Sarchuk,
T.CJ.:—The
appeal
of
Martin
Feed
Mills
Ltd.
(MFM)
is
with
respect
to
an
assessment
of
its
1983
taxation
year.
The
single
issue
before
me
arose
as
follows.
Rock
Road
Ltd.
(Rock
Road)
was
a
private
corporation
carrying
on
a
trucking
business.
The
common
shareholders
of
Rock
Road,
as
at
September
30,
1979,
the
company's
fiscal
year
end,
were:
Martin
Feed
Mills
Ltd.
(MFM)
52
per
cent,
Harvey
Martin
(H.
Martin)
24
per
cent
and
L.C.
Currah
Mills
Ltd.
(Currah)
24
per
cent.
Mr.
Donald
B.
Martin
(D.B.
Martin)
was
at
all
relevant
times
the
president
and
controlling
mind
of
MFM.
D.B.
Martin
and
H.
Martin
are
not
related,
nor
are
H.
Martin
and
Currah
related
to
MFM.
In
1977
Rock
Road
acquired
a
70
per
cent
interest
(28
shares)
in
another
trucking
company,
Roberge
Bros.
Transport
Ltd.
(Roberge).
In
the
computation
of
its
income
in
its
1980
taxation
year
Rock
Road
claimed
an
allowable
business
investment
loss
of
$63,700
resulting
from
the
disposition
of
certain
of
these
shares
to
one
Joseph
W.
Grundy
(Grundy).
Rock
Road
was
wound
up
voluntarily
under
the
provisions
of
the
Ontario
Business
Corporations
Act,
R.S.O.
1980,
c.
54
and
ceased
to
exist
on
May
10,
1981.
At
the
time
of
the
wind-up
MFM
was
the
sole
shareholder
of
Rock
Road
and
the
non-capital
loss
of
Rock
Road
was
considered
to
be
a
non-capital
loss
of
MFM.
In
its
computation
of
taxable
income
with
respect
to
its
1983
taxation
year,
MFM
deducted
the
amount
of
$63,700
as
a
non-capital
loss,
on
the
basis
that
the
non-capital
loss
of
its
subsidiary
Rock
Road
was
deductible
pursuant
to
the
provisions
of
subsection
88(1.1)
of
Subdivision
8,
Division
B
of
the
Income
Tax
Act,
R.S.C.
1952,
c.
148
(am.
S.C.
1970-71-72,
c.
63)
(the
"Act").
By
his
reassessment
the
Minister
disallowed
the
deduction
claimed.
Evidence
as
to
the
circumstances
in
which
the
impugned
transaction
took
place
was
given
by
Donald
Curtis
Gillies
(Gillies),
Donald
B.
Martin
(D.B.
Martin)
ana
Joseph
W.
Grundy.
Evidence
of
D.C.
Gillies
Mr.
Gillies
is
a
chartered
accountant
and
was
employed
by
MFM
from
1964
to
the
end
of
1986.
At
all
relevant
times
he
was
its
secretary-treasurer.
In
that
capacity
he
was
responsible
for
its
financial
and
tax
accounting,
and
was
familiar
with
its
investments.
With
respect
to
the
purchase
of
the
Roberge
shares
by
its
subsidiary,
Rock
Road,
Gillies
testified
that
the
price
of
$560,000
was
paid
partly
in
cash
with
the
balance
to
be
paid
over
a
period
of
time.
As
security
for
repayment
of
the
unpaid
balance
Rock
Road
assigned
the
shares
to
be
purchased
as
security.
These
shares
were
to
be
held
by
the
vendors
until
they
were
fully
paid
for.
During
1979
and
1980
the
principals
in
MFM
and
in
certain
other
companies
in
which
MFM
had
an
interest
had
discussions
relating
to
corporate
reorganization.
These
discussions
led
to
a
decision
to
wind
down
Rock
Road's
operations
and
to
dispose
of
its
assets,
including
the
28
shares
of
Roberge
it
owned.
The
initial
decision
appears
to
have
been
that
the
shares
of
Roberge
would
be
divided
and
sold
to
the
shareholders
of
Rock
Road
on
a
pro
rata
basis.
In
fact
the
shares
to
which
MFM
would
have
been
entitled
wound
up
being
sold
to
Grundy.
Minutes
of
a
meeting
of
the
shareholders
held
on
September
25,
1980
disclose
that
the
shareholders
accepted
an
offer
for
the
purchase
of
the
Roberge
shares
for
the
price
of
$350,000.
A
resolution
was
passed
that:
.
.
.
the
Company
do
sell
14.56
shares
of
Roberge
Bros.
Transport
Ltd.
to
Joseph
Grundy,
6.72
shares
to
Harvey
Martin
and
6.72
shares
to
Fraser
Currah
Ltd.
and
to
receive
as
consideration
for
the
sale
of
the
shares
demand
Promissory
Notes
bearing
no
interest
until
default
and
thereafter
at
fourteen
percent
(14%)
per
annum
and
in
the
following
amounts:
Joseph
Grundy—$163,800.00;
Harvey
Martin—$75,600.00;
Fraser
Currah
Ltd.—$75,600.00.
As
further
consideration
each
of
the
shareholders
shall
assume
on
a
pro
rata
basis
a
liability
of
the
Corporation
to
Roberge
Bros.
Transport
Ltd.
which
liability
is
for
the
amount
of
$160,000.00.
The
minutes
also
disclose
that
Rock
Road
owed
to
each
of
its
three
shareholders
substantial
amounts
of
money
which,
in
the
case
of
H.
Martin
and
Currall
exceeded
the
price
to
be
paid
by
them
on
their
purchase
of
the
Roberge
shares.
Accordingly,
Rock
Road
was
directed
to
prepare
new
promissory
notes
to
them,
having
regard
to
the
amounts
presently
owing
less
the
purchase
price
of
the
shares
of
Roberge.
Concurrently
a
transfer
of
the
common
shares
of
Rock
Road
owned
by
H.
Martin
and
Currah
to
MFM
was
approved.
According
to
Gillies
the
mechanism
used
to
allocate
the
purchase
price
amongst
H.
Martin,
Currah
and
Grundy
was
the
pro
rata
holdings
of
the
shares
in
Rock
Road.
Since
Grundy
was
not
a
shareholder
of
Rock
Road
his
purchase
price
of
$163,800
was
made
by
way
of
a
promissory
note
in
favour
of
Rock
Road.
This
note
was
dated
September
25,
1980
and
was
due
October
1,
1981
(Exhibit
A-6).
On
October
7,
1980
the
solicitors
acting
for
Rock
Road
advised
Roberge
Bros.'
solicitors
that
the
Roberge
shares
had
been
transferred
to
Currah,
H.
Martin
and
Grundy
and
confirmed
that
the
liability
owing
to
the
original
vendors,
Roberge
Bros.,
in
the
amount
of
$163,800
had
been
assumed
by
these
three
parties
in
accordance
with
their
respective
shareholding.
On
December
12,
1980
counsel
responded
and
indicated
that
there
was
no
objection
to
the
transfer
of
the
shares
subject
to
the
new
purchasers
agreeing
to
be
bound
by
the
terms
of
the
initial
agreement
and
provided
that
MFM
agree
to
execute
an
unconditional
guarantee
for
the
outstanding
indebtedness
to
the
vendors.
This
was
done.
H.
Martin,
Currah
and
Grundy
also
assumed
the
obligation
of
Rock
Road
to
make
instalment
payments
on
the
amount
due
to
Roberge
Bros.
In
January
1981
H.
Martin
and
Currah
defaulted
on
their
payments
and
a
demand
was
made
upon
them
and
upon
Rock
Road.
Following
a
flurry
of
correspondence
and
telephone
conversations
between
the
solicitors
an
agreement
was
reached
which
is
set
out
in
a
letter
from
Rock
Road's
solicitors
to
Roberge
Bros.'
solicitors
dated
February
27,
1981
(Exhibit
A-12).
The
understanding
was
as
follows:
1.
That
Rock
Road
Ltd.
would
be
allowed
to
wind
up
and
the
shares
of
Roberge
Bros.
Transport
Ltd.
would
be
transferred
to
Joseph
Grundy,
Fraser
Currah
Limited
and
Harvey
Martin.
2.
That
the
Joseph
Grundy
shares
would
then
be
assigned
to
Martin
Feed
Mills
Limited.
3.
That
in
the
event
that
either/or
both
of
Fraser
Currah
Limited
and
Harvey
Martin
defaulted
on
their
payment
under
the
original
Agreement,
that
your
clients
would
accept
payment
from
Shantz
Bros.
Limited
and
deem
Shantz
Bros.
Limited
to
be
possessed
of
all
the
rights
and
benefits
under
the
original
Agreement
and
would,
therefore,
accept
Shantz
Bros.
Limited
as
being
a
shareholder
to
the
extent
that
Harvey
Martin
and
Fraser
Currah
Limited
would
have
been
if
they
had
made
the
required
payment.
The
letter
went
on
to
say:
You
will
recall
that
I
have
advised
you
that
we
did,
in
fact,
wind
up
Rock
Road
Limited
and
transfer
14.56
shares
to
Joseph
Grundy
and
6.77
shares
to
each
of
Harvey
Martin
and
Fraser
Currah
Limited.
We
are
now
requesting
that,
due
to
the
default
in
payment
by
Fraser
Currah
Limited
and
Harvey
Martin
that
the
shares
owned
by
them
previously
be
transferred
to
Shantz
Bros.
Limited
and,
therefore,
the
28
shares
would
be
owned
as
follows:
Martin
Feed
Mills
Limited—14.56
shares
Shantz
Bros.
Limited—13.44
shares
In
the
writer's
opinion,
the
Guarantee
by
Martin
Feed
Mills
Limited
of
the
outstanding
balance
owning
[sic]
to
your
clients
and
the
actual
payment
made
in
January
of
this
year
should
indicate
to
your
clients
that
their
position
is
secure
and
that
the
share
transfers
as
set
forth
above
are
not
detrimental
to
their
position.
Attached
to
this
letter
was
a
guarantee
executed
by
MFM
with
respect
to
the
balance
owing
by
Rock
Road
together
with
an
extract
of
a
director's
meeting
authorizing
this
guarantee.
On
February
27,
1981
Grundy
assigned
and
transferred
the
promissory
note
in
favour
of
Rock
Road
to
MFM.
To
complete
the
transfer
of
the
14.56
snares
of
Rock
Road
owned
by
Grundy,
MFM
assumed
the
liability
incurred
by
Grundy
to
Rock
Road
by
way
of
the
promissory
note
in
the
amount
of
$163,800
and
concurrently
indemnified
Grundy
from
any
and
all
claims
arising
out
of
that
note
(Exhibit
A-13).
Mr.
Gillies
did
not
appear
to
have
been
personally
involved
in
the
arrangements
made
between
MFM,
D.B.
Martin
and
Grundy.
Counsel
for
the
appellant
elicited
from
Gillies
his
"understanding"
that
the
nature
of
Grundy's
acquisition
was
“as
a
nominee".
This
understanding
however
was
later
conceded
by
Gillies
to
be
based
purely
on
hearsay
and
has
little
probative
value.
In
the
course
of
cross-examination
Gillies
acknowledged
that
on
June
27,
1980
he
received
a
letter
directed
to
MFM
from
Coopers
&
Lybrand
regarding
certain
corporate
reorganizations
including
that
of
Rock
Road
(Exhibit
RI).
This
letter
sets
out,
amongst
other
matters,
the
following:
The
reorganization
of
Rock
Road
will
take
place
as
follows:
1.
The
shares
of
Roberge
Bros.
Transport
Ltd.
(Roberge)
will
be
sold
to
the
shareholders
of
Rock
Road
in
proportion
to
the
percentage
of
shares
presently
owned
by
each
shareholder
of
Rock
Road.
As
payment
for
the
Roberge
shares,
each
shareholder
will
assume
a
pro
rata
portion
of
the
10%
notes
payable
to
the
Roberge
brothers.
To
the
extent
that
part
of
the
purchase
price
of
the
shares
is
not
satisfied
by
the
assumption
of
the
10%
notes,
the
balance
will
be
applied
as
payment
on
the
10%
loans
payable
to
the
shareholders.
Assuming
that
the
fair
market
value
of
28
Rock
Road
shares
is
$350,000,
the
above
transaction
will
create
an
allowable
business
investment
loss
of
$58,800
in
Rock
Road.
This
amount
will
be
added
to
the
non-capital
losses
available
to
MFM
in
its
1982
fiscal
year
after
Rock
Road
is
wound
up
into
MFM.
The
remaining
allowable
business
investment
loss
of
$63,700
is
denied
because
MFM
controls
Rock
Road.
An
allowable
capital
loss
is
similarly
denied.
2.
In
order
to
avoid
the
denial
of
the
allowable
business
investment
loss
in
#1
above,
Rock
Road
could
sell
14.56
Roberge
shares
(which
would
otherwise
be
sold
to
MFM)
to
a
person
(X)
not
related
to
Rock
Road
or
MFM
for
cash
or
a
note.
Prior
to
or
upon
the
wind-up
of
Rock
Road,
MFM
will
acquire
the
note
from
X,
presumably
as
payment
on
the
amount
payable
to
MFM
by
Rock
Road.
MFM
could
then
purchase
the
Roberge
shares
from
X
as
payment
ofthe
note
receivable
from
X.
However,
cash
transactions
are
preferable.
This
approach
may
avoid
the
provisions
of
the
Income
Tax
Act
which
deny
the
losses.
If
Revenue
Canada
reassesses
to
negate
the
effect
of
this
procedure,
the
consequence
will
be
that
the
losses
will
be
the
same
as
#1
above.
On
September
17,
1980
Gillies
received
a
follow-up
letter
from
Coopers
&
Lybrand,
included
with
which
was
a
summary
of
"the
transactions
that
are
to
be
concluded
before
the
end
of
this
month”.
Gillies
concedes
that
the
steps
outlined
therein
were
carried
out.
Evidence
of
Joseph
W.
Grundy
Mr.
Grundy
was
once
employed
by
MFM.
He
has
been
acquainted
with
D.B.
Martin
for
a
number
of
years
and
has
been
involved
in
several
business
transactions
with
him.
During
the
relevant
period
of
time
Grundy
had
an
interest
in
several
companies,
each
of
which
was
involved
in
the
trucking
business.
In
particular
he
owned
one-sixth
of
the
shares
of
Shantz
Bros.
Ltd.
(Shantz)
and
from
1978
to
at
least
1983
was
its
secretary.
MFM
also
owned
one-
third
of
the
issued
shares
as
did
the
Shantz
family.
The
balance
was
owned
by
Mr.
D.K.
Hemmerle.
Shantz
in
turn
owned
1,440
of
3,000
issued
shares
of
Trend-Line
Glass
&
Mirror
Inc.
(Trend-Line)
and
48
of
100
issued
shares
of
Laramee
Leasing
and
Trucking
Ltd.
(Laramee).
Grundy
was
the
secretarytreasurer
of
each
and
both
he
and
D.B.
Martin
were
directors
of
all
of
the
aforesaid
companies.
The
testimony
of
Grundy
regarding
the
transaction
in
issue
was
imprecise
and
equivocal
notwithstanding
the
able
assistance
of
the
appellant's
counsel.
What
is,
however,
quite
clear
is
that
the
initiative
to
have
Grundy
participate
in
the
acquisition
of
the
Roberge
shares
came
from
D.B.
Martin
who
told
Grundy
that
he
wanted
him
to
pick
up
these
shares.
Subsequently
and
in
response
to
a
somewhat
directory
question
Grundy
agreed
that
there
“was
a
desire
on
the
part
of
Shantz,
or
Laramee,
or
Trend-Line
to
expand"
their
"operations".
He
said
that
since
Roberge
had
a
broad
PCV
licence
in
Canada
the
acquisition
of
its
shares
would
provide
the
purchaser,
whoever
that
might
be,
the
capability
of
hauling
glass
from
the
west
coast
into
Edmonton
and
from
Edmonton
to
eastern
Canada.
To
the
best
of
his
recollection
14.56
shares
were
available
which
he
said
he
was
to
buy
from
MFM.
After
counsel
drew
his
attention
to
the
promissory
note
payable
to
Rock
Road
he,
in
a
somewhat
bemused
fashion,
agreed
the
shares
were
purchased
from
Rock
Road,
saying
"Yes
I
guess
I
did.”.
Counsel
for
the
appellant
referred
Grundy
to
a
letter
he
received
from
Rock
Road's
solicitors
confirming
the
sale
of
the
14.56
Roberge
shares
to
him
(Exhibit
A-20)
and
asked
him
to
describe
the
nature
of
the
transaction.
The
following
exchange
then
took
place:
A.
We
purchased
them
from
Rock
Road
Limited
on
September
25th,
1980.
Q.
For
how
much?
A.
For
$163,000.
Q.
And
we
being
whom,
"we
purchased
them"?
A.
Well,
I
purchased
them
at
the
time
as
you
know
on
behalf
of
Shantz
Bros.
Limited.
Grundy
believed
it
was
in
January
or
perhaps
February
1981
that
he
heard
from
D.B.
Martin
that
H.
Martin
and
Currah
had
failed
to
make
the
required
payments
to
Roberge.
He
says
it
was
then
that
he
learned
the
price
at
which
their
13.44
shares
of
Roberge
might
be
available
and
recalls,
vaguely,
that
he
expressed
a
degree
of
unhappiness
to
D.B.
Martin
regarding
the
purchase
of
the
14.56
shares
of
Roberge
for
$140,000
only
to
learn
that
shares
were
available
several
months
later
at
virtually
half
the
price.
He
said
that
it
was
at
this
time
that
Shantz
made
"the
deal
to
buy
those
shares
and
sell
the
other
ones
back
to
Martin
Feed
Mills’.
He
assumed
that
the
sale
price
to
MFM
was
the
same
amount
that
he
had
paid
for
them.
Evidence
of
Donald
B.
Martin
At
all
relevant
times
D.B.
Martin
was
the
president
of
MFM
and
a
director
of
Rock
Road,
Shantz,
Laramee,
Trend-Line
and
at
least
one
other
related
company.
He
has
also
been
involved
in
several
investments
with
Grundy
whom
he
appears
to
consider
as
a
protégé.
He
described
himself
as
the
catalyst
with
respect
to
the
transactions
in
issue
and
said
that
he
negotiated
matters
both
on
behalf
of
MTM
and
the
Shantz
group
of
companies.
The
original
purchase
of
the
Roberge
shares
by
Rock
Road
which
he
negotiated,
was
made
in
order
to
enable
Rock
Road
to
acquire
a
PCV
licence.
However
by
1979
Rock
Road
had
financial
problems
and
a
wind-up
decision
was
taken.
According
to
him
as
part
of
the
wind-up
MFM
bought
the
remaining
assets
of
Rock
Road.
When
specifically
asked
by
the
appellant's
counsel
about
the
14.56
shares
of
Roberge
transferred
by
Rock
Road
to
Grundy,
D.B.
Martin's
response
was
somewhat
incomprehensible.
He
said
that
he
had
very
brief
discussions
with
Grundy
regarding
the
purchase
of
those
shares;
that
he
has
had
a
long-term
business
relationship
with
Grundy
as
did
MFM,
and
in
addition
MFM
had
an
equity
position
in
Shantz.
Then
he
added:
“What
happened
with
these
shares
I
am
sure
it
would
be
a
case
of
where
I
said
‘Joe
I
think
Roberge
fits
real
good
somewhere
in
Shantz,
Big
Bear,
Trend-Line
or
Laramee
Glass.'
The
fit,
according
to
him,
related
to
the
PCV
licence
which
became
available
through
the
acquisition
of
the
Roberge
shares.
He
described
the
manner
in
which
Grundy
was
to
hold
the
shares
as
follows:
A.
I
took
a
note,
we
took
a
note
back
holding
those
shares
until
we
sort
of,
in
trust,
until
we
decided
as
to
where
they
should
go.
Mr.
Sommerville:
In
trust
for
whom?
A.
In
trust
for,
took
it
out
of
Roberge
and
saying
you
hold
them
in
trust
for
whoever
we
allocate
it
to,
Martin,
Martin
took
a
note
from
him,
and
I
assured
him
he
would
not
get
hurt
on
the
deal.
and
later
he
said:
Q.
Mr.
Martin,
you
say
Mr.
Grundy
held
the
shares
in
trust.
Would
it
be
fair
also
to
say
he
held
them
as
a
nominee?
A.
The
same
thing
to
me.
Q.
And
he
held
them
as
a
nominee?
A.
Until
we
decided
as
to
where
it
should
go.
Q.
Just
let
me
finish
the
question.
You
have
indicated
there
was
a
business
fit
with
the
Shantz
group?
A.
That's
right.
Q.
That
is
why
you
got
Mr.
Grundy
involved.
You
indicated
Mr.
Grundy
held
the
shares
as
a
nominee.
My
question
is,
who
did
he
hold
the
shares
as
nominee
for
at
the
time
of
the
original
acquisition,
what
group?
A.
Who
did
he
hold
them
for?
It
was
Martin
Feed
Mills
money,
we
took
a
note
back.
He
was
not
holding
them
on
behalf
of
us,
he
was
holding
them
in
limbo
until
I
knew
where
to
put
them.
I
don't
get
the
question.
and
later:
Q.
Just
a
minute,
Mr.
Martin,
Shantz
Bros.
Ltd.
had
business
investments
itself,
correct?
A.
That
is
correct.
Q.
You
were
an
officer
or
a
director
of
Shantz?
A.
Of
Shantz
Bros.
Q.
And
you
have
heard
the
names
Laramee
Trucking
and
Trend-Line
Glass
&
Mirror?
A.
That
is
right,
we
owned
about
half
of
that,
a
little
less
than
half.
Q.
We
being?
A.
Shantz,
but
who
we
were
holding
it
for
as
far
as
I
am
concerned,
I
am
saying
Joe
Grundy
take
these
shares
we
have
to
decide
where
we
are
going
to
put
them.
I
could
say
they
were
held
for
Shantz
Bros.
but
we
are
not
certain.
Q.
Let
me
ask
you
this
question
and
come
at
it
from
another
way.
Were
the
shares
being
held
in
trust
at
this
time
of
original
acquisition,
were
they
being
held
in
trust
for
Martin
Feed
Mills
Ltd.?
A.
It
is
our
money,
I
guess
that
is
what
you
call
it,
yes,
does
that
mean
that
it
is
in
trust
if
we
have—it
is
our
money.
His
Honour:
Our
being
Martin
Feed
Mills?
A.
Martin
Feed
Mills,
and
he
is
holding
them
and
I
guess
he
is
holding
them
in
trust
for
us.
The
direction
which
they
were
to
go
was
uncertain.
I
don't
understand
the
word
in
trust
I
guess.
and:
Q.
I
will
ask
one
more
question
and
then
I
will
leave
that
line
of
questioning.
The
share
that
was
held
by
Mr.
Grundy,
the
14.56
shares
that
were
acquired
in
1980,
how
did
you
understand
those
shares
were
to
be
held?
A.
Those
shares
were
to
be
held
by
Joe
Grundy
until
we
found
which
one—
His
Honour:
We
being
who?
A.
We
being
Rock
Road
winding
it
up,
I
Don
Martin
having
the
interest
via
Rock
Road
saying
where
should
these
shares
go.
He
was
to
hold
them
until
we
decide,
we
know
it
is
going
into
that
organization
but
which
part
of
the
organization
we
were
not
clear.
The
organization
being
Shantz,
Big
Bear,
Laramee
or
Trend-Line
Trucking.
I
must
add
I
believe
we
were
only
about
48%,
we
were
less
than
50%
of
Trend-Line.
In
answer
to
a
question
regarding
the
transfer
of
the
14.56
shares
purchased
by
Grundy
in
October
1980
to
MFM
in
January
1981
D.B.
Martin
said:
“Martin
Feed
Mills
indirectly
had
them
and
they
went
back
to
Martin
Feed
Mills,
the
reason
being
..
.”.
He
did
not
complete
his
answer
at
this
point,
but
later
when
called
upon
to
explain
the
reacquisition
of
the
14.56
shares
by
MFM
from
Grundy
the
following
exchange
took
place:
Mr.
Sommerville:
Why
did
you
do
the
transaction
that
way?
Why
did
Grundy
transfer
to
Martin
Feed
Mills
the
14.56
shares?
A.
You
have
to
realize
I
gave
to
Joe
Grundy,
suggested
he
take
those
until
we
find
out
which
company
to
put
them
in.
His
Honour:
Which,
the
14?
A.
Yes,
the
14%.
Mr.
Sommerville:
What
was
the
purchase
price
for
those?
A.
The
purchase
price,
considerably
higher,
it
was
considerably
higher,
most
nearly
double
without
me
looking,
it
was
about
double.
Then
when
these
lesser
shares
became
available
it
was
logical
and
was
good
on
my
part
to
say
you
are
better
off
to—
His
Honour:
My
part,
who
is
my
part
in
this
instance,
please?
A.
This
is
a
problem,
what
hat
do
I
wear?
His
Honour:
Which
hat
were
you
wearing?
A.
I
am
the
negotiator.
His
Honour:
But
from
who
are
you
negotiating?
A.
I
am
the
catalyst
between
all
these
companies.
and
later:
I,
Martin
Feed
Mills
and
a
person
of
Don
Martin
could
not
see
hanging
them
with
the
expensive
shares
when
there
were
shares
for
less,
it
kept
a
good
relationship
for
Don
Martin
and
Martin
Feed
Mills.
Mr.
Sommerville:
So
Martin
Feed
Mills
for
that
reason
bought
the
shares
that
Grundy
had
held
as
nominee?
A.
That
is
right.
The
foregoing
is
virtually
the
totality
of
the
explanation
given.
Certain
questions
were
put
to
D.B.
Martin
regarding
the
planning
and
structure
of
these
transactions.
He
said
he
did
not
involve
himself
with
technical
details
relating
to
corporate
reorganization
or
tax
planning,
and
that
he
did
not
concern
himself
with
those
matters
at
all.
He
conceded
that
there
was
tax
planning
involved
and
that
the
transactions
were
carried
out
following
professional
advice
with
the
objective
of
obtaining
an
income
tax
advantage
for
MFM.
Appellant's
Position
Counsel
for
the
appellant
submitted
that
as
a
matter
of
established
fact
the
sale
of
the
Roberge
shares
to
Grundy
by
Rock
Road
took
place.
This
transaction
was
recorded
in
Rock
Road's
corporate
records
and
a
promissory
note
creating
legal
liability
was
executed.
He
contended
that
the
sale
to
Grundy
was
as
nominee
instead
of
beneficial
owner
and
that
this
occurred
only
because
of
uncertainty
as
to
which
of
Shantz,
Laramee
or
Trend-Line
would
ultimately
be
the
beneficial
owner
of
those
shares.
He
urged
the
Court
to
give
credence
to
the
testimony
that
there
was
a
business
advantage
to
be
derived
by
one
of
the
Shantz
group
of
companies,
specifically
the
availability
of
the
PCV
licence
of
Roberge.
The
primary
thrust
of
the
submissions
made
on
behalf
of
MFM
is
that
on
any
consideration
of
the
original
transaction,
that
is
the
acquisition
of
the
14.56
shares
by
Grundy
in
October
1980,
it
is
the
intention
of
the
purchaser
which
ought
to
be
the
dominant
intention
and
that
Grundy's
uncontroverted
evidence
was
that
it
was
his
intention
at
that
time
to
acquire
those
shares
as
"nominee"
for
the
Shantz
group.
The
fact
that
MFM
received
tax
advice
and
that
the
transaction
was
ultimately
structured
in
a
manner
that
was
markedly
beneficial
to
it
should
not
impair
its
right
to
say
that
the
transaction
was
structured
in
a
legally
binding
manner.
Respondent's
Position
Counsel
for
the
respondent
submitted
that
Grundy
and
MFM
were
acting
in
concert,
in
that
MFM
directed
the
bargaining
for
the
disposition
of
the
14.56
Roberge
shares
on
both
sides
of
the
transaction;
that
is,
MFM
directed
Rock
Road
and
Grundy
and
accordingly
the
parties
were
not
acting
at
arm's
length.
Counsel
also
contends
that
the
respondent
has
properly
disallowed
Rock
Road
the
amount
of
the
allowable
business
investment
loss
of
$63,700
claimed
by
it
in
its
1980
taxation
year
on
the
basis
that
the
disposition
of
the
14.56
shares
in
Roberge
to
Grundy
was
in
Grundy's
capacity
as
trustee
or
agent
for
MFM
resulting
in
the
beneficial
ownership
being
transferred
to
MFM.
Accordingly
Rock
Road
is
not
entitled
to
an
allowable
business
investment
loss
pursuant
to
paragraph
38(c)
of
the
Act
as
a
disposition
of
any
property
disposed
by
it
to
MFM,
a
person
by
whom
it
was
controlled,
results
in
the
loss
otherwise
determined
to
be
nil,
in
accordance
with
the
provisions
of
paragraph
40(2)(e)
of
the
Act.
The
respondent
further
takes
the
position
that
Rock
Road
always
intended
that
the
series
of
transactions
in
issue
may
reasonably
be
considered
to
have
artificially
or
unduly
created
a
loss
from
the
disposition
of
the
14.56
Roberge
shares.
Accordingly
Rock
Road's
loss
from
the
disposition
of
these
shares
shall
be
computed
as
if
such
creation
of
a
loss
had
not
occurred,
in
accordance
with
the
provisions
of
subsection
55(1)
of
the
Act.
Conclusions:
Arm's
Length
Transaction
The
relevant
provision
of
the
Act
reads:
39.
(1)
For
the
purposes
of
this
Act,
(c)
a
taxpayer's
business
investment
loss
for
a
taxation
year
from
the
disposition
of
any
property
is
the
amount,
if
any,
by
which
his
capital
loss
for
the
year
from
a
disposition
after
1977
(ii)
to
a
person
with
whom
he
was
dealing
at
arm's
length
of
any
property
that
is
[Emphasis
added.]
If
then,
as
counsel
for
the
respondent
asserts,
I
conclude
that
MFM
directed
Rock
Road
and
Grundy
and
that
as
a
result
the
parties
were
not
acting
at
arm's
length,
there
would
be
no
allowable
business
investment
loss
which
could
be
available
for
deduction
for
the
purpose
of
computing
the
taxable
income
of
MFM
pursuant
to
subsection
88(1.1)
of
the
Act.
There
is
no
definition
of
the
phrases
"at
arm's
length"
or
"arm's
length
transaction"
in
the
Income
Tax
Act.
However
useful
reference
can
be
made
to
a
number
of
cases,
in
particular
Robson
Leather
Co.
v.
M.N.R.,
[1977]
C.T.C.
132;
77
D.T.C.
5106
(F.C.A.);
M.N.R.
v.
Sheldons
Engineering
Ltd.,
[1954]
C.T.C.
241;
54
D.T.C.
1106;
M.N.R.
v.
Merritt,
T.R.
Estate,
[1969]
C.T.C.
207;
69
D.T.C.
5159
and
Swiss
Bank
Corporation
v.
M.N.R.,
[1971]
C.T.C.
427;
71
D.T.C.
5235;
aff'd
[1972]
C.T.C.
614;
72
D.T.C.
6470
(S.C.C.).
In
Merritt,
supra,
Cattanach,
J.
stated
at
page
217
(D.T.C.
5165):
In
my
view,
the
basic
premise
on
which
this
analysis
is
based
is
that,
where
the
"mind"
by
which
the
bargaining
is
directed
on
behalf
of
one
party
to
a
contract
is
the
same
"mind"
that
directs
the
bargaining
on
behalf
of
the
other
party,
it
cannot
be
said
that
the
parties
are
dealing
at
arm's
length.
In
other
words
where
the
evidence
reveals
that
the
same
person
was
“dictating”
the
"terms
of
the
bargain”
on
behalf
of
both
parties,
it
cannot
be
said
that
the
parties
were
dealing
at
arm's
length.
The
judgment
of
Cattanach,
J.
in
Merritt,
supra,
was
referred
to
by
Thurlow,
J.
in
Swiss
Bank
Corp.
v.
M.N.R.,
supra,
who
said,
at
page
437
(D.T.C.
5241):
To
this
I
would
add
that
where
several
parties—whether
natural
persons
or
corporations
or
a
combination
of
the
two—act
in
concert,
and
in
the
same
interest,
to
direct
or
dictate
the
conduct
of
another,
in
my
opinion
the
"mind"
that
directs
may
be
that
of
the
combination
as
a
whole
acting
in
concert
or
that
of
any
of
them
in
carrying
out
particular
parts
or
functions
of
what
the
common
object
involves.
I
turn
to
the
evidence
before
me.
It
is
significant
that
prior
to
any
involvement
by
Grundy
or
any
of
the
Shantz
group
of
companies
a
scheme
had
been
devised
to
reorganize
the
affairs
of
some
of
the
appellant's
subsidiaries.
In
so
doing
it
was
determined
that
Rock
Road
would
realize
an
allowable
business
investment
loss
with
respect
to
the
sale
of
the
Roberge
shares
to
its
minority
shareholders
but
would
be
denied
an
allowable
business
investment
loss
on
the
sale
of
the
Roberge
shares
to
MFM
since
it
was
the
controlling
shareholder
of
Rock
Road.
In
an
attempt
to
avoid
the
denial
of
the
allowed
business
investment
loss
it
was
decided
that
Rock
Road
would
sell
the
Roberge
shares
which
would
otherwise
have
been
sold
to
MFM
to
a
third
party
not
related
to
it
or
to
MFM
for
cash
or
a
promissory
note.
Rock
Road
and
MFM
planned,
prior
to
the
winding
up
that
MFM
would
acquire
from
Rock
Road
the
promissory
note
from
the
third
party,
held
by
Rock
Road,
as
payment
for
Rock
Road's
liability
to
MFM
of
the
amount
owed
to
it
in
the
amount
of
$102,000
under
a
10
per
cent
shareholder
note
given
by
Rock
Road.
MFM
then
planned
to
purchase
the
14.56
Roberge
shares
back
from
the
third
party
with
payment
being
the
promissory
note
receivable
from
the
third
party.
This
scenario
is
quite
clear
on
any
reading
of
Exhibits
R-1
and
R-2.
Furthermore,
as
counsel
for
the
respondent
noted,
there
has
been
no
evidence
from
any
of
the
professional
advisors
that
what
in
fact
was
contemplated
and
set
out
in
those
documents
was
not
in
fact
carried
out.
A
course
was
set
and
I
am
satisfied
that
what
the
appellant
did
was
exactly
as
predetermined.
Grundy
was
selected
as
the
third
party
by
D.B.
Martin.
It
is
not,
as
counsel
for
the
respondent
noted,
the
case
that
Grundy
came
into
the
picture
and
decided
that
he
would
buy
certain
shares
of
Roberge
motivated
solely
by
his
interest
in
the
business
affairs
of
the
Shantz
group
of
companies.
On
the
evidence
before
me
I
am
not
at
all
satisfied
that
Grundy's
decision
to
acquire
the
Roberge
shares
was
motivated
by
any
such
concern
or
that
he
acted
as
nominee
for
one
of
those
companies.
Both
his
evidence
and
that
of
D.B.
Martin
suggests
that
he
acted
only
to
accommodate
his
friend
and
business
associate
and
at
all
relevant
times
his
role
was
that
of
trustee
or
agent
for
MFM.
He
was
at
best
peripherally
involved
and
was
not
in
my
view
consulted
with
respect
to
any
of
the
arrangements
being
made.
I
am
satisfied
on
the
totality
of
the
evidence
that
Grundy
played
virtually
no
role
in
the
decision
making
process.
Such
conduct
is
not
the
hallmark
of
an
arm's
length
transaction.
The
evidence
is
quite
clear
that
the
directing
mind
in
all
of
the
transactions
was
D.B.
Martin.
He
was
the
prime
mover
in
the
impugned
transaction
acting
on
the
advice
of
the
appellant's
solicitors
and
accountants.
He
said
he
was
in
charge
of
the
negotiation
with
respect
to
the
Rock
Road
acquisition
of
Roberge;
with
respect
to
the
reorganization
of
Rock
Road
and
with
respect
to
directing
Grundy
to
acquire
the
14.56
shares
of
Roberge.
It
is
apparent
that
he
was
unequivocally
dictating
the
terms
of
the
bargain
on
behalf
of
all
parties
and
therefore,
as
was
stated
by
Cattanach
J.
in
Merritt,
it
cannot
be
said
that
the
parties
were
dealing
at
arm's
length.
I
have
substantial
misgivings
regarding
the
testimony
of
D.B.
Martin
and
Grundy
as
to
the
“business
reasons"
which
are
alleged
to
have
impelled
Grundy
to
acquire
the
Roberge
shares
as
nominee
for
Shantz,
et
al.
There
is
no
evidence
that
either
had
the
authority
necessary
to
invoice
them
in
these
transactions.
There
was
no
evidence
that
the
acquisition
of
the
Roberge
shares
by
Grundy
was
considered
by
the
shareholders
of
Shantz
or
by
any
other
of
the
Shantz
group
of
companies.
There
are
no
documents
or
corporate
minutes
confirming
or
authorizing
the
series
of
transactions
described
by
Grundy
prior
to
the
acquisition
by
Shantz
of
the
13.44
shares
of
Roberge
which
became
available
when
H.
Martin
and
Currah
defaulted.
Furthermore
it
is
difficult
to
disregard
the
evidence
of
D.B.
Martin
and
his
various
comments
to
the
effect
that
the
shares
in
Grundy's
name
were
being
held
in
trust
for
MFM
because
at
the
end
of
the
day
it
was
MFM's
money
which
would
be
required
to
pay
for
these
shares
in
one
form
or
another.
The
subsequent
default
by
F.
Martin
and
Currah
is
to
some
extent
irrelevant
to
the
issue
before
me.
It
does
not
change
the
nature
of
Grundy's
initial
involvement
as
evidenced
by
Exhibits
R-1
ana
R-2
and
by
the
testimony
of
D.B.
Martin.
All
that
the
subsequent
events
and
transactions,
that
is
the
availability
of
13.44
Roberge
shares
at
a
lower
price,
the
transfer
of
those
shares
to
the
Shantz
group
and
the
transfer
of
the
14.56
shares
from
Grundy
to
MFM
demonstrate
is
the
absence
of
any
arm's
length
in
these
dealings.
Quite
clearly
if
the
separate
parties
were,
as
is
the
case
with
arm's
length
parties,
each
trying
to
protect
their
own
interest,
it
is
hardly
conceivable
that
MFM
would
have
accepted
the
more
expensive
shares
and
permitted
the
Shantz
group
to
have
the
less
expensive
shares.
I
might
add
also
that
Gillies,
the
appellant's
secretary-treasurer,
was
unable
to
give
a
coherent
explanation
for
this
transaction.
Counsel
for
the
appellant
in
his
submissions
urged
the
Court
not
to
draw
a
negative
inference
simply
because
the
appellant
had
tax
planning
advice
and
structured
the
transaction
in
accordance
with
that
plan.
While
the
involvement
of
professional
advisors
and
tax
planners
is
not
per
se
significant,
such
evidence
cannot
be
ignored.
It
is
clear
that
D.B.
Martin
accepted
the
advice
and
the
decision
to
carry
out
those
proposals
was
a
unilateral
decision
made
by
D.B.
Martin
on
behalf
of
the
appellant.
To
again
borrow
the
words
of
Cat-
tanach,
J.
in
Merritt,
supra:
"From
that
time
on
everything
that
was
done
was
done
to
implement
those
instructions
and
there
was
no
part
of
the
arrangement
that
involved
bargaining
between
parties
with
independent
interests.”
Having
concluded
that
it
was
not
an
arm's
length
transaction
it
follows
that
the
appeal
must
fail.
It
is
therefore
not
necessary
to
deal
with
the
two
alternative
arguments
submitted
on
behalf
of
the
respondent.
Appeal
dismissed.
Email this Content