The Queen v. Phillips, 76 DTC 6093, [1976] CTC 126 (FCA)

The Chief Justice (judgment delivered from the Bench) (concurred in by Pratte, J, and Hyde, DJ):—This is an appeal from a judgment of the Trial Division dismissing an appeal from a judgment of the Tax Review Board allowing an appeal by the respondent from an assessment under Part I of the Income Tax Act for the 1966 taxation year, which assessment was based on the assumption that $22,000 paid in that year by a company whose shares were held by the respondent to one Donat Beaupré were funds that had been appropriated to or for the benefit of the respondent within the meaning of section 8 of the Income Tax Act, the relevant portion of which read, in respect of that year, as follows:

8.(1) Where, in a taxation year,

(b) funds or property of a Corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or

(c) a benefit or advantage has been conferred on a shareholder by a corporation,

the amount or value thereof shall be included in computing the income of the shareholder for the year.

The facts are fully set out in the Reasons for Judgment of the learned Trial Judge, with which ! agree, and I need not repeat them. To put my reasons for agreeing with the learned Trial Judge in my own words, it is sufficient for me to summarize the effect of the relevant transactions — in a manner slightly different in immaterial respects from that adopted by the learned Trial Judge — as follows:

1. In 1964, the respondent acquired Beaupré’s shares in the company under an arrangement pursuant to which

(a) the respondent and Beaupré entered into an agreement by which Beaupré sold his shares to the respondent for $12,000, and

(b) the company was caused by the respondent, as its controlling shareholder, to enter into an agreement with Beaupré by which the company bound itself to pay Beaupré $48,000 by installments spread over a period of years.

2. As a result of an action brought by Beaupré against the company for its failure to make certain of the payments contemplated by the second of those two agreements, the Superior Court of Quebec rendered a judgment on July 25, 1966, in favour of Beaupré against the company.

3. Subsequently in 1966, the company paid Beaupré $22,000 and Beaupré executed a release, in favour of the company and the respondent, of all claims arising out of Beaupré’s relations with the company and, in particular, recognized that the Superior Court judgment was satisfied and that all obligations in the agreement between him and the Company were discharged.

There is no question in my mind that the company was caused by the respondent to confer on him a benefit of the kind contemplated by section 8 when he caused the company to bind itself by agreement to pay Beaupré $48,000 over a period of years. Such agreement was part of the inducement or consideration for the transfer of his shares by Beaupré to the respondent. If the company had not executed that agreement, the respondent would not have obtained the shares for a payment by him to Beaupré of only $12,000. That agreement was, however, executed in 1964 and the value of the benefit conferred on the respondent thereby is not in question in this appeal.

The question here is whether the payment by the company to Beaupré in 1966 of $22,000 was an appropriation of funds or property of the company “to, or for the advantage of,” the respondent or was “a benefit or advantage . . . conferred” on the respondent by the company.

On that question, there would seem to me to be no doubt that the correct view is that the $22,000 was paid by the company in discharge of the company’s obligations to Beaupré and was neither an appropriation of company property to the respondent nor a benefit conferred on the respondent by the company. Any suggestion that the learned Trial Judge held otherwise does not result, in my view, from a fair reading of his Reasons.

Indeed, it is fair to say that the various submissions made in support of the appeal were all based on the view that there was an obligation of the respondent to pay by installments the aforesaid sum of $48,000 to Beaupré and that the payment of $22,000 by the company to Beaupré in 1966 was a partial relief to the respondent of such obligation. As already indicated, as I understand the facts established by the evidence in the Trial Division, the respondent never became liable to pay such installments. It follows that, in my view, all such submissions must be rejected.

For the above reasons, my conclusion is that the appeal should be dismissed with costs.