Board,
which dismissed the appellant's appeal from an assessment for
income tax. The issue in the appeal is whether the sum of
$350,005.50 paid as a dividend in November 1965 by Montreal
Terra Cotta Limited—a company controlled by appellant—to
Central Motor Sales Ltd. and paid over by the latter in
satisfaction of indebtedness to its controlling shareholder, the
Rocheleau estate, and in consideration of which Central Motor
Sales Ltd. transferred its shares in Montreal Terra Cotta
Limited to the appellant, should be included in appellant's
income for the 1965 taxation year as a benefit within the
meaning of section 8(1)(b),(c), 16(1) or 137(2) of the Income
Tax Act.
Held, the appeal is dismissed. Appellant's position that the
parties to the agreement never intended that the appellant
should incur a legal obligation to cause this payment to be
made, cannot be adopted. His contention that the same pay
ment should not give rise to taxability as a dividend and as a
benefit—a form of double taxation—is not acceptable. If a
shareholder chooses to take the payment in the form of a
dividend for a sale of his shares to another shareholder under
an agreement such as this one, then this must be the result,
however excessive from a fiscal point of view it may appear.
There is no basis on which the selling shareholder can be said
not to have received a dividend within the meaning of section 6
and no basis on which the purchasing shareholder can be said
not to have received a benefit. A payment by a corporation
which has the effect of extinguishing a shareholder's debt must
be considered to be a benefit conferred on him. It is not the
effect of the payment of the dividend but its effect that
constitutes a benefit and the value of what he actually acquired
in consideration of the debt is really irrelevant. The payment of
the dividend was not part of a winding-up of the Company so as
to make section 8(1) inapplicable or section 81(1) applicable.
As the payment was not a dividend to the appellant, the tax
incurred should not be treated as receipt of a dividend with the
benefit of the dividend tax credit. The payment by the Com
pany to Central Motor should not be considered to be a
"payment or transfer of property" within the meaning of
section 16(1) even though it could be said to have been made
pursuant to the direction or concurrence of the appellant.
Smythe v. Minister of National Revenue [ 1970] S.C.R.
64, distinguished. Merritt v. Minister of National Revenue
[1941] Ex.C.R. 175, distinguished. Minister of National
Revenue v. Pillsbury Holdings Ltd. [ 1965] 1 Ex.C.R. 676,
distinguished. Minister of National Revenue v. Bisson
[1972] F.C. 719, referred to.
INCOME tax appeal.
COUNSEL:
Philip Vineberg, Q.C., for appellant.
Alban Garon, Q.C., and Roger Roy for
respondent.
SOLICITORS:
Phillips & Vineberg, Montreal, for appellant.
Deputy Attorney General of Canada for
respondent.
The following are the reasons for judgment
rendered in English by
LE DAIN J.: This is an appeal from a judgment
of the Trial Division [[1976] 1 F.C. 339] dismis
sing an appeal from a decision of the Tax Review
Board, which dismissed the appellant's appeal
from an assessment for income tax in respect of
the 1965 taxation year.
The issue in the appeal is whether the sum of
$350,005.50 paid as a dividend in November 1965
by Montreal Terra Cotta Limited, a company of
which the appellant Charles Perrault was the con
trolling shareholder, to Central Motor Sales Ltd.
and paid over by the latter in satisfaction of
indebtedness to its controlling shareholder, the
estate of A. H. Rocheleau, and in consideration of
which Central Motor Sales Ltd. transferred its
shares in Montreal Terra Cotta Limited to the
appellant, should be included in the appellant's
income for the 1965 taxation year as a benefit to
him within the meaning of section 8(1)(b), section
8(1)(c), section 16(1) or section 137(2) of the
Income Tax Act, R.S.C. 1952, c. 148, as amended.
These provisions, as they applied to the 1965
taxation year, read 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,
(ii) by payment of a stock dividend, or
(iii) by conferring on all holders of common shares in the
capital of the corporation a right to buy additional
common shares therein,
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, decla
rations of trust, or other transactions of any kind whatsoever is
that a person confers a benefit on a taxpayer, that person shall
be deemed to have made a payment to the taxpayer 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,
(b) deemed to be a payment to a non-resident person to
which Part III applies, or
(c) deemed to be a disposition by way of gift to which Part
IV applies.
Montreal Terra Cotta Limited (hereinafter
referred to as the "Company") was a well-estab
lished firm engaged in the manufacture of prod
ucts used in building construction. It operated
plants at Pointe-Claire and Deschaillons, in the
Province of Quebec. It prospered in the years
immediately after the Second World War, but
during the 1950's technological change in building
construction caused it to lose the market for its
principal product. The owners of the Company
made efforts during the 1950's and early 1960's to
find a buyer for the Company, but without success.
In 1962, A. H. Rocheleau, who held his shares in
the Company through Central Motor Sales Ltd.,
(hereinafter referred to as "Central Motor") died
leaving an estate that encountered the need of
funds to meet debts and succession duties. About
1964 the appellant began to take a less active part
in the Company because of ill-health. The Com
pany was heavily indebted and in the fiscal year
ending February 28, 1965, it suffered a loss after
depreciation. In 1964 the plant at Pointe-Claire
was closed down. Negotiations were carried out to
sell the property at Pointe-Claire. Operations were
continued on a reduced scale at the Deschaillons
plant. The plan was to dispose of the existing
inventory, pay the debts of the Company and wind
up the business as soon as possible.
Mr. L. P. Bélair, a member of the Company's
firm of auditors and an executor of the Rocheleau
estate, was active throughout this period in
attempting to find a buyer for the Company and in
looking after the interests of the estate. The estate
was in financial difficulties. When the Company
succeeded in making arrangements for the sale of
its property at Pointe-Claire, from which it was to
realize some $465,000 in cash, Bélair conceived
the plan of transferring some of these funds to the
Rocheleau estate. At that time the shares of the
Company were held as follows: the appellant
273; Central Motor-193; Oskar Nômm-24. The
plan was that the Company would pay the value of
the shares held by Central Motor in the form of a
dividend to the latter company, in return for which
Central Motor would transfer its shares in the
Company to the appellant. Bélair wrote out an
offer to purchase to be signed by the appellant as
follows:
[TRANSLATION] I, the undersigned, offer to become the pur
chaser of the 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 signed by the appellant on July
28, 1965 and accepted on behalf of the A. H.
Rocheleau estate by Bélair and the other executor
on August 12, 1965. Bélair also obtained the sig
natures of all the heirs. It was not signed on behalf
of Central Motor. Bélair retained the only copy of
the offer.
In September, 1965, the Company sold to
Elysee Realties Ltd. part of its property at Pointe-
Claire for a price of $465,000 of which $15,000
was paid in cash at the time of sale, and another
part of the said property to the City of Pointe-
Claire for a price of $435,000 cash. It was from
the proceeds of the latter sale that the dividend
was to be paid to Central Motor.
In November and December 1965, the following
transactions were put through:
1. On November 1st the appellant issued a
cheque for $1 to the estate of A. H. Rocheleau;
2. On November 11th the appellant purchased
the shares of the Company held by Oskar
Nômm for the sum of $50,000;
3. On November 15th a meeting of the Board of
Directors of the Company was held at which a
dividend of $1,813.50 per share was declared
and the appellant and Nômm renounced their
right to the dividend;
4. On the same day a cheque for $350,005.50
was issued by the Company to Central Motor
and endorsed on behalf of the latter by Bélair
for deposit into the account of the Rocheleau
estate;
5. On or about the same day the shares of the
Company held by Central Motor were trans
ferred to the appellant.
6. On December 30th the Company issued a
cheque payable to Nômm in the amount of
$50,000 in payment for the shares sold to the
appellant. This amount was charged to the
appellant's account and written off when the
Company was liquidated.
On December 1, 1966, the Company sold the
plant at Deschaillons to a newly incorporated com
pany, Montreal Terra Cotta (1966) Ltd., and the
Company was liquidated around the end of 1966
or the beginning of 1967. On liquidation the appel
lant, as the sole beneficial shareholder, received
(a) $60,000 in cash or credit (of which $50,000
had been used to pay for the shares of Nômm); (b)
shares in the new company which had been issued
for $7,000; (c) a mortgage of $400,000 on the
Deschaillons property and (d) the balance of the
property at Pointe-Claire which had been repos
sessed upon default by Elysee Realties Ltd.
The appellant was assessed in respect of his
1965 taxation year by inclusion of the sum of
$350,005.50 as a benefit conferred on him by the
Company. The assessment was confirmed by the
Minister on the basis of section 8(1) of the Income
Tax Act. An appeal to the Tax Review Board was
dismissed, also on the ground that the payment by
the Company of the said sum to Central Motor
conferred a benefit or advantage on the appellant
within the meaning of section 8(1). An appeal
from this decision to the Trial Division was dis
missed on the ground that the benefit was one
within the terms of section 16(1) of the Act.
The learned Trial Judge found that the sum of
$350,005.50 was a "fair and realistic price" for the
shares. He further observed that the total value of
the shares held by the appellant in the Company,
including those acquired from Central Motor, had
necessarily been reduced by this amount. But after
stating at one point that the value of the shares
acquired by the appellant was to be determined as
of the date of their acquisition and that what
happened subsequently to the Company was irrele
vant, the Trial Judge concluded from a comparison
of the financial statements of the Company for the
fiscal years ended February 28, 1965 and 1966
respectively that there had been an increase in
shareholders' equity and that the appellant had
therefore failed to show that he did not receive a
benefit by the acquisition of the shares. This con
clusion is contained in the following passages from
the reasons of the Trial Judge [at pages 353-354]:
The balance sheet of Montreal Terra Cotta Limited as of
February 28, 1965, showed Shareholders 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 acquisition
by plaintiff of Central Motor Sales Ltd.'s shares appears to be
a fair and realistic price.
After the dividend declaration and payment the next balance
sheet of the company as of February 28, 1966, shows Share
holders 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 plaintiff did not in
fact receive a benefit by acquiring the additional shares without
paying for same personally.
The appellant attacked this conclusion on the
ground that the Trial Judge misunderstood the
significance of the apparent appreciation in value
reflected in the financial statements. He argued
that the increase in the shareholders' equity was an
increase in the book value of the physical assets
resulting from the transactions involving the real
property which took place in 1965 and the effect of
which was taken into account in determining the
price to be paid for the shares.
In my opinion there is much force in the appel
lant's contention that in the circumstances he did
not gain much, if anything, in value by the acquisi
tion of the shares of Central Motor when, as a
result of the payment of the dividend, the share
holders' equity was reduced by $350,000. But this
does not exhaust the question of whether the
appellant received a benefit from the payment that
was made by the Company to Central Motor. By
the offer to purchase, which was accepted by the
Rocheleau estate, the appellant became legally
obliged to cause the sum of $350,000 to be paid to
Central Motor. The payment of this sum by the
Company to Central Motor in the form of a
dividend extinguished the appellant's obligation
and to this extent conferred a benefit upon him of
the value of $350,000.
Counsel for the appellant sought to diminish the
legal significance and effect of the agreement be
tween the appellant and the Rocheleau estate by
suggesting that it did not reflect the true intention
of the appellant. He contended, on the basis of the
testimony of the appellant and Bélair, that the
appellant was not interested in purchasing the
shares of the other shareholders but was rather
interested in selling the Company or liquidating it;
that the sole purpose of the scheme was to assist
the Rocheleau estate in its financial difficulties
and that it was never intended to confer a benefit
on the appellant; and that what was done could be
likened to a reduction of capital or a redemption of
the shares by the Company, or a distribution to the
Rocheleau estate of its share of the assets of the
Company as a first step in the winding-up of its
business. The testimony tends to support certain
aspects of this view of what was generally contem
plated by the parties, but it cannot alter the lan
guage of the agreement that was actually signed.
The agreement creates an obligation on the part of
the appellant to cause the sum of $350,000 to be
paid to Central Motor, as clearly indicated by the
words [TRANSLATION] "I undertake to have paid
to Central Motor Sales Co. Ltd. the sum of $350,-
000". I do not see how we can ignore this lan
guage, however regrettable it may be for the
appellant, and adopt the position that the parties
to the agreement never really intended that the
appellant should incur a legal obligation to cause
this payment to be made. The agreement is unam
biguous, but even if full weight be given to the
testimony in an attempt to interpret its terms, the
testimony falls short of establishing that the appel
lant did not intend to bind himself by the offer he
signed. Whatever may have been the understand
ing of the appellant as to the nature and purpose of
the plan proposed by Bélair, the appellant gave his
free consent to the agreement to purchase and he
is bound by its terms.
The appellant argued that the transaction was
essentially one of payment of a dividend and that it
should be taxable as such or not at all. The
dividend did not attract tax in the hands of Central
Motor because deduction of it as an inter-corpora
tion dividend was permitted by section 28 of the
Act. In effect, the appellant contended that the
same payment should not give rise to taxability as
a dividend and as a benefit since this would be a
form of double taxation. As I see it, if a sharehold
er chooses to take payment in the form of a
dividend for a sale of his shares to another share
holder under an agreement such as the one in this
case then this must be the result, however exces
sive from the fiscal point of view it may appear.
There is no basis on which the selling shareholder
can be said not to have received a dividend within
the meaning of section 6, and there is no basis on
which the purchasing shareholder can be said not
to have received a benefit. The selling shareholder
has received a dividend; the purchasing sharehold
er has received a benefit in that the payment of the
dividend has satisfied his obligation to pay the
price of the shares. It is not the payment of the
dividend but its effect that constitutes the benefit.
It is undeniable that a payment by a corporation,
whatever its form, which has the effect of extin
guishing a debt or obligation of a shareholder must
be considered to be a benefit conferred on him.
See, for example, M.N.R. v. Bisson [ 1972] F.C.
719 at 726-727 and 728-729. The value of what he
acquired in consideration of the debt or obligation
is really irrelevant.
The appellant further argued that there were
several ways in which this operation or transaction
could have been carried out so as not to attract tax
liability for the appellant, but we must determine
the issue of taxability on the basis of what was in
fact done. The operation was not a reduction of
capital nor a redemption of shares by a company
nor a distribution on the winding-up or discontinu
ance of the company's business. As to the last, the
appellant contended that the payment to Central
Motor for the benefit of the Rocheleau estate was
simply a step in the winding-up of the Company,
and he cited in support of this proposition the
decision of the Supreme Court of Canada in
Smythe v. M.N.R. [1970] S.C.R. 64 at 71, in
which Judson J., delivering the judgment of the
Court, adopted the reasoning of Maclean J. of the
Exchequer Court of Canada in Merritt v. M.N.R.
[1941] Ex.C.R. 175 at 181-182 and held 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". In both
these cases the result of the transactions in issue
was that the companies no longer had any assets
with which to carry on business. The same cannot
be said of the Company in the present case after
the payment of the dividend to Central Motor.
Although the intention may well have been to wind
up or discontinue the business of the Company in
the near future, it continued to carry on business
at the Deschaillons plant, albeit on a reduced
scale, through 1966. After the payment of the
dividend the Company still had assets with which
to carry on business and did in fact do so. I would
conclude, therefore, that the payment of the divi
dend was not part of the winding-up or discontinu
ance of the Company so as to exclude the applica
tion of section 8(1) of the Act or to make section
81(1) applicable, as it was in the Smythe case.
The appellant contended that there were other
bases on which the payment could have been made
subject to tax, in particular, section 138A with
respect to dividend stripping, which might have
been applied to the receipt of the payment by the
Rocheleau estate, assuming it involved a distribu
tion of income. Although the Rocheleau estate was
the recipient of the benefit it was not assessed in
respect of it. It is this aspect of the case that is
understandably disturbing to the appellant: that
the Rocheleau estate should escape taxation in
respect of a payment that was clearly made for its
benefit, and that the appellant should be subject to
taxation in respect of it because of the form in
which the transaction was carried out. I have
much sympathy with this view but I do not see
how this consequence can be avoided without
ignoring the plain terms of the agreement to pur
chase and doing violence to the language of the
applicable provisions of the Income Tax Act.
Whether the Rocheleau estate was taxable on the
basis of section 138A or some other provision of
the Act I do not know, but assuming that it was,
this is again the argument with respect to double
taxation which the appellant raised with reference
to the taxability of the payment as a dividend in
virtue of section 6. It is once again the question
whether, as a matter of principle, a single payment
should be capable of being treated under different
provisions of the Act as income in the hands of two
taxpayers. Where the payment is received by one
but has the effect of conferring a benefit on the
other then it involves two distinct transfers or
receipts, each of which may be subject to taxation
on a separate basis. It is not being taxed twice in
the hands of the same person. The appellant's
argument in essence is that the economy and spirit
of the Act require that the payment be taxed once.
I find nothing in the Act which dictates this result.
The incidence of taxation depends on the manner
in which a taxpayer arranges his affairs. Just as he
may arrange them to attract as little taxation as
possible, so he may unfortunately arrange them in
such a manner as to attract more than is
necessary.
Finally, the appellant argued that if he was to be
taxed in respect of the payment it should be as the
receipt of a dividend with the benefit of the divi
dend tax credit. The payment was not the payment
of a dividend to the appellant. It was the payment
of a dividend to Central Motor. It was the effect of
the payment under the agreement to purchase that
conferred a benefit on the appellant. There is no
way that the receipt of that benefit can be con
sidered to be the receipt of a dividend.
The Crown relied on both sections 8(1) and
16(1) as the basis for including the benefit in the
income of the appellant. The appellant contended,
citing M.N.R. v. Pillsbury Holdings Limited
[1965] 1 Ex.C.R. 676 at 682-683, that section 8(1)
does not apply to payments by way of dividend.
The answer to that contention, for the reasons
indicated above, is that the benefit conferred on
the appellant was not by way of dividend but by
the satisfaction of the appellant's debt or obliga
tion as a result of the payment of a dividend to a
third person. As such it is a benefit conferred on a
shareholder by a corporation within the meaning
of section 8(1)(c) of the Act. In so far as section
16(1) is concerned, I am doubtful that the pay
ment by the Company to Central Motor should be
considered to be a "payment or transfer of proper
ty" within the meaning of that section even if it
could be said to have been made "pursuant to the
direction of, or with the concurrence of" the appel
lant, who although only one of the three directors
required to approve the payment of the dividend
was the controlling shareholder of the Company
and thus able to make his will ultimately prevail.
The "payment or transfer of property" in this case
was by way of dividend, and the reasoning which
the appellant directed to section 8(1) would appear
to have application here. I doubt whether these
words were intended to apply to the payment of a
dividend, which is governed by section 6 of the
Act.
For the foregoing reasons I would dismiss the
appeal with costs.
* * *
PRArrE J.: I agree.
* * *
HYDE D.J.: For the reasons given by Mr. Justice
Le Damn I would dismiss this appeal with costs.
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.