Gibson,
J:—These
two
appeals.
were:
heard
together
on
common
evidence.
The
appellant
Huron
Steel
Fabricators
(London)
Limited
appeals
from
a
judgment
of
the
Tax
Appeal
Board
dated
July
2,
1971
in
respect
of
reassessments
for
income
tax
for
the
taxation
years
1965,
1966,
1967
and
1968.
The
appellant
Herman
Fratschko
appeals
from
a
judgment
of
the
Tax
Appeal
Board
dated
June
28,
1971
in
respect
of
reassessments
for
income
tax
for
the
taxation
years
1965,
1966
and
1967.
In
essence,
these
reassessments
are
premised
on
the
allegations
that,
by
reason
of
the
execution
and
completion
of
(1)
a
loan
contract
(Exhibit
17)
between
Herman
Fratschko
and
Leslie
E
Peckham,
(2)
a
service
contract
(Exhibit
16)
between
Huron
Steel
Fabricators
(London)
Limited
and
Pelon
Holdings
Limited,
and
(3)
the
transfer
of
1,000
common
shares
of
Huron
Steel
Fabricators
(London)
Limited
from
one
Leslie
E
Peckham
to
Herman
Fratschko,
(a)
a
“benefit”
within
the
meaning
of
subsection
8(1)*
of
the
Income
Tax
Act
was
conferred
on
Herman
Fratschko,
(b)
the
moneys
paid
out
by
Huron
Steel
Fabricators
(London)
Limited
to
Pelon
Holdings
Limited
pursuant
to
the
service
contract
(Exhibit
16)
were
not
outlays
or
expenditures
made
or
incurred
by
Huron
Steel
Fabricators
(London)
Limited
for
the
purpose
of
gaining
or
producing
income
within
the
meaning
of
paragraph
12(1)(a)+
of
the
Income
Tax
Act,
and
(c)
such
moneys
so
paid
out
were
disbursements
or
expenses
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
artificially
reduce
the
income
of
the
appellant
within
the
meaning
of
subsection
137(1)$
of
the
Income
Tax
Act.
The
respondent
in
the
defences
in
each
of
these
actions
pleaded
certain
assumptions.
The
evidence
did
not
support
the
following
assumptions
made
in
the
defence
in
the
Herman
Fratschko
action
namely,
those
stated
in
paragraphs
of
the
defence
numbered
2(e)(iii),
(iv)
and
the
concluding
words
of
paragraph
2(e)
commencing
with
the
words
“with
the
result
that
it
would
appear
that
a
loan
of
$5,000
had
been
made
.
.
.”,
paragraph
3(a),
(b)
and
paragraph
5.
The
evidence
also
did
not
support
the
following
assumptions
in
the
defence
in
the
Huron
Steel
Fabricators
(London)
Limited
action,
namely,
paragraphs
2(d)
and
(e),
3(a)
and
(b),
5
and
paragraph
8.
In
particular,
the
evidence
did
not
support
the
allegations
in
paragraph
3(a)
where
reference
was
made
to
another
taxpayer,
Pelon
Holdings
Limited.
.
.
The
evidence
from
the
income
tax
returns
of
Pelon
Holdings
Limited
which
the
respondent
purported
to
use
in
making
this
said
assumption
was
not
supported
by
the
facts
contained
in
such
income
tax
‘returns.
(Counsel
for
the
appellants,
by
order
in
the
Trial
Division
of
this
Court
which
was
appealed
by
the
respondent,
unsuccessfully,
to
the
Court
of
Appeal
of
this.
Court,
obtained
production
of
these
income
tax
returns
and
they
were
filed
on
these
subject
appeals.)
It
was
this
evidence
together
with
the
evidence
brought
out
on
the
cross-examination
of
the
assessor
of
the
respondent
which
established
that
the
above
assumptions
were
not
supportable.
The
findings
made
in
favour
of
the
appellants
in
respect
to
these
assumptions
are
predicated
in
a
substantial
measure
on
the
cross-examination
of
the
official
for
the
respondent
who
gave
evidence
on
these
appeals.
This
evidence
was
less
than
frank.
On
April
6,
1965
the
appellant
Fratschko
owned
all
the
shares
except
1,000
shares
of
Huron
Steel
Fabricators
(London)
Limited.
One
Peckham
owned
these
1,000
shares.
Huron
Steel
Fabricators
(London)
Limited
is
a
private
company
incorporated
under
The
Corporations
Act
of
Ontario
and
the
following
restriction
on
the
transferability
of
its
shares
is
contained
in
its
charter:
.
.
.
(1)
the
right
to
transfer
shares
of
the
company
shall
be
restricted
in
that
no
share
or
shares
shall
be
transferred
without
either
(a)
the
sanction
of
the
directors
of
the
Company
expressed
by
a
resolution
passed
at
a
meeting
of
the
board
of
directors
or
by
an
instrument
or
instruments
in
writing
signed
by
a
majority
of
the
directors,
or
(b)
the
sanction
of
the
holders
of
at
least
fifty-one
per
cent
(51%)
of
the
shares
of
the
Company
for
the
time
being
outstanding
expressed
by
a
resolution
passed
at
a
meeting
of
the
holders
of
such
shares
or
by
an
instrument
or
instruments
in
writing
signed
by
the
holders
of
at
least
fifty-one
per
cent
(51%)
of
such
shares;
provided,
however,
that
without
such
resolution
(i)
any
share
may
be
transferred
by
a
shareholder
to
any
other
shareholder
of
the
Company,
and
(ii)
any
share
may
be
transferred
by
a
shareholder
during
his
lifetime
or
by
his
executor
or
administrator
after
the
death
of
such
shareholder
according
to
the
terms
of
his
Will
or
by
intestate
succession
to
the
issue
of
such
shareholder
or
other
shareholder
or
brother,
sister,
husband
or
wife
of
such
shareholder
or
other
shareholder;
(2)
The
number
of
shareholders
of
the
Company,
exclusive
of
persons
who
are
in
the
employment
of,
the
Company,
is
hereby
limited
to
fifty
(50),
two
(2)
or
more
persons
holding
one
(1)
or
more
shares
jointly
being
counted
as
a
single
shareholder;
and
(3)
Any
invitation
to
the
public
to
subscribe
for
any
shares
or
securities
of
the
Company
is
hereby
prohibited;
'j
:
The
market
therefore
for
these
1,000
shares
of
Peckham
on
April
6,
1965
was
the
appellant
Fratschko
and
there
was
no
other
market.
As
a
consequence,
they
had
little
if
any
value.
In
any
event,
their
value
was
not
the
market
value
ascribed
to
them
by
the
witness
at
trial
who
gave
evidence
for
the
respondent,
and
not
the
value
pleaded
in
the
defence.
In
April
1965
Peckham
and
Pelon
Holdings
Limited
were
in
financial
trouble,
but
notwithstanding
this,
the
appellant
Fratschko
and
the
corporate
appellant
wished
to
have
the
services
of
Pelon
Holdings
Limited
and,
through
it,
the
services
of
Peckham.
In
consequence,
the
loan
contract
(Exhibit
17)
and
the
service
contract
(Exhibit
16)
were
entered
into
and
subsequently
completely
executed
by
all
parties.
The
evidence
established
that
Pelon
Holdings
Limited
provided
substantial
services
to
Huron
Steel
Fabricators
(London)
Limited
for
the
purpose
of
the
latter
gaining
or
producing
income.
As
a
consequence,
the
evidence
proved
that
no
“benefit”
within
the
meaning
of
subsection
8(1)
of
the
Income
Tax
Act
was
conferred
on
Herman
Fratschko,
that
the
moneys
paid
out
to
Pelon
Holdings
Limited
were
outlays
or
expenditures
for
gaining
or
producing
income
within
the
meaning
of
paragraph
12(1)(a)
of
the
Act,
and
the
manner
and
method
by
which
moneys
were
paid
out
in
this
case
did
not
cause
subsection
137(1)
of
the
Act
to
be
breached.
The
appeals,
therefore,
are
allowed,
and
the
reassessments
are
set
aside
and
referred
back
for
further
reassessments
not
inconsistent
with
these
reasons.
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