Addy,
J:—The
facts
as
established
at
trial
were
numerous
as
well
as
complicated.
The
case
concerned
the
alleged
responsibility
of
the
appellant
towards
respondent
for
its
participation
in
the
operations
of
two
other
companies
which,
by
various
offshore
trading
operations,
that
is
to
say,
various
loans,
sales
and
transfers
of
options,
shares
and
assets
to
individuals
and
companies
in
Canada,
as
well
as
companies
and
agencies
in
Bermuda,
converted
or
attempted
to
convert
into
dividends
payable
to
their
shareholders
the
major
portion
of
their
assets.
If
these
transactions
had
taken
place
in
Canada,
and
directly
between
the
appellant
and
the
two
vendor
companies,
the
latter
undoubtedly
would
be
obliged
to
pay
a
large
amount
of
income
tax,
on
the
recuperation
of
accumulated
depreciation
on
their
fixed
assets.
However,
to
determine
the
question
in
issue,
it
is
not
necessary
nor
even
helpful,
in
my
view,
to
describe
in
detail
all
the
various
manoeuvres
or
to
identify
the
role
of
each
actor
in
the
complicated
drama
which
unfolded
between
the
months
of
May
1964
and
March
1965,
as
the
issue
depends
mainly
on
the
role
which
the
appellant
might
have
played
either
directly
or
by
means
of
agents,
and
either
as
one
of
the
main
instigators
of
the
plan
or
as
a
participant
in
certain
of
the
financial
operations
and
transfers
of
assets.
The
two
companies,
which
engaged
in
dividend
stripping,
were
Simard
&
Frères,
Cie
Ltée,
owned
by
the
two
Simard
brothers
and
Beaudry
Ltée,
owned
by
the
two
Beaudry
brothers.
Simard
&
Frères,
Cie
Ltée
was
engaged
mainly
in
heavy
construction
while
Beaudry
Ltée
operated,
above
all,
as
a
production
company
engaged
in
the
manufacture
of
concrete
and
cement
blocks
and
also
in
the
exploitation
of
quarries,
etc.
Aubert
Brillant,
who
had
more
than
16
years’
experience
in
general
construction
and
who
was
at
that
time
the
owner
of
various
construction
companies,
became
interested
in
the
purchase
of
the
two
companies:
Simard
&
Frères,
Cie
Ltée
and
Beaudry
Ltée.
To
accomplish
this,
on
August
31,
1964,
he
incorporated
the
appellant,
Simard-
Beaudry
Inc.
On
December
15,
1964
the
appellant
acquired
the
business,
goodwill
and
current
assets
of
Beaudry
Ltée
for
the
sum
of
$518,162
and
those
of
Simard
&
Frères,
Cie
Ltée
for
the
sum
of
$851,941.
On
January
13,
1965
the
appellant
also
acquired
from
a
Bermuda
company,
Group
Investments
Limited
(hereinafter
called
“Group”),
an
option
to
purchase
the
fixed
assets
of
these
two
companies
and
paid
for
this
option
a
sum
of
approximately
$5,406,000.
Five
days
previously,
Group
had
acquired
this
option
from
Beaudry
Ltée
and
from
Simard
&
Frères,
Cie
Ltée
for
the
sum
of
$1.
On
the
same
day
that
it
acquired
the
option,
that
is
January
13,
1965,
the
appellant
acquired
directly
from
these
two
companies
the
fixed
assets
for
an
additional
sum
of
$1,950,000,
in
exercising
the
option
which
it
had
acquired
from
Group.
This
sum
of
$1,950,000
represented
the
depreciated
value
of
the
assets
as
shown
on
the
books,
while
the
sum
of
$5,406,000
represented
mainly
the
accumulated
depreciation
on
these
fixed
assets,
the
two
vendor
companies
not
having
paid
any
income
tax
on
this
depreciation
as
it
was
accumulating.
The
actual
value
of
these
fixed
assets
at
the
moment
of
the
purchase
was
approximately
$10,600,000.
The
case
turns
on
the
question
whether
the
appellant
would
have
the
right
to
claim
for
the
years
following
the
purchase
a
depreciation
calculated
on
the
additional
amount
of
some
$5,406,000
paid
to
Group
for
the
option
plus
the
amount
of
$1,950,000
or
whether,
as
alleged
by
the
respondent,
the
depreciation
can
be
allowed
only
on
the
amount
of
$1,950,000,
that
is,
the
non-depreciated
value
as
shown
in
the
books
of
the
two
vendor
companies.
The
ultimate
decision
depends
on
the
interpretation
of
and
on
the
effect
of
subsection
(1)
of
section
137
of
the
Income
Tax
Act,
RSC
1952,
c
148.
The
subsection
reads
as
follows:
137.
(1)
In
computing
income
for
the
purposes
of
this
Act,
no
deduction
may
be
made
in
respect
of
a
disbursement
or
expense
made
or
incurred
in
respect
of
a
transaction
or
operation
that,
if
allowed,
would
unduly
or
artificially
reduce
the
Income.
It
is
interesting
to
note
that,
when
the
Income
Tax
Act
was
revised
in
1971,
although
the
English
text
of
this
subsection,
now
subsection
245(1),
was
not
touched,
the
French
text
was
amended
slightly:
for
the
word
“déboursé”
there
was
substituted
the
word
“débours”
(which
is
perhaps
better
French)
and
the
words
“dépense
faite
ou
engagée”
were
replaced
by
the
words
“dépense
contractée’’.*
To
understand
the
sequence
of
events,
it
is
useful
to
note
that
the
matter
first
arose
in
the
spring
of
1964,
during
a
discussion
between
Aubert
Brillant
and
one
of
the
Simard
brothers,
when
Brillant
let
it
be
known
that
he
would
possibly
be
interested
in
the
acquisition
of
the
company
Simard
&
Frères,
Cie
Ltée.
Soon
after
that,
Mr
Brillant
consulted
Mr
Jacques
Melançon
of
Jacques
Melançon
et
Associés,
Inc,
financial
counsellors.
The
later
advised
Mr
Brillant
that
he
should
give
some
thought
at
the
same
time
to
the
possibility
of
buying
Beaudry
Ltée
and
prepared
for
the
latter’s
use
a
plan,
for
the
acquisition
of
these
two
companies,
dated
June
1,
1964.
Briefly,
this
plan
provided
for
the
purchase
of
the
shares
of
these
companies.
Mr
Brillant
testified
at
the
trial,
and
I
accept
his
evidence
on
this
point,
that,
after
having
considered
the
report
of
Mr
Melançon,
it
seemed
evident
to
him
that
it
would
not
be
profitable
for
him
to
acquire
these
two
companies
in
the
manner
recommended
by
Mr
Melançon,
that
is,
by
purchasing
the
issued
shares.
In
spite
of
certain
testimony
to
the
contrary,
the
evidence,
in
my
view,
establishes
clearly
that
Mr
Brillant,
after
analysing
Mr
Melançon’s
report,
decided
that
it
would
not
be
profitable
for
a
buyer
to
purchase
the
shares
of
these
two
companies
due
to
the
fact
that
the
future
depreciation,
such
a
purchaser
could
claim
on
these
fixed
assets
worth
$10,600,000,
would
be
limited
to
$1,900,000.
In
addition
thereto,
it
was
evident
to
him
that
any
future
sale
of
these
assets
would
attract
a
very
large
amount
of
tax
on
the
accumulated
depreciation
of
$5,406,000.
Mr
Brillant,
however,
remained
interested
in
the
purchase
of
the
assets
of
these
two
companies
and,
between
the
end
of
July
and
the
end
of
August
of
the
same
year,
he
caused
three
reports
to
be
prepared
on
the
assets
and
liabilities
and
on
the
amount
of
business
of
these
two
companies
in
order
to
study
the
possibility
of
acquiring
same.
These
reports
were
prepared
by
Unica
Research
Company
Limited,
by
Canadian
Appraisal
Company
Limited
and
by
McDonald,
Currie
&
Co,
Accountants.
It
is
evident,
according
to
these
reports,
the
testimony
given
at
trial
and
the
events
which
took
place
subsequently
that,
in
the
opinion
of
McDonald,
Currie
&
Co
and
of
Mr
Brillant’s
legal
counsel,
the
only
method
by
which
Mr
Brillant
could
purchase
these
companies
at
the
price
he
wished
to
pay
and
at
the
same
time
benefit
from
the
full
depreciation
on
the
amount
paid
for
the
fixed
assets,
would
be
to
acquire
the
assets
themselves
and
not
the
shares.
It
was
equally
evident
to
the
sellers,
that
is
the
Beaudry
brothers
and
the
Simard
brothers,
that,
in
order
to
avoid
income
tax
on
the
recoupment
of
the
accumulated
depreciation
in
their
companies
and
also
in
order
to
be
able
to
withdraw
the
assets
by
means
of
dividend
stripping,
it
would
be
necessary
to
engage
in
the
financial
manoeuvre
of
offshore
trading.
In
other
words,
in
order
that
the
final
deal
lead
to
the
desired
results,
it
would
be
necessary
to
engage
in
operations
involving
offshore
trading,
the
details
of
which
were
conceived
to
a
large
extent
by
one
D
J
MacGregor
of
McDonald,
Currie
&
Co.
The
evidence
at
trial
establishes
clearly
that
Mr
Brillant
was
perfectly
aware
at
all
times
of
the
exact
effect
of
the
financial
manoeuvring
proposed
by
the
Beaudry
brothers
and
by
the
Simard
brothers.
He
contributed
also
to
the
ultimate
success
of
the
plan
by
actively
participating
in
various
meetings
in
Canada
and
in
Bermuda
and
by
being
instrumental
in
obtaining
financial
aid
from
at
least
one
finance
company,
that
is,
Traders
Finance
Corporation
Limited.
Mr
Melancon,
having
become
the
owner
of
the
shares
of
these
two
companies
by
various
interim
financial
operations
including
back-to-
back
bank
loans,
transferred
the
shares
of
the
vendor
companies
to
Group
on
the
same
day
that
the
appellant
purchased
the
current
assets,
goodwill
and
business
of
the
companies,
that
is,
December
15,
1964.
Despite
certain
statements
to
the
contrary
by
certain
witnesses
of
the
appellant,
the
evidence,
in
my
view,
establishes
clearly
the
following
facts:
1.
that
Jacques
Melangon
et
Associés,
Inc
and
Group
were
acting
as
figureheads.
for
the
vendor
companies
and
their
shareholders;
2.
that
Jacques
Melançon
et
Associés,
Inc
was
acting
as
agent
not
only
of
Simard
&
Frères,
Cie
Ltée
and
of
Beaudry
Ltée
but
also
of
Aubert
Brillant
as
well
as
of
the
appellant
in
order
to
bring
to
fruition
the
planned
financial
operations;
3.
these
financial
manoeuvres
resulting
in
the
stripping
of
the
surplus
and
the
avoidance
of
income
tax
on
the
recoupment
of
accumulated
depreciation
did
not
directly
benefit
Simard-Beaudry
Inc,
but
this
company
benefited
indirectly
from
these
operations
since
the
purchase
of
the
assets
could
not
have
taken
place
at
the
agreed
price
without
the
operations
having
succeeded;
4.
Aubert
Brillant
and,
by
the
same
token,
his
company,
the
appellant,
were
perfectly
aware
of
this
financial
manoeuvring
and
of
its
ultimate
aim;
5.
the
option
granted
Group
for
$1
and
resold
to
Simard-Beaudry
Inc
for
the
amount
of
$5,406,000
was
but
an
indirect
method
of
effecting
the
purchase
of
the
fixed
assets
at
a
global
price
of
$7,356,000
and
at
the
same
time
allowing
dividend
stripping
and
ensuring
the
avoidance
of
payment
of
tax
by
the
vendors
on
the
recoupment
of
the
$5,406,000
paid
on
the
option.
Simard-Beaudry
Inc
cannot
be
considered,
in
any
way,
as
an
alter
ego
either
of
Simard
&
Frères,
Cie
Ltée,
or
of
Beaudry
Construction,
or
of
the
Beaudry
brothers
or
of
the
Simard
brothers
who
benefited
from
the
dividend
stripping.
Mr
Melançon
was,
without
a
doubt,
the
agent
and
the
alter
ego
of
the
Simard
brothers
and
of
the
Beaudry
brothers
in
the
transaction
relating
to
dividend
stripping
and
in
the
sale
of
the
shares
in
their
companies.
He
was
also
the
agent
of
Brillant
and
of
the
appellant
in
so
far
as
the
first
negotiations
for
the
purchase
of
the
business
and
of
the
fixed
assets
are
concerned,
but
he
was
not
the
agent
of
Brillant
or
of
the
appellant
in
the
deal
concerning
dividend
stripping
or
the
sale
of
the
shares.
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
responsibility
between
them
for
ali
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.
The
evidence
establishes
clearly
that
Melançon,
in
acquiring
the
shares
of
the
two
vendor
companies,
did
so
as
agent
and
alter
ego
of
the
Simard
brothers,
the
Beaudry
brothers
and
the
two
vendor
companies
and
not
as
agent
of
Brillant
or
of
the
appellant
company;
the
latter
had
never
acquired
these
shares
and
never
had
any
interest
in
them.
Notwithstanding
the
argument
of
counsel
for
the
respondent,
there
is
no
evidence,
either
direct
or
circumstantial,
that
would
indicate
that
they
would
have
ever
acquired
these
shares.
The
evidence
establishes
clearly
that
Melançon
acquired
the
shares,
but
he
did
so
in
the
name
of
the
shareholders
of
the
two
vendor
companies.
The
fact
that
he
had
acted
for
Brillant
at
the
outset
of
the
negotiations
is
certainly
not
sufficient
to
impute
to
Brillant
or
to
the
appellant
a
real
interest
in
these
shares
at
the
time
of
the
subsequent
acquisition
by
Melançon,
since
it
was
clearly
established
that
Brillant
had
already
decided
for
a
considerable
time
previously
that
he
was
not
interested
in
the
least
in
the
purchase
of
the
shares
for
himself
or
his
company.
One
must
first
determine
whether
the
$7,356,000
that
the
appellant
alleges
having
disbursed
for
the
fixed
assets
of
the
two
companies
were
really
disbursed
for
this
purpose.
If
not,
it
would
follow
that
a
depreciation
on
these
fixed
assets
could
not
be
claimed
to
the
extent
that
moneys
were
not
actually
disbursed
in
attaining
this
end.
When
a
transaction
constitutes
a
trick
or
hoax
in
the
sense
that
the
word
“sham”
is
employed
when
describing
certain
financial
transactions,
one
must
pierce
the
veil
and
decide
what
the
real
substance
or
the
intrinsic
nature
of
the
transaction
Is.
A
transaction
or
a
financial
operation
constitutes
a
sham
when
it
is
not
truly
what
it
appears
to
be
or
when
it
is
but
a
veil
to
dissimulate
an
entirely
different
state
of
affairs.
For
example,
when
one
uses
the
pretext
of
establishing
a
pension
plan
for
employees
of
a
firm
for
the
purpose
of
furnishing
a
means
of
removing
profit
from
that
firm
free
from
tax,
without
having
the
true
intention
of
furnishing
protection
to
employees
or
to
continue
to
make
disbursements
to
the
pension
plan.
See
Cattermole-Trethewey
Contractors
Ltd
v
MNR,
[1970]
CTC
619:
71
DTC
5010.
An
excellent
definition
of
a
financial
sham
was
given
by
Lord
Diplock
in
the
case
of
Snook
v
London
&
West
Riding
Investments,
Ltd,
[1967]
1
All
ER
518,
at
528
and
529:
As
regards
the
contention
of
the
plaintiff
that
the
transactions
between
himself,
Auto-Finance,
Ltd,
and
the
defendants
were
a
“sham”,
it
is,
I
think,
necessary
to
consider
what,
If
any,
legal
concept
is
involved
in
the
use
of
this
popular
and
pejorative
word.
I
apprehend
that,
if
it
has
any
meaning
in
law,
it
means
acts
done
or
documents
executed
by
the
parties
to
the
“sham”
which
are
intended
by
them
to
give
to
third
parties
or
to
the
court
the
appearance
of
creating
between
the
parties
legal
rights
and
obligations
different
from
the
actual
legal
rights
and
obligations
(If
any)
which
the
parties
intend
to
create.
One
thing
I
think,
however,
is
clear
in
legal
principle,
morality
and
the
authorities
(see
Yorkshire
Railway.
Wagon
Co
v
Maclure
(1882),
21
Ch
D
309;
Stoneleigh
Finance,
Ltd
v
Phillips,
[1965]
1
All
ER
513;
[1965]
2
QB
537)
that
for
acts
or
documents
to
be
a
“sham”,
with
whatever
legal
consequences
follow
from
this,
all
the
parties
thereto
must
have
-a
common
intention
that
the
acts
or
documents
are
not
to
create
the
legal
rights
and
obligations
which
they
give
the
appearance
of
creating.
No
unexpressed
intention
of
a
“shammer”
affect
the
rights
of
a
party
whom
he
deceived.
There
is
an
express
finding
in
this
case
that
the
defendants
were
not
parties
to
the
alleged
“sham”.
So
this
contention
fails.
This
definition
was
approved
by
our
courts.
See
Susan
Hosiery
Limited
(No
2)
v
MNR,
[1969]
CTC
533
at
543;
69
DTC
5346
at
5352.
On
the
other
hand,
in
order
to
determine
if
a
document
constitutes
or
not
a
sham
and
for
this
reason
must
necessarily
attract
financial
consequences,
one
must
not
take
an
exaggerated
view
of
the
motives
of
the
parties
for
the
sole
purpose
of
arriving
at
an
interpretation
favourable
to
the
taxing
authority.
The
rule
which
lays
down
that
the
substance
and
the
nature
of
the
transaction
must
be
considered,
must
not
serve
as
a
pretext
for
a
detailed
search
into
motives
in
order
to
attain
a
farfetched
or
exaggerated
interpretation
of
its
exact
nature.
Lord
Greene
in
the
case
of
Commissioners
of
Inland
Revenue
v
Wesleyan
and
General
Assurance
Society,
30
CA
(HL)
11;
176
LT
84
(KB
&
CA);
64
TLR
173,
described
the
restrictions
which
must
be
applied
to
such
a
search
in
the
following
terms
at
page
16
of
the
report:
lt
is
perhaps
convenient
to
call
to
mind
some
of
the
elementary
principles
which
govern
cases
of
this
kind.
The
function
of
the
Court
in
dealing
with
contractual
documents
is
to
construe
those
documents
according
to
the
ordinary
principles
of
construction,
giving
to
the
language
used
its
normal
ordinary
meaning
save
in
so
far
as
the
context
requires
some
different
meaning
to
be
attributed
to
it.
Effect
must
be
given
to
every
word
in
the
contract
save
in
so
far
as
the
context
otherwise
requires.
Another
principle
which
must
be
remembered
is
this.
In
considering
tax
matters
a
document
is
not
to
have
placed
upon
it
a
strained
or
forced
construction
in
order
to
attract
tax,
nor
is
a
strained
or
forced
construction
to
be
placed
upon
it
in
order
to
avoid
tax.
The
document
must
be
construed
in
the
ordinary
way
and
the
tax
legislation
then
applied
to
it.
If
on
its
true
construction
it
falls
within
a
certain
taxing
category,
then
it
is
taxed.
If
on
its
true
construction
it
falls
outside
the
taxing
category,
then
it
escapes
tax.
There
have
been
cases
in
the
past
where
what
has
been
called
the
substance
of
the
transaction
has
been
thought
to
enable
the
Court
to
construe
a
document
in
such
a
way
as
to
attract
tax.
That
particular
doctrine
of
substance
as
distinct
from
form
was,
I
hope,
finally
exploded
by
the
decision
of
the
House
of
Lords
in
the
case
of
Duke
of
Westminster
v
Commissioners
of
Inland
Revenue,
19
TC
490.
The
argument
of
the
Crown
in
the
present
case,
when
really
understood,
appears
to
me
to
be
an
attempt
to
resurrect
it.
The
doctrine
means
no
more
than
that
the
language
that
the
parties
use
is
not
necessarily
to
be
adopted
as
conclusive
proof
of
what
the
legal
relationship
is.
That
is
indeed
a
common
principle
of
construction.
These
remarks
were
approved
by
the
House
of
Lords
when
the
case
was
brought
before
them
on
appeal.
They
describe
the
precise
manner
in
which
the
question
should
be
considered.
Since
the
true
value
of
the
fixed
assets
purchased
was
$10,600,000
and
the
payment
of
$5,406,000
for
the
option
cannot
be
attributed
to
anything
except
the
assets,
which
were
purchased
by
means
of.
this
option,
it
seems
clear
that
Simard-Beaudry
Inc
paid
the
total
amount
of
approximately
$7,356,00
for
the
fixed
assets.
It
seems
clear
also
that
no
part
of
this
money,
in
so
far
as
Simard-Beaudry
Inc
is
concerned,
could
be
considered
as
an
artificial
payment
in
the
sense
that
it
represents
anything
but
a
payment
for
the
fixed
assets
of
the
two
vendor
companies.
The
sole
reason
why
Simard-Beaudry
Inc
could
acquire
these
fixed
assets
at
a
price
lower
than
their
true
value
was
the
method
of
purchase
by
the
ingenious
contrivance
of
an
option.
This
option
covered
solely
the
right
to
purchase
the
fixed
assets.
There
is
no
question
here
of
any
artificial
increase
of
the
purchase
price.
On
the
contrary,
the
purchase
price
could
only
be
fixed
at
this
reduced
amount
because
of
the
financial
manoeuvres,
of
which
the
option
formed
an
essential
part.
This
reduction
in
the
purchase
price
was
effected
of
course
to
the
detriment
of
the
taxing
authority
and
to
the
benefit
of
Simard-Beaudry
Inc,
which
acquired
these
fixed
assets
at
a
reduced
price,
as
well
as
to
the
benefit
of
the
two
companies
Beaudry
Ltée
and
Simard
&
Frères,
Cie
Ltée
who
profited
directly
from
the
avoidance
of
tax
on
the
recouped
depreciation
which
had
been
claimed
previously
on
their
assets
and
also
to
the
benefit
of
the
Simard
brothers
and
of
the
Beaudry
brothers
who,
by
stripping
dividends
from
their
respective
companies,
managed
to
extract
large
sums
without
paying
tax.
When.
one
considers
the
transaction
from
the.
standpoint
of
the
appellant,
one
is
driven
to
the
realization
that
the
latter
spent
moneys
for
the
sole
purpose
of
acquiring
the
assets
purchased
and
for
the
right
to
purchase
those
fixed
assets
and
that
the
total
value
of
the
moneys
spent
by
this
company
is
in
fact
represented
by
these
assets.
One
must
also
realize
in
addition
that
this
company
never
purchased
at
any
time
the
shares
of
other
companies.
Therefore,
I
can
come
to
no
other
conclusion
but
that
the
payment
of
$7,356,000
was
truly
made
and
that
the
payment
can
be
attributed
to
nothing
else
but
the
purchase
of
the
fixed
assets
and
not
to
the
purchase
of
shares
or
other
assets.
Having
regard
to
the
manner
in
which
the
Supreme
Court
of
Canada,
in
its
unanimous
judgment
in
the
recent
case
of
MNR
v
James
A
Cameron,
[1972]
CTC
380;
72
DTC
6325,
applied
the
definition
contained
in
the
case
of
Snook
v
London
&
West
Riding
investments,
Ltd
(supra)
to
the
circumstances
of
the
Cameron
case,
it
is
clear,
in
my
view,
that
the
purchase
by
the
appellant
by
means
of
an
option
does
not
constitute
a
sham
in
the
legal
sense.
In
addition,
contrary
to
the
motives
of
the
taxpayer
in
the
case
of
Concorde
Automobile
Ltée
v
MNR,
[1971]
CTC
246
at
267;
71
DTC
5161
at
5174,
who,
in
order
to
deduct
as
expenses
revenue
otherwise
taxable
for
income
tax
purposes
established
a
pension
plan,
in
the
present
casé
the
main
object
and
even
the
sole
object
of
the
appellant
was
not
to
avoid
the
payment
of
tax,
for
no
tax
was
payable
by
it
in.
any
event,
but
in
order
to
purchase
the
assets
of
the
two
vendor
companies,
as
described
in
the
option.
But
the
question
is
not
finally
settled
in
favour
of
the
appellant
by
the
simple
fact
that
the
transaction
does
not
constitute
a
sham
as
defined
in
tax
law;
one-must
also.
determine
whether,
notwithstanding
this,
it
would
not
constitute
in
whole
or
in
part
a
disbursement
which
would
reduce
unduly
or
artificially
the
income
of
the
appellant
or
whether
a
depreciation
taken
on
the
assets
involved
in
the
transaction
would
not
constitute
one.
See
Concorde
Automobile
Ltée
v
MNR
(supra),
also
West
Hill
Redevelopment
Company
Limited
v
MNR,
[1969]
Ex
CR
441;
[1969]
CTC
581;
69
DTC
5385,
and
Isaac
Shulman
v
MNR,
[1961]
CTC
385
at
399;
61
DTC
1213
at
1221,
which
deal
clearly
and
precisely
with
the
definition
and
the
effect
of
subsection
137(1).
The
case
of
Louis
J
Harris
v
MNR,
[1966]
CTC
226;
66
DTC
5189,
establishes
that
a
disbursement
or
expense,
as
mentioned
in.
subsection
137(1),
includes
a
claim
for
depreciation—see
pages
241
and
242
[5197-8]
of
the
report.
Putting
aside
any
sympathy
that
one
might
naturally
feel
for
the
respondent,
who
finds
itself
deprived
of
an
enormous
sum
by
these
financial
manoeuvres,
and
also
for
the
numerous
citizens
of
modest
means
whose
contributions
to
public
coffers
only
too
frequently
involve
considerable
sacrifice,
in
order
to
examine
from
a
strict
legal
Standpoint
subsection
137(1)
in
the
light
of
the
above-mentioned
conclusions
of
fact
it
is,
in
my
view,
impossible
to
imagine
how,
under
this
section,
the
appellant
can
be
deprived
of
the
right
to
claim
a
depreciation
on
the
full
amount
of
$7,356,000
paid
for
the
purchase
of
these
fixed
assets.
If
these
fixed
assets
had
been
acquired
directly
from
the
two
selling
companies
at
their
true
value,
that
is
for
the
sum
Of
$10,600,000
without
any
financial
manoeuvring,
nobody
could
logically
deny
that
the
appellant
would
have
the
right
to
claim
an
annual
depreciation
based
on
this
purchase
price.
The
depreciation,
in
such
a
case,
would
be
calculated
on
a
total
capitalization
of
fixed
assets
of
approximately
$3,244,000
more
than
the
amount
on
which
the
appellant
is
claiming
depreciation
in
the
present
appeal.
As
they
are
the
same
assets,
how
can
one
then
conclude
that
this
would
be
a
deduction
or
an
expense
which
would
“unduly
or
artificially
reduce
the
income”
of
the
appellant?
Furthermore,
it
seems
evident
that
if
the
appellant
had
acquired
these
assets
from
the
two
companies
who
sold
them
at
the
same
price
under
the
same
conditions,
but
only
after
these
two
companies
had
paid
to
the
taxing
authority,
from
the
purchase
price,
income
tax
calculated
on
the
recaptured
depreciation,
there
would
not
be
the
slightest
question
but
that
the
appellant
would
be
fully
entitled
to
claim
the
depreciation
on
the
total
amount
paid,
including
the
cost
of
the
option.
Unless
there
is
a
sham,
subsection
137(1),
in
my
view,
cannot
be
invoked
to
deny
an
expense
or
a
deduction
where
the
revenue
of
the
taxpayer
who
is
claiming
the
depreciation
would
not
be
reduced
un-
duly
or
artificially.
The
original
expense
was
made
for
the
purchase
at
the
reduced
price
of
fixed
assets
which,
according
to
the
evidence
submitted,
will
undoubtedly
be
used
to
produce
revenue.
There
is
no
evidence
that
these
fixed
assets
will
not
be
entirely
required
for
this
object.
The
original
expense
therefore
cannot
be
an
undue
or
an
artificial
one
and
the
depreciation
itself
cannot
constitute
that
type
of
reduction
in
revenue.
It
is
interesting
also
to
note
that
the
respondent
has
already
in
the
past
allowed
a
depreciation
on
this
entire
amount
involving
the
same
fixed
assets
in
the
same
type
of
business,
at
a
time
when
they
were
actually
worth
less
than
at
the
time
the
appellant
purchased
them.
Even
when
interpreting
the
section
in
the
most
favourable
way
possible
to
the
respondent,
it
is
impossible
for
me
to
attribute
to
it
any
other
meaning
but
that
advanced
by
the
appellant.
It
has
been
stated
too
often,
to
justify
citing
jurisprudence
to
establish
the
validity
of
the
principle,
that
in
interpreting
a
section
of
a
taxing
statute
one
must
not
consider
moral
principles
nor
even
equitable
principles.
It
would
undoubtedly
seem
more
equitable
to
tax
the
appellant
since,
by
its
creator
and
guiding
light,
Aubert
Brillant,
it
participated
very
actively
in
a
manoeuvre
which
permitted
the
selling
companies
to
deny
to
the
taxing
authorities
income
tax
on
an
accumulated
depreciation
of
$5,406,000
and
also
permitted
the
shareholders
of
these
companies
to
extract
this
as
a
capital
gain.
in
the
event
of
the
operation
involving
dividend
stripping
by
means
of
the
option
being
illegal
when
it
occurred,
it
is
possible
that
the
respondent
might
recoup
from
the
appellant,
from
these
assets,
the
income
tax
of
which
the
former
was
deprived
by
the
vendors
since
the
appellant
is
still
in
possession
of
the
assets
which
one
might
possibly
consider
as
being
subject
to
a
claim
of
the
respondent.
Furthermore
the
appellant
could
certainly
not
be
considered
as
a
purchaser
in
good
faith
of
these
assets
since
it
knew
in
detail
of
the
claims
for
income
tax.
At
the
time
of
the
hearing
of
the
appeal
I
also
brought
up
the
question
of
the
Bulk
Sales
Act
of
the
Province
of
Quebec.
Counsel
for
both
parties
admitted
that
they
had
not
considered
this
question
on
the
appeal
but
that,
on
thinking
it
over,
they
were
satisfied
that
the
sale
was
in
accordance
with
this
Act.
However,
it
would
seem
to
me
that
there
never
at
any
time
was
a
single
contract
covering
the
purchase
of
both
the
current
assets
and
the
fixed
assets
and
that
furthermore
the
two
transactions
took
place
at
different
moments
in
time.
The
evidence
tendered
establishes
that,
after
the
purchase
of
the
current
assets
including
goodwill,
from
the
two
companies
on
December
15,
1964,
there
was
no
contractual
obligation
on
the
part
of
the
appellant
to
purchase
the
fixed
assets
nor
was
there
any
obligation
on
the
part
of
the
Beaudry
brothers
or
the
Simard
brothers
or
their
companies
to
sell
these
fixed
assets.
In
addition,
the
purchase
of
the
option
and
the
purchase
of
the
fixed
assets
took
place
in
Bermuda
and
all
the
vendors
were,
apparently,
at
that
moment
situated
in
and
domiciled
in
Bermuda,
the
two
vendor
companies
having
apparently
elected
domicile
in
that
country
before
the
sale;
one
might
therefore
question
whether
the
sale
would
not
fall
under
the
provisions
of
the
Bulk
Sales
Act
of
Bermuda
since
the
option
was
given
in
Bermuda
and
that
the
purchase
of
the
fixed
assets
took
place
in
accordance
with
the
rights
acquired
by
the
option.
In
any
event,
the
question
before
me
is
not
to
determine
whether
the
taxing
authorities
could,
by
some
other
means,
recover
the
income
taxes
which
might
be
otherwise
payable,
but
to
decide
as
to
the
application
of
subsection
137(1)
to
the
circumstances
of
the
present
case.
The
appeal
is
therefore
allowed
with
costs.
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