Dale v. The Queen, 94 DTC 1100, [1994] 1 CTC 2303 (TCC), aff'd supra.

Bowman, J.T.C.C.:—These appeals relate to assessments for the 1985, 1987 and 1988 taxation years. The matter was originally framed as a motion under section 58 of the Tax Court of Canada Rules (General Procedure) for the determination of a question of law raised by the pleadings. Subsections 58(1) and (2) of the rules are as follows:

58 (1) A party may apply to the court,

(a) for the determination, before hearing, of a question of law raised by a pleading in a proceeding where the determination of the question may dispose of all or part of the proceeding, substantially shorten the hearing or result in a substantial saving of costs, or

(b) to strike out a pleading because it discloses no reasonable grounds for appeal or for opposing the appeal,

and the court may grant judgment accordingly.

(2) No evidence is admissible on an application,

(a) under paragraph (1)(a), except with leave of the court or on consent of the parties, or

(b) under paragraph (1)(b).

The question set out in the notice of motion was:

[W]hether or not preference shares in the Dale Corporation legally existed effective December 31, 1985.

After hearing the motion and reviewing the rather voluminous material adduced I requested the deputy registrar of the court to inform counsel that I had concluded that this was not an appropriate case for an application under Rule 58, on the basis that there was no real consensus either on the issues or the facts and the answer to the question asked would not in any event dispose of the action. Accordingly the matter proceeded to trial as an ordinary action in the court and, with the, agreement of both counsel, I dismissed the application under section 58 with costs in the cause. The cases of both Peter Dale and of his father Bernard Dale were heard together on common evidence.

Overview

The central issues are essentially the effectiveness in law of an election which the appellants purported to make in 1985 under section 85 of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") with respect to a transfer of an apartment building in Halifax to the Dale Corporation and the declaration and payment of a capital dividend in 1985 on preferred shares that the company issued, or purported to issue, as part of the section 85 rollover.

In order to give some focus to the more detailed discussion of the facts and issues that follows, it may be helpful if I set out in summary form the events giving rise to the problem as I see it. In 1985 the Dales, father and son, owned 23 or the 26 issued shares of the Dale Corporation. They were also the beneficial owners of an apartment building in Halifax, Nova Scotia. They intended to sell it to an arm's length purchaser but to do so personally would have subjected them to substantial tax on the capital gain and recapture of capital cost allowance so realized. Therefore they proposed to roll it into the company for consideration consisting of the assumption of the mortgage and shares of the company, make an election under section 85 of the Income Tax Act, and cause the company to sell it and realize the gain. The company had ample losses to absorb the capital gain and recapture.

To that end they passed resolutions, entered into an agreement with the company, caused the company to issue to themselves two preference share certificates, signed and filed a section 85 election, transferred the building to the company, had the company sell the property to the proposed purchaser and realize the capital gain and recapture that they would otherwise have realized. On the assumption that the steps taken achieved their objective, they declared a capital dividend of $80,000 on each of the preferred shares that were issued as part of the section 85 rollover.

What they did was a perfectly acceptable form of tax planning. It should have worked without a hitch but for one small omission. The company did not have an authorized capital that would permit the issuance of the preferred shares and supplementary letters patent increasing the authorized capital were to have been obtained. Whoever had the responsibility of doing this evidently neglected to apply for the necessary supplementary letters patent. Later, when this was discovered, more resolutions were passed but by this time they were on the point of causing the company to continue into Nova Scotia, a jurisdiction in which corporations are not formed by letters patent but rather by memoranda of association. They subsequently obtained an order from the Supreme Court of Nova Scotia which purported retroactively to validate the increase in the share capital and the issuance of the preference shares.

The Department of National Revenue assessed on the basis that the section 85 rollover was invalid because the preference shares were not validly issued. Therefore the appellants were deemed by section 69 to have transferred the building to the company at its fair market value, with the result that the Dales personally realized the capital gains and recapture. Moreover the capital dividend that the company purported to pay to them was not treated as a dividend at all, capital or otherwise, because the shares did not exist but rather as a shareholder's benefit under subsection 15(1) and in any event the invalidity of the section 85 election precluded the company's having a capital dividend account.

The precise figures are not necessarily germane to the questions of principle involved here but they are worth noting. According to the firm of chartered accountants, Arney and Levy, the original cost of the building was $4,519,327 and of the land $350,000. Capital cost allowance on the building had brought the undepreciated capital cost to $3,218,132. The undepreciated capital cost of the equipment and paving was $274,148. The fair market value and the proposed sale price of the property to the Dale Corporation was $6,550,000. The balance of the mortgage outstanding on the property was in the amount of $4,264,596.

It was proposed that the rollover be effected as follows:

The land would be sold for $500,000 giving rise to a capital gain of $150,000 in the hands of the Dales. The equipment and paving would be sold for $100,000, their estimated fair market value. The payment for the land, equipment and paving would be effected by the assumption by the company of $600,000 of the mortgage. The building would be transferred to the company for corporate purposes at $5,950,000, its fair market value (i.e., $6,550,000 — $600,000) and would be paid for by the assumption of the balance of the mortgage, $3,664,596 ($4,264,596 — $600,000). The difference between that amount and the sale price of the building ($5,950,000), or $2,285,405, was to be satisfied by the issuance to the two Dales of two redeemable and retractable preference shares of $1,142,702.50.

It was intended that the company would sell the property for $6,550,000 and realize a capital gain of $1,425,673, thereby creating a capital dividend account of 50 per cent thereof, or $714,337 which could be paid out to the Dales as a tax free capital dividend under subsection 83(2).

The Minister's assessment of the appellants entailed rather different results. Since the Minister did not recognize the section 85 rollover he treated the transfer to the company as having taken place at the fair market value of the property, $6,550,000. This gave rise to an additional taxable capital gain in the hands of each appellant of $304,426.25 and additional recapture of capital cost allowance of $514,928 as well as the inclusion of a further $80,000 as a shareholders’ benefit under subsection 15(1) on the basis that the capital dividend was not validly declared or paid since the shares did not exist and, owing to the invalidity of the section 85 rollover, no capital gain was realized by the company and therefore it had no capital dividend account.

Issues

The issues of corporate and tax law boil down to three broad questions.

1. Was the section 85 election valid and effective independently of the corrective action taken later?

2. If not, were the subsequent actions taken sufficient to render the election valid? and

3. Whatever might be the answer to the above two questions was a capital dividend validly declared and paid in 1985?

Facts

The sequence of events in detail is as follows:

1. At all material times the appellants were shareholders and directors of the Dale Corporation (subsequently, the Dale Corporation Ltd., hereinafter referred to as "the company") which had been incorporated by letters patent under the laws of Prince Edward Island in 1969.

2. Immediately prior to the transaction in question the authorized capital of the company was $5,000, consisting of 50 common shares of $100 each. The appellant Peter Dale owned one share of the company, his father Bernard Dale owned 22 shares, and his mother Roberta, his sister Janet and his brother Norman Dale each owned one share.

3, The Welsford apartment building in Halifax was acquired by the appellant and his father on March 15, 1978. Title to the building was held by the Dale Corporation "in trust for Bernard Dale and Peter Dale. . . .”

4. On September 1, 1985 a meeting of the shareholders of the company was held. The relevant portion of the minutes of that meeting is as follows:

The chairman reported to the meeting that the company had concluded negotiations between itself and two of the principal shareholders, Messrs. Bernard and Peter Dale with respect to the transfer of the Welsford Apartment Buildings at Halifax, Nova Scotia, from the individuals to the Dale Corporation under the provisions of subsection 85(1) of the Income Tax Act.

The chairman provided draft documents to the meeting to effect this transaction, and advised the meeting that because the adjusted cost base of the subject property was lower than the outstanding mortgage indebtedness to Credit Foncier, that the transfer would have to take place at the higher of these two values. The meeting was advised that the outstanding indebtedness as to principal due to Credit Foncier on September 1, 1985, was the sum of $4,264,597.52, and that the calculated transfer value of the building would be the sum of $3,664,596. Neither land nor equipment and paving would be transferred directly under the provisions of subsection 85(1) of the Income Tax Act.

The chairman advised the meeting that a meeting of the directors would take place in order to approve the necessary documentation.

The chairman further advised the meeting that while the subsection 85(1) rollover would be effected as of September 1, 1985, the company was advised by its solicitors to hold the transaction in escrow, pending settlement with the Bank of Montreal and the provincial government. However, the escrow would have to be released before December 31, 1985, in order to effect it for the 1985 taxation year.

The chairman did advise the meeting that it would be necessary for the company to make application for supplementary letters patent as the transfer would have to be paid for by the corporation, in part, by the issuance of shares.

A resolution to this effect would be presented to the shareholders immediately upon documents being released from escrow.

The intention was that the company would acquire the Welsford apartment building from the appellant and his father for an elected amount equal to the mortgage indebtedness to Credit Foncier and that part of the consideration for the building was to be the issuance of shares. An agreement made on December 30, 1985 "as of this first day of September 1985” was entered into by the company of the Dales providing for the transfer of the property in consideration of the assumption of the mortgage indebtedness and the issuance of seven per cent redeemable retractable voting preference shares. Clauses 3 and 4 of the agreement read as follows:

3. It is agreed that upon delivery by the Dale’s to the Dale Corporation of a complete release of all right, title and interest by the Dale's to the property that the company shall forthwith deliver unto the Dale's and to each of them, a non- cumulative seven per cent redeemable, retractable, voting preference share and that the company will assume all liabilities with respect to the operation of the subject property.

4. The parties agree that forthwith after the execution hereof, they will do and perform all such further acts, deeds and things as are necessary to implement this agreement.

On September 30, 1985 an agreement was entered into between Marcan Investment Corporation, the appellant and his father and the company whereby the vendors (i.e., the company and the Dales) agreed to sell the building, including the land, chattels and paving, for $6,550,000. The agreement recited that beneficial owners of the property were the Dales and the company held the property in trust for them.

Clause 9.04 of the agreement provided that:

The vendors shall have the unrestricted right to arrange their affairs prior to or concurrent with the closing date so as to take advantage of any tax planning which the vendors, in their discretion, deem appropriate, including any transaction pur- suant to section 85 of the Income Tax Act, and in consequence thereof shall have the right to assign, in whole or in part, this agreement to any other person, persons, firms, corporation or other body without obtaining the consent of the purchaser, it being agreed and understood that the vendor shall not be relieved of the obligations hereunder. In the event that any transaction pursuant to this paragraph requires an actual transfer of title, then the grantee of any such transfer shall first agree in writing to be bound by this agreement and all of its terms.

On December 30, 1985 the trust was terminated and Bernard Dale and Peter Dale executed a transfer to the company of their beneficial interest in the Welsford apartments. On December 31, 1985 the company transferred the property to one Khandker Shamsul Hoque, an assignee from Marcan Investment Corporation. Both transfers were registered in the Registry of Deeds in Halifax on January 2, 1986.

Meetings of the shareholders and directors were held on December 28, 1985. The minutes of the shareholders' meeting contain the following:

The chairman advised the meeting that the rollover under the provisions of subsection 85(1) of the Income Tax Act with respect to the Welsford could now be concluded, the documents released from escrow and executed.

UPON MOTION, duly made and seconded, the resolution respecting the change in share capital of the company, appended as Schedule "A" to the minutes of the meeting, was adopted, with instructions to the secretary to effect the necessary amendments by means of Supplementary Letters Patent. R. Barry Ward, barrister and solicitor of Halifax, is hereby appointed transfer agent for all shares of the company.

Appended to the minutes of the meeting of the shareholders was a resolution reading as follows:

BE IT RESOLVED THAT the company make application through its solicitors for amendment to the Letters Patent of the company in that the provisions of paragraph 5 of the Letters Patent bearing date December 9, 1969, which reads:

The capital stock of the company shall be $5,000 consisting of 50 common shares of $100 each

be and is hereby amended to be as follows:

The capital stock of the company shall be $6,000,000 divided into:

(a) five non-cumulative seven per cent redeemable, retractable, voting preference shares, having an individual aggregate redemption value of $1,142,702;

(b) 28,149 subordinate ordinary preference shares having a nominal or par value of $10 each;

(c) 50 common shares of the nominal or par value of $100 each.

The directors' meeting followed the shareholders’ meeting on the same day and contained the following:

The chairman of the meeting advised the meeting that the solicitors for the company at Halifax, Messrs. Burton, Lynch, Armsworthy, Ward & O’Neil, had advised the company that the Release of Mortgage from the Bank of Montreal had been received by them on Tuesday, December 24, 1985. Accordingly, it would now be appropriate for the subsection 85(1) rollover between the Dale Corporation and Messrs. Bernard and Peter Dale to be effected. The necessary documents have now been released from all escrows so that the rollover could be completed as of September 1, 1985.

With the unanimous [sic] of the meeting, the directive was given to the necessary officers of the company to conclude the rollover of the Welsford, and it was directed that all documentation be appended to the minutes of this meeting.

The secretary of the meeting advised that the solicitor for the company for the Province of Prince Edward Island would be instructed to effect the necessary change in authorized share capital for the company as the necessary consents and releases had been obtained from the Bank of Montreal and from Peat Marwick Ltd. as part of the settlement documentation with the Bank of Montreal. The secretary advised the meeting that the instructions would be given forthwith and that the company had received legal advice that it was now permissible for the company to issue the necessary shares pursuant to the subsection 85(1) rollover.

The secretary of the meeting advised that it would be advantageous for the company to declare and authorize payment of dividends out of its capital dividend account to preference shareholders of record on December 31, 1985.

UPON MOTION, duly made and seconded, the directors' resolution respecting dividends as presented to the meeting was approved, and a copy directed to be appended as Schedule "B" to the minutes of this meeting.

Appended to the minutes of the directors' meeting was an agreement dated December 30, 1985, made as of December 28, 1985 between the Dale Corporation and Bernard Dale and Peter Dale. The operative part of the agreement reads as follows:

WHEREAS the Dale Corporation (the "company") desires to issue to the shareholders certain preference shares of the company for consideration other than cash;

AND WHEREAS both the company and the shareholders have agreed that the issuance of such shares would be in consideration of those assets acquired by the company from the shareholders further to a rollover of assets pursuant to the provisions of subsection 85(1) of the Income Tax Act.

NOW WITNESSETH THAT IN CONSIDERATION of certain assets being transferred and released to the company by the shareholders and the consideration for such transfer being, inter alia, the issuance of certain shares by the company to the shareholders, and other good and valuable consideration, the company and the shareholders do hereby agree that the company issue to the shareholders from the authorized share capital of the company such preference shares as are more particularly described herein.

1. That it is agreed between the company and the shareholders that the shares issued shall be as follows:

TRANSFEROR	SHARES	TRANSFEREE
Company-Treasury	one non-cumulative seven per cent,
	redeemable, retractable, voting
	preference share	Bernard Dale
Company-Treasury	one non-cumulative seven per cent,
	redeemable, retractable, voting
	preference share	Peter A.B. Dale

2. That it is agreed that the shares as intended to be issued be so issued for consideration other than the payment of cash, that consideration being as aforesaid.

3. This agreement shall be governed by the laws of the Province of Prince Edward Island.

Also, appended to the minutes was a director's resolution relating to the payment of dividends. It reads as follows:

BE IT RESOLVED:

That the company declare a dividend out of its capital dividend account pursuant to subsection 83(2) of the income tax in the amount of $80,000 per share on each of the two issued, outstanding and fully paid preference shares for an aggregate

payment of $160,000, to be paid to those shareholders of record at the hour of 5:00 o'clock p.m. on Tuesday December 31, 1985.

In 1985 the company issued one preference share certificate having a redemption value of $1,142,702 to each of the appellants in consideration of the transfer of the apartment building. The appellants and the company signed and filed an election in prescribed form pursuant to section 85 of the Income Tax Act in respect of the acquisition. The form of election was that prescribed for the purposes of subsection 85(2), which is used where a partnership transfers property. No issue was taken with the form of the election and I accept that the formal requirements of signing and filing the appropriate form were complied with.

The election form under “Description of Shares Received” is as follows:

Supplementary letters patent authorizing the amendment to the authorized capital of the company and the creation of the preference shares purportedly issued in connection with the transfer and the section 85 election of the company were not obtained from the Province of Prince Edward Island. The omission appears to have come to light in 1988. It appears that by order of the Supreme Court of Prince Edward Island dated February 13, 1985 certain assets of the company in Prince Edward Island had been placed under the control of a receiver. That receivership was terminated on September 1, 1988 by order of the same Court and the corporate records were returned to the care and custody of the officers of the company. The state of the records was described in the minutes of a shareholders’ meeting held on December 6, 1988 in Victoria, British Columbia as "abysmal", and the following observation was made in the minutes:

. . . as a consequence of the receivership order the powers of the Board of Directors was suspended in that Province [i.e. Prince Edward Island]. . . .

Whether this statement is correct in law is not germane to this case. The board clearly had the power to deal with the Welsford apartment building, which was located in Halifax.

The shareholders therefore passed a resolution on December 6, 1988 purporting to ratify the increase in the share capital of the company. The preamble to the motion and the motion were as follows:

The secretary of the meeting advised the meeting that the receiver and manager was discharged by an order filed on September 1, 1988. However, subsequent to the discharge the minute book of the company has not been returned with the receiver and manager disavowing any knowledge of the minute book. The secretary, as a consequence thereof, had occasion to check the records of the company on file with the registrar of companies in and for the Province of Prince Edward Island and noted that the records were in error with respect to the authorized share capital of the company. The secretary advised the meeting that a resolution confirming amendment of the authorized share of the company would be appropriate so as to ensure the registrar of companies records were up-to-date and accurate. After brief discussion, the following motion was presented to the meeting.

UPON MOTION, duly made, seconded and unanimously approved, the special resolution attached as Schedule "A" to the minutes of this meeting was and is hereby approved.

The special resolution appended as schedule A read as follows:

WHEREAS by order of the Supreme Court of Prince Edward Island dated February 13, 1985, under style of cause Court Number G.D.C.-5677, the assets of the Dale Corporation were placed in receivership;

AND WHEREAS by order of the Supreme Court of Prince Edward Island dated August 31, 1988, under the same style of cause and filed with the Supreme Court of Prince Edward Island on September 1, 1988, the said receivership was terminated with the consequence that care custody and control of the Dale Corporation was therewith returned to it’s [sic] Officers, Directors and Shareholders;

AND WHEREAS at a meeting of the shareholders of the company a review of the records on file with the office of the registrar of companies for the Province of Prince Edward Island resulted in an observed inaccuracy in those records;

AND WHEREAS the inaccuracy pertained to the statement of authorized capital of the company which was amended subsequent to the incorporation of the company in 1969 with the records of the registrar of companies for the Province of Prince Edward Island not having been previously advised of said amendment;

NOW THEREFORE in furtherance to the objective of correctness and accuracy with the office of the registrar of companies in and for the Province of Prince Edward Island;

BE IT RESOLVED as special resolution of the shareholders that the amendment to the authorized share capital of the company be and is hereby ratified, confirmed and approved, with that amendment being an amendment to the letters patent of the company being dated December 9, 1969, which reads:

The capital stock of the company shall be $5,000 consisting of 50 common shares of $100 each. . . .

so that the authorized share capital of the company be amended to be as follows:

The capital stock of the company shall be $6,000,000 divided into:

(a) Five non-cumulative seven per cent redeemable, retractable, voting preference shares having an individual aggregate redemption value of $1,142,702;

(b) 28,149 subordinate ordinary preference shares having a nominal or par value of $10 each;

(c) 50 Common Shares of the nominal or par value of $100 each.

At the same meeting of shareholders held on December 6, 1988 it was resolved that the company continue under the laws of Nova Scotia. The petition of the Dale Corporation to the registrar of joint stock companies had appended to it the memorandum of association which set out the capital stock of the company as $6,000,000 divided into the three classes of shares described in the various resolutions passed since December of 1985. A certificate of continuance was issued by the Registrar of Joint Stock Companies of Nova Scotia on July 27, 1989, certifying that the company was continued in the Province of Nova Scotia under the name of the Dale Corporation Ltd.

The registrar of joint stock companies of Nova Scotia also issued on February 13, 1991 a certification that, according to the records of his office, "the authorized capital of the Dale Corporation Ltd." [1] upon its continuance under the Nova Scotia Companies Act, (R.S.N.S. 1989, c. 81) on July 27, 1989, consisted of $6,000,000 divided into:

(a) Five non-cumulative seven per cent redeemable, retractable, voting preference shares, (without nominal or par value) having an individual aggregate redemption value of $1,142,702;

(b) 28,149 subordinate ordinary preference shares having a nominal or par value of $10 each; and

(c) 50 common shares of the nominal or par value of $100.

On May 22, 1991 a meeting of the shareholders was held and a further special resolution was passed whereby the resolution approved on December 28, 1985, reproduced above, was again "expressly sanctioned, ratified, confirmed and approved as of December 28, 1985”.

At a meeting of the directors of the company held on the same day a resolution was passed authorizing an application to permit the late filing under section 109 of the Nova Scotia Companies Act of the contract entered into on December 30, 1985 with respect to the issuance of the preference shares. Subsections 109(1), (2) and (3) of the Nova Scotia Companies Act provides:

109 (1) Every share with nominal or par value in any company shall be deemed and taken to have been issued and to be held subject to the payment of the whole amount thereof in cash, unless the same has been otherwise determined by a contract, duly made in writing and filed with the Registrar at or before the issue of such shares.

(2) Every share without nominal or par value in any company shall be deemed and taken to have been issued and to be held subject to the payment in cash of the whole amount for which same has been subscribed for and allotted unless otherwise determined by a contract duly made in writing and filed with the Registrar at or before the issue of such share.

(3) Whenever before, on or after the first day of August, 1935, any shares in the capital of any company, credited as fully or partly paid up, shall have been or may be issued for a consideration other than cash and at or before the issue of such shares no contract or no sufficient contract is filed with the registrar in compliance with this section, the company or any person interested in such shares, or any of them, may apply to the court for relief, and the court, if satisfied that the omission to file a contract or sufficient contract was accidental or due to inadvertence, or that for any reason it is just and equitable to grant relief, may make an order for the filing with the registrar of a sufficient contract in writing, and directing that on such contract being filed within a specified period it shall in relation to such shares operate as if it had been duly filed with the registrar aforesaid before the issue of such shares.

An order was therefore obtained from the Supreme Court of Nova Scotia on June 28, 1991. It reads as follows:

UPON HAVING HEARD the Application of the Dale Corporation Ltd. (herein the "company") for an order of relief under subsection 109(3) of the Companies Act, R.S.N.S. 1989, c. 81;

AND UPON HAVING READ the Affidavit of Peter A.B. Dale sworn to May 22, 1991, and other documents and materials on file herein;

NOW UPON MOTION:

IT IS ORDERED THAT the contract appended as Schedule "A" to this Order bearing execution date December 30, 1985, be and is hereby declared to be a sufficient contract executed in due compliance with the requirements of section 109 of the Compa ni es Act, R.S.N.S. 1989, c. 81;

AND IT IS FURTHER ORDERED THAT upon the filing of that contract with the registrar aforesaid within 30 days next following the date of this order that such filing shall, in relation to such shares, operate as if it had been duly filed with the Registrar aforesaid before the issue of such shares, that being a filing as of Monday, December 30, 1985.

Almost a year passed and then a further order was obtained on June 25, 1992 from Mr. Justice R. MacDonald of the Supreme Court of Nova Scotia reading as follows:

UPON having heard the Application of the Dale Corporation Ltd. (hereinafter the "company") for an order of relief under section 44 of the Companies Act, R.S.N.S. 1989 c. 81;

AND UPON having read the affidavit of Peter A.B. Dale sworn to June 19, 1992, and other documents and materials on file herein;

NOW UPON MOTION:

IT IS ORDERED THAT the authorized share capital of the Dale Corporation be and is hereby declared to have been amended as per Schedule "A" to this Order, effective December 28, 1985.

IT IS FURTHER ORDERED THAT the two preference shares issued are hereby ratified and confirmed as having been validly issued and outstanding as at December 31, 1985.

Schedule A to the order is simply a repetition of the revised authorized capital set out in the resolutions passed or ratified on December 28, 1985 and May 22, 1991, except that schedule A contains the words in paragraph (a) "without nominal or par value".

The original basis of assessing was not that supplementary letters patent were not obtained from the Province of Prince Edward Island but rather that, since the appellants’ common shares in the Dale Corporation had been placed in escrow with an escrow agent as security for a loan from the Bank of Montreal to the company, the shareholders had no authority to change the share structure of the company with the result that the shares were not validly issued. That escrow agreement placed certain contractual restrictions on the appellants with respect to their powers to deal with the shares. The escrow agreement did not however prevent the Dales from taking the corporate action that they did in respect of the Welsford apartment building and in any event both the Bank of Montreal and the escrow agent were fully aware of the proposed transactions and acquiesced in them. The assumption upon which the assessment was based was wrong and the position was not advanced at trial. The failure to obtain supplementary letters patent was raised after the assessment. Normally this change of basis would entail a shifting of the onus of proof to the respondent. Since all of the facts were before me, however, and the question is essentially one of law the question of onus does not arise.

The Minister treated the transfer of the building as having taken place at fair market value under section 69. In addition, with respect to the purported declaration of a capital dividend of $80,000 to each of the Dales on the preference shares, the Minister’s position was that, because of the invalidity of the section 85 rollover, the company did not have a capital dividend account and, because the shares did not exist, the purported capital dividend was not a dividend at all but rather an appropriation to a shareholder under subsection 15(1) of the Income Tax Act.

The respondent also pleaded in the alternative that there was no transfer of the building to the company but in substance a direct sale from the Dales to the ultimate purchaser. The evidence did not support this position and it was not pressed by counsel.

Analysis

One is left therefore with relatively few essential facts upon which to form a legal conclusion as to the effectiveness in law of the section 85 rollover and the declaration of a capital dividend.

(a) We have a binding agreement between the Dales and their company to transfer the property for a consideration that included shares, followed by a valid transfer of the property to the company in 1985.

(b) We have an issuance in 1985 of two preference share certificates to the Dales in purported satisfaction of the company's obligations under the agreement. They were given to Mr. Ward, the solicitor, who testified that they were lost. I accept his testimony. Replacement certificates were issued on July 10, 1989 and this fact was reflected in the share transfer register.

(c) We have a meeting of shareholders on December 28, 1985 resolving that the secretary be instructed to apply for supplementary letters patent.

(d) We have a number of resolutions, both before and after the continuance into Nova Scotia, sanctioning and ratifying the resolution of December 28, 1985 relating to the increase in the authorized capital and the adoption by the shareholders of the Memorandum of Association setting out the increased share capital.

(e) We have a certificate of the Nova Scotia Registrar of Companies certifying that the authorized capital of the Dale Corporation Ltd. upon its continuance into Nova Scotia on July 27, 1989 consisted of $6,000,000 divided as described above.

(f) We have an order by the Supreme Court of Nova Scotia that the authorized share capital of the company be declared to have been amended in accordance with Schedule A thereto effective December 28, 1985.

What do we not have? Supplementary letters patent from Prince Edward Island sanctioning a by-law increasing the authorized capital.

In considering whether this omission is fatal to the appellants’ case I propose to start from what I believe to be a solid footing, and that is the situation on June 25, 1992 when Mr. Justice MacDonald made his order. By that time, were the preference shares validly issued to the appellants? Counsel for the respondent does not dispute that they were and, although that is an admission of law not binding on either the parties or the court, I am in respectful agreement with her.

Subsection 133(4) of the Nova Scotia Companies Act provides in part as follows:

133 (4)(a) without prejudice to the power of the company to vary or amend the same, the articles of continuance and the by-laws of the company shall, respectively, constitute the memorandum and articles of association of the company;

(b) the share capital of the company shall be the existing share capital and the liability of the shareholders thereon shall continue to be limited.

It was argued that the “existing share capital" with which the company came into Nova Scotia was the original share capital of the Dale Corporation, since the resolution that the share capital be increased was not confirmed by supplementary letters patent as required by sections 32, 34, and 35 of the Prince Edward Island Companies Act (R.S.P.E.I. 1988, c. C-14). [2]

The adoption of the memorandum and articles of association by the shareholders and the resolutions passed at the meeting of December 6, 1988, containing the increased share capital which acts were again sanctioned at the meeting of May 22, 1991 (after the company had continued into Nova Scotia), make it clear that at least by June 25, 1992 the share capital was as set out in the articles of association. The petition to the registrar of joint stock companies of Nova Scotia, dated July 17, 1988, relating to the continuance into Nova Scotia had attached the proposed memorandum of association "unanimously adopted by the shareholders of the company".

Section 23 of the Nova Scotia Companies Act reads as follows:

23 (1) Subject to this Act and to the conditions contained in its memorandum, a company may by special resolution, alter or add to its articles, and any alteration or addition so made shall be as valid as if originally contained in the articles and be subject in like manner to alteration by special resolution.

(2) The power of altering articles under this section shall, in the case of an unlimited company formed and registered under this Act, extend to altering any regulations relating to the amount of capital or its distribution into shares, notwithstanding that those regulations are contained in the memorandum. R.S., c. 81, section 23.

The resolution of May 22, 1991 is a special resolution as defined in section 87 of that Act.

We may then proceed from the premise that at the very latest by June 25, 1992 and probably by May 22, 1991 if not July 27, 1989 the share capital was increased and any defects in the issuance of the preference shares to the appellants were cured. Whether the Supreme Court of Nova Scotia had the power to make an order that had retroactive effect to a time that predated the continuance into Nova Scotia when the company was subject to Prince Edward Island law may be moot but even if, by including the words in his order of June 25, 1992 "effective December 28, 1985” and "as at December 31, 1985”, Mr. Justice MacDonald exceeded his jurisdiction, it does not follow that the order should not be given effect within the limits of his powers as a superior court of Nova Scotia with respect to a company that, by June 25, 1992, was clearly subject to the laws of Nova Scotia. Thus, whether by reason of Mr. Justice MacDonald’s order or by the resolution of May 22, 1991, or by the petition of July 17, 1989 giving rise to the continuance into Nova Scotia on July 27, 1989 the company had completely fulfilled its obligations under the agreement of December 28, 1985. It is perhaps open to question whether, if the order of MacDonald, J. is treated as having effect only on the day it was made and not having retroactive effect, it added anything to the petition of

for the issue of supplementary letters patent to confirm the same.

It might be noted that the resolutions passed in 1985 by the shareholders and directors do not, on their face, purport to be directors' "by-laws" as contemplated by section 32. Mr. Wegenast, in his book Canadian Companies describes the difference as follows at page 251:

A by-law is a formal instrument under seal. A resolution is informal. The difference between a by-law and a resolution is analogous to the difference between a deed and an ordinary agreement. The difference is in the degree of formality and the importance of the difference in each case lies in the difference in legal effect, which is none the less real for being the product of historical development.

While one might be inclined to question whether these observations, written over half a century ago, are still meaningful in a closely held company whose directors and controlling shareholders are the same, one is still faced with the inescapable fact that whatever one might choose to call the corporate procedures taken in December 1985 they were not confirmed by supplementary letters patent.

July 17, 1989 and the resolution of the shareholders of May 22,1991. Counsel for the respondent argued that the order of MacDonald, J. might be binding as between the shareholders and the company but it could not bind the Minister. The correctness in law of that statement is questionable. In the absence of a specific statutory provision, (such, for example, as section 68 of the Income Tax Act) the Minister is not free to pick and choose which legal relationships he will recognize and which he will not. The Minister is seldom, if ever, a party to legal relations between subjects although they affect him in that they create the foundation from which tax consequences emanate. The Minister takes those relations as he finds them. The question is not whether he recognizes them. Rather, it is what is the true effect of the relations. Here we have an obligation to issue preference shares in consideration of the transfer of a building. The fulfilment of that obligation required, under Prince Edward Island law, a by-law increasing the authorized capital and a confirmation thereof by supplementary letters patent. That corporate step was not completed and the authorized capital was not increased until the company became subject to Nova Scotia law. This is not a matter of rewriting history, as counsel suggests, but of fulfilling all of the steps necessary to complete the company's obligations some time after the year in which the transfer takes place.

It was part of the company's binding contractual obligations to increase its share capital under the laws of the province to which it became subject, Nova Scotia. The subsequent actions rectified the earlier omission and validated what, in their absence, would otherwise have been at least irregular, if not invalid. [3] The result is that the appellants’ title to the preference shares was perfected.

I hope that in my attempt to set out and deal with the respondent's position I do no disservice to Ms. Goldstein’s able and lucid presentation of the Crown's case. She contended that whatever might have been the effect of the subsequent actions that were designed to correct the failure to obtain supplementary letters patent, the irrefutable fact remains that the issuance of the preference shares was, as of December 31, 1985, unauthorized. From this position she contends that no corrective action after 1985 could avail to validate the section 85 election, the efficacy of which requires that the transfer of the capital property be "for consideration that includes shares of the capital stock of the corporation". Her position was that the shares had to be validly issued within the taxation year in which the rollover takes place. I presume that the taxation year referred to is that of the corporation issuing the shares. If this theory were correct it would mean that even if supplementary letters patent had been obtained on January 2, 1986 the section 85 rollover would nave been invalid.

This is not in my view a reasonable interpretation of section 85. The expression “consideration that includes shares" does not, as counsel suggests, imply that the share must necessarily be issued simultaneously with the transfer of property to the company or indeed within the same taxation year. What is essential is that there be either an actual issuance of shares or a binding obligation to do so at the time of transfer and that the shares be issued within a period of time that, in all the circumstances, is reasonable. There is no basis, in my view, for confining the word "consideration" to executed consideration. Consideration is of two kinds—executed and executory—and it would be an unwarranted restriction on that term to limit it to only one of the two types. [4]

The events in 1985, including the issuance of share certificates, were not nullities. They were simply incomplete. They were part of the fulfilment of the company's obligations under the contract. As soon as it was discovered that the necessary capitalization needed to issue the preference shares had not been obtained the directors and shareholders took the steps that they considered necessary to cure the defect. It should be borne in mind that it was not until September 1988 that, following the termination of the receivership, the corporate records were returned to officers of the company. The steps to correct the defect were ultimately taken in a jurisdiction that did not require supplementary letters patent. Where a corporate act is commenced under the laws of one province and the company continues under the laws of another jurisdiction before the corporate act is perfected, whatever steps are needed to complete the act must of necessity be those required by the laws of the new jurisdiction. After continuing into Nova Scotia the company obviously could not obtain supplementary letters patent from Prince Edward Island.

Counsel for the respondent, in support of her position that "consideration" did not include a promise to issue shares, referred to paragraph 66.1 (6)(a) of the Income Tax Act, which uses the words "as consideration for shares . . . of the capital stock of the corporation issued to him or any interest in such shares or right thereto". From this she argued that the absence of similar language in the opening words of subsections 85(1) and (2) implied a legislative intent to exclude executory consideration. Counsel for the appellants on the other hand suggested that precisely the opposite conclusion should be drawn from the use in paragraph 85(1)(b) of the words ”. . . of the consideration therefor (other than any shares of the capital stock of the corporation or a right to receive any such shares). . .””. In a statute such as the Income Tax Act which increasingly resembles a patchwork quilt produced by different quilters working independently of each other, such comparisons may not necessarily be determinative. The wording of paragraph 85(1)(b) itself does, however, tend to support the respondent's position. It is, moreover, consistent with the established meaning of consideration and the overall purpose of section 85. That section is intended to operate in a commercial context to permit taxpayers to effect transfers of property in consideration of shares without the immediate tax consequences that such a transfer would entail. It should not be given an unduly restrictive interpretation that would defeat its purpose.

Counsel for the respondent contended that the judgment of the Supreme Court of Canada in M.N.R. v. Benaby Realties Ltd., [1968] S.C.R. 12, [1967] C.T.C. 418, 67 D.T.C. 5275, supports the position that all of the necessary corporate steps to perfect the issuance of shares must be completed within the year. That decision does not in my view support the proposition for which she contends. It settled the question of the year in which the proceeds of expropriation are to be taken into account and in so doing rejected the English concept of the reopening a taxpayer's books for a previous year to take account of a subsequent event, as illustrated in Newcastle Breweries Ltd. v. C.I.R. (1927), 12 T.C. 927. The problem dealt with in Benaby, supra, the timing of the recognition of income, is not that with which we are faced here, which involves a transfer of property in 1985. In no other year can the tax consequences of that transfer be recognized. The question is whether the appellants have fulfilled the conditions necessary for the application of section 85. The only condition that the respondent contends has not been met is that contained in the words "for consideration that includes shares". For the reasons set out above I think the condition has been met.

The second issue, the declaration and payment of the capital dividend on the preferred shares requires a different analysis. Subsection 83(2) permits a private corporation to elect that a dividend that "becomes payable . . . to shareholders of any class of shares of its capital stock" be a capital dividend to the extent of its capital dividend account. In light of my conclusion that the election under section 85 was valid it follows that the company's cost of the property was deemed to be the amount elected in the prescribed form under section 85. Accordingly on its disposition of the property to Hoque it realized a capital gain and it had a capital dividend account within the meaning of paragraph 89(1 )(b). It cannot, however, be said that a dividend became payable in 1985 on a class of shares of the company's capital stock. It was not necessary for my decision under section 85 that for the purposes of these appeals I give effect to the stated retroactivity of the order of MacDonald, J. of June 25, 1992. Compliance with section 85 did not require that all steps necessary to perfect the issuance be completed in the year provided that the "consideration" for the transfer included shares. The same reasoning is not available in the case of a dividend under subsection 83(2). For dividends to be payable on a class of shares at a particular time all steps necessary for the valid issuance of the shares must in fact and in law have been completed at that time. Dividends cannot become payable on embryonic shares. I do not think that the decision of the Federal Court of Appeal in Hillis v. The Queen, [1983] C.T.C. 348, 83 D.T.C. 5365, supports giving retroactive effect to the order of MacDonald, J., particularly where to do so would involve recognizing a retroactive amendment as of December 28, 1985 to the share register of a company that on that date was not subject either to the law of Nova Scotia or to the jurisdiction of the Nova Scotia Court. Although the three judges who decided Hillis gave very different reasons, only one, Heald, J., based his decision upon the retroactive effect of the Saskatchewan Court under the Dependants' Relief Act. In a later decision, Boger Estate v. M.N.R., [1993] 2 C.T.C. 81, 93 D.T.C. 5276, Mr. Justice Heald, at page 86 (D.T.C. 5280), commented on the Hillis decision and quoted from the judgment of Mr. Justice Clement:

In my opinion the provisions come into operation upon the death of the intestate and effect an indefeasible vesting in the beneficiary of the interest provided, to which the Administrators must give effect albeit subject to dealings with the vested interest by the beneficiary. In this view, the vesting of the interest is not dependent upon an order of the court granting administration of the intestate's estate: it takes place by force of imperative statutory provision operating at the moment of death of an intestate.

[Emphasis added.]

As I read the Hillis decision and the subsequent decision in Boger it would appear that, whatever might be the effect of a specific statutory provision, a court order purporting to have retroactive effect cannot create a state of affairs in an earlier year that did not in fact exist.

In the result the amounts of $80,000 paid to each appellant by the company and purporting to be capital dividends under subsection 83(2) of the Income Tax Act are not in my opinion dividends within the meaning of that subsection but rather are benefits to the appellants as shareholders under subsection 15(1) and properly included in their income.

One final issue was dealt with by consent of counsel at trial. On assessing, the Minister of National Revenue included in the income of the appellants certain benefits alleged to have been conferred on them as employees by Triton Investments Ltd. The benefits related to the use made by them of two automobiles owned by Triton. It was agreed that the amounts that should be included under paragraphs 6(1 )(a) and 6(1 )(e) in respect of these automobiles are as follows:

The appeals are therefore allowed and the assessments are referred back to the Minister of National Revenue for reconsideration and reassessment in accordance with these reasons as follows:

1. The assessments of the appellants for 1987 and 1988 should be varied to give effect to the consents relating to automobile benefits under paragraphs 6(1 )(a) and 6(1 )(e) of the Income Tax Act.

2. The assessments of the appellants for 1985 should be varied to give effect to the conclusion that the election made by the appellants under section 85 with respect to the transfer of the Welsford apartment building to the Dale Corporation in 1985 was valid and effectual but that the amounts of $80,000 paid to each appellant purporting to be capital dividends are to be treated as shareholder benefits to be included in their incomes under subsection 15(1) of the Income Tax Act and not as capital dividends within the meaning of subsection 83(2).

Since success is divided the appellants are entitled to one-half of their costs on a party-and-party basis. Only one counsel fee for both appellants is allowed.

Appeal allowed.