Lalonde v. MNR, 90 DTC 1313, [1990] 1 CTC 2427 (TCC)

Mogan, T.CJ.: — The appeals of Fridolin Lalonde and his wife Vida Lalonde were heard together on common evidence. In March 1985, the appellants entered into a written agreement with Lucien Lalonde (not related to the appellants) under which the appellants agreed to purchase 20 common shares of River Valley Farms Ltd. (the "company") for a price of $89,000. When the transaction was completed, Lucien Lalonde delivered certificates for the 20 shares endorsed in blank for transfer and the appellants inserted the name of the company as transferee. The appellants claim that, at all relevant times, they were acting as agents for the company; and that the real principals to the transaction were Lucien Lalonde as vendor and the company as purchaser. The respondent assessed tax against the appellants for 1985 on the assumptions (i) that they purchased the 20 shares in their personal capacity; and (ii) that they are deemed to have received a dividend under subsection 84(3) of the Income Tax Act upon the resale of the shares to the company. The only issue in this appeal is the question of fact as to whether the appellants were acting as agents for the company when they purchased the 20 shares from Lucien Lalonde.

The company was incorporated in 1973 under the laws of Saskatchewan and it acquired a full line of farm equipment to engage in the business of custom farming, mainly on the lands of its shareholders. Immediately after incorporation, 60 common shares were issued and distributed equally (10 each) to the following six individuals: the appellant Fridolin Lalonde (known as “Fred”), the appellant Vida Lalonde (Fred's wife), Jack Lalonde, Richard Newell and Lucien Lalonde. In 1974, the appellants transferred their 20 shares to their four children (2 sons and 2 married daughters) on the basis that each child received 5 shares: Raymond Lalonde, Arthur Lalonde, Della Vickaryous and Marlene Perrault. In 1976, Richard Newell sold his 10 shares which were purchased two each by Jack Lalonde, Maurice Lalonde and Lucien Lalonde and one each by the four children of the appellants. And finally, in 1977, Jack and Maurice Lalonde sold their 24 shares which were purchased by and allocated among the following: one to each of the appellants; eight to Lucien; and three and one- half to each of the four children: Raymond, Arthur, Della and Marlene. The above transactions are summarized in the table below:

After the sale of 24 shares by Jack and Maurice in 1977, the distribution of the 60 issued common shares remained constant until the transaction which is the subject of this appeal. Mrs. Vida Lalonde stated in testimony that she and her husband had transferred all of their 20 shares to their children in 1974 because they wanted the children to own the family interest in the company; and they each took back only one share in 1977 to qualify as directors of the company. In 1983, Lucien Lalonde was a full time employee of the company and his salary was higher than that of any other shareholder/employee. Sometime around 1983, a dispute developed between Arthur Lalonde (son of the appellants) and Lucien Lalonde. As a consequence of that dispute, Lucien changed jobs in the spring of 1984 and went to work for a different company. There followed a series of events which resulted in the sale of Lucien's 20 shares in 1985.

On April 25, 1984, the appellants met with certain of their children and purported to remove Lucien Lalonde as a director of the company. About ten days later, the appellants’ lawyer advised them that the meeting on April 25 was defective and he prepared the notice for a new meeting and a new agenda. On May 28, 1984, a duly convened meeting of the shareholders of the company elected a new board of directors substituting Arthur Lalonde (son of the appellants) for Lucien Lalonde. On June 7, 1984, the company filed fresh documents with the Royal Bank of Canada appointing Arthur Lalonde as a signing officer in place of Lucien Lalonde.

The appellant, Vida Lalonde, stated in evidence that when Lucien stopped working for the company in the spring of 1984, he thought that he could take one-third of the company's equipment because he owned one-third of the company's shares. She stated that they could not pay him off that way because the company needed all its equipment to carry on its custom farming business.

On May 12, 1984, Lucien wrote to Fred offering to sell his 20 shares for $90,000 or to purchase the 40 shares held by the appellants and their children for $180,000. The appellants discussed the letter of May 12 and decided to purchase Lucien's 20 shares but they thought that the price of $90,000 for one- third of the company was too high. On November 16, 1984, Lucien’s lawyer wrote to the appellants offering to sell Lucien's 20 shares based on an independent appraisal of the value of the company. The appellants retained a professional auctioneer at Melfort, Saskatchewan who appraised the market value of the company's equipment and tools at $354,950. Also, the appellants retained the firm of Armstrong & Neumann, Chartered Accountants, to determine the fair market value of the company's issued shares based on the appraised value of the equipment and tools. The appellants were advised that the value of the 60 issued common shares was $205,597 or $68,532 for Lucien's 20 shares. Notwithstanding the independent appraisals, Lucien would not sell his 20 shares for less than $89,000.

A three page document entitled "Share Purchase Agreement" was drafted by Lucien's lawyer in March 1985 and included the following provisions:

— Lucien was named as the "Vendor";

— The appellants were named as the "Purchasers";

— Lucien was to sell his 20 shares in the Company;

— The price was $89,000;

— The price was payable on or before April 1, 1985 in three different components:

— $65,000 in cash

— $19,500 by delivery of a 1982 John Deere 665 Air Seeder

— $4,500 by delivery of a 1983 Wai ingo A Grain Air Vacuum

— Lucien was to deliver "all his shares endorsed in blank".

The share purchase agreement was drafted with a certain degree of carelessness. Although the appellants were called the “Purchasers”, there were two important clauses in which the terms "Vendor" and “Purchaser” (singular) were interchanged; and when the correction was made by striking out the typed word and inserting the correct word by hand, the word "Purchaser" was printed in the singular. Also, the payment clause required the two pieces of equipment (the Air Seeder and the Grain Air Vacuum) to be delivered by "the Purchaser" when the auctioneer's appraisal reported listed those two pieces of equipment as belonging to the company at values of $19,500 and $4,500 respectively.

The appellant, Mrs. Vida Lalonde, stated that the share purchase agreement should have named the company as "Purchaser" because it never was the intention of the appellants to increase their shareholdings in the company. The appellants' lawyer, Mr. Fitzpatrick, told them that they could proceed to sign the agreement with this error if the directors met first and authorized the appellants to purchase the 20 shares as agents for the company. The share purchase agreement was signed by Lucien Lalonde on March 27, 1985. The next day, on March 28, 1985, the directors of the company passed a resolution authorizing the appellants, as agents for the company, to purchase the 20 shares of Lucien Lalonde. On March 29, 1985, the sum of $75,650 was deposited in the company's bank account representing the following cheques received as shareholder loans:

Mrs. Vida Lalonde stated that the total deposit of $75,650 was to put the company in funds to make the $65,000 cash payment for the shares; and the extra amount ($10,650) was to meet other obligations of the company. The cheques for the shareholder loans were dated March 26, 1985 because the family knew that the deal with Lucien was imminent. The company issued a cheque dated March 26, 1985 to Taylor & Fitzpatrick (lawyers for the appellants and the company) in the amount of $65,000 in payment for the shares. That cheque was deposited to the lawyers’ trust account on April 1, 1985; and I assume that Taylor & Fitzpatrick issued their own cheque for $65,000 to Lucien Lalonde or his agent as vendor of the 20 shares. In the company's annual return filed on April 8, 1985 under the Saskatchewan Business Corporations Act, the name Lucien Lalonde was typed in as director and then stroked out by hand with the hand written notation “20 shares purchased by the Company"; and Lucien is not listed among the shareholders.

The three share certificates in Lucien's name representing his 20 shares were all endorsed by him in blank and dated March 27,1985 (the same date that he signed the share purchase agreement); and someone typed in the name of the company as transferee. Also, the company issued to Lucien Lalonde a Revenue Canada, Taxation form T-5 for 1985 showing the “actual amount of eligible dividends" at $88,980 representing the purchase price of $89,000 less the $20 paid-up capital with respect to his 20 shares.

I have concluded that the appellants were agents of the company when they purchased the 20 shares from Lucien Lalonde. Therefore, the real principals to the transaction were Lucien Lalonde as vendor and the company as purchaser. Under subsection 15(1) of the Saskatchewan Business Corporations Act, the company had the legal capacity to appoint the appellants as its agents. At law, no special form is required for one person to appoint another as his agent; it may be done in writing or by oral agreement. The resolution (Exhibit A-15) signed by the directors of the company on March 28, 1985, specifically empowered the appellants, as agents for the company, to purchase the 20 shares from Lucien Lalonde. And in argument, counsel for the respondent acknowledged that the resolution (Exhibit A-15) was signed by all persons who were directors of the company at that time.

The share purchase agreement (Exhibit A-10) was signed by Lucien Lalonde as vendor on March 27, 1985, but it was not signed by the appellants as purchasers until March 29, 1985, the day after the resolution (Exhibit A-15) was passed. Assuming that the effective date of the agreement was March 29, 1985, then the appellants as purchasers had been appointed agents of the company prior to their signing the agreement. And because the appellants were two of the directors who signed and passed the resolution on March 28, they knew they were acting as agents for the company when they signed the share purchase agreement on March 29. There is strong authority for the proposition that when an agent enters into a contract in his own name, evidence may be admitted to show who the real principal is. See Fred Drughorn Ltd. v. Rederiakiebolaget, [1919] A.C. 203 at 206.

The evidence indicates either that Lucien Lalonde did not address his mind to the question of whether the purchaser of his 20 shares might be the company or other shareholders like the appellants or that he was indifferent as to who the purchaser might be. Lucien's lawyer, Mr. Gaucher, wrote to the appellants' lawyer, Mr. Fitzpatrick, on March 21, 1985 stating that payment would be:

1. $65,000.00 cash to be paid prior to March 31, 1985.

2. That River Valley Farms Ltd. transfer their interest in the air seeder and air vac to our client free and clear of all claims, encumbrances, liens, charges, and security interests of any nature whatsoever.

This letter was the basis of the share purchase agreement as signed by the parties; it clearly indicates that some of the consideration (2 pieces of equipment worth $24,000) was flowing directly from the company to Lucien; and there is no restriction or caution to the effect that Lucien would not sell his shares to the company. As the highest paid shareholder/employee of the company prior to 1984, Lucien would have known that the company was the owner of the air seeder and grain air vacuum. There is no statement in the share purchase agreement that neither party was acting for an undisclosed principal.

There are four contemporaneous documents which demonstrate that the appellants regarded the company as the purchaser of the 20 shares at the time of the transaction and immediately thereafter. The share certificates were delivered by Lucien endorsed in blank and the company's name was typed in as transferee. Certain shareholders advanced money to the company so that it could issue a company cheque for $65,000 in payment for the shares. The company’s annual returns filed in April 1985, contained the hand written notation that the company had purchased 20 of its own shares. And the company issued a T-5 form to Lucien for 1985 showing a dividend of $88,980. There was no evidence that Lucien protested the T-5 form.

The so-called “capital gains exemption" was not announced until May 23, 1985. Therefore, when the transaction was completed at the end of March 1985, there probably was not a material difference in the income tax to be paid by Lucien whether he sold to another shareholder for a capital gain or sold to the company for a deemed dividend, assuming that his adjusted cost base of the 20 shares was not significantly different from their paid-up capital of $20. His adjusted cost base was probably not significantly different because he was issued ten shares upon incorporation in 1973 and he acquired the additional ten shares in the following four years. In any event, there was no evidence that the appellants were trying to make life more difficult for Lucien by providing him with a deemed dividend under subsection 84(3) of the Act rather than a capital gain. Indeed, there was no significant evidence that after-tax consequences were a factor in negotiating the form or substance of the transaction.

Counsel for the respondent rested her case on the doctrine of undisclosed principal arguing that, even if there were an agency relationship between the appellants and the company, the appellants remain liable for the purchasers' obligations under the contract. She cited the decision in Mitchell-Clapham v. Fullarton (1974), 8 N.B.R. (2d) 192; 46 D.LR. (3d) 766 in which the New Brunswick Court of Appeal at page 768 quoted from the fifth edition of Cheshire and Fifoot, Law of Contract, as follows:

Where an agent, having authority to contract on behalf of another, makes the contract in his own name, concealing the fact that he is a mere representative, the doctrine of the undisclosed principal comes into play. By this doctrine either the agent, or the principal, when discovered, may be sued, and either the agent or the principal may sue the other party to the contract.

At any rate it is well settled that the contract is enforceable either by or against the agent. . . Parol evidence is admissible to introduce a new party, i.e. the principal, but is never admissible for the purpose of discharging an apparent party, i.e. the agent.

In my view, the doctrine of undisclosed principal has no application to this appeal. The Appellants have never attempted to deny that they were obligated as purchasers under the terms of the Share Purchase Agreement. They simply state that they were purchasing as agents for the Company. There is no doubt that Lucien Lalonde and the Appellants went through with the share purchase transaction. And more importantly, there was no evidence that Lucien Lalonde would not have sold to the Appellants if he had known that they were purchasing as agents for the Company. Both Lucien Lalonde and his lawyer knew that part of the consideration (equipment worth $24, 000) was flowing directly from the Company to Lucien as vendor. Also, the evidence was that Lucien did not protest to the Appellants or to the Company when he received the Revenue Canada, Taxation form T-5 for 1985 showing that he received eligible dividends of $88, 980. That form indicated that Lucien had sold 20 shares to the Company and not to other shareholders. Lucien Lalonde did not testify at the hearing of this appeal.

In my opinion, the Appellants have discharged the onus of proving that they did not purchase the 20 shares of the Company for themselves on their own behalf. There was overwhelming contemporaneous documentation to prove that the Appellants purchased the 20 shares as agents for and on behalf of the Company. The appeals are allowed with costs.

Appeals allowed.