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:
The contents of this table are not yet imported to Tax Interpretations.
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."
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).
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.
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.
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:
Peter
Dale
|
1987
|
$
400
|
|
1988
|
$1,250
|
Bernard
Dale
|
1987
|
$1,200
|
|
1988
|
$3,750
|
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.