Robson v. Minister of National Revenue, 52 DTC 1088, [1952] CTC 85, [1952] 2 SCR 223

KERWIN, J.:—This appeal is concerned with the assessment to income tax of the appellant under the Income War Tax Act in the year 1944. I agree with the reasons for judgment of the trial judge except that I find no occasion to consider any of the decisions in the Courts of the United States referred to by him.

His findings of fact are the only possible ones on the evidence. The appellant was the President and Managing Director of Timberland Lumber Co. Limited and its principal shareholder. That company had obtained 100 shares, at $100 each, of Salmon River Logging Company Limited, which latter had profits, after payment of taxes in each of the years 1938 to 1943 inclusive, of various amounts ranging from about $65,000 to about $126,000. Timberland held earned profits and the object of its shareholders, including the appellant, was to distribute those profits. This is made quite clear from the Company’s annual statements and the letters to the Income Tax Inspectors from the firm that acted as auditors of that company and also of the Salmon River Company. These letters also show that originally it was the intention to declare a dividend of the Salmon River shares to the shareholders of Timberland. What was finally done was that Timberland sold to its shareholders, in proportion to their holdings, the Salmon River shares at $100 per share. The shareholders, including the appellant, thus secured shares that represented profits and which profits had never been capitalized by Timberland.

Upon these facts the case falls within subsection 1 of Section 3 of the Income War Tax Act because the difference between the price paid to Timberland by its shareholders of $100 for each share of the Salmon River Company and the true value was an annual net profit or gain in the sense of being a dividend or profit directly or indirectly received from stocks within that part of subsection 1 of Section 3 of the Act, reading as follows :—

‘‘and shall include the interest, dividends or profits directly or indirectly received from money at interest upon any security or without security, or from stocks, or from any other investment, and, whether such gains or profits are divided or distributed or not, and also the annual profit or gain from any other source.”

Mr. Lawrence suggested that this should be read :—‘‘The interest . . . received from money at interest upon any security or without security . . . dividends from stocks . . . profits from any other investment.’’ This, however is not the correct interpretation as what is included is: (a) the interest, dividends or profits directly or indirectly received from money at interest upon any security or without security; and (b) the interest, dividends or profits directly or indirectly received from stocks or from any other investment. The same construction results from a consideration of the French version of the text :—

1 ‘ et doit comprendre l’intérêt, les dividendes ou profits directement ou indirectement reçus de fonds placés à intérêt sur toutes valeurs ou sans garantie, ou d’actions, ou de tout autre placement, et, que ces gains ou profits soient partagés ou distri- bués ou non, et aussi les profits ou gains annuels dérivés de toute autre source, y compris. ’ ’

The distribution of the shares by Timberland was not a distribution of capital of that company. As the correspondence and the balance sheet of Timberland show, those shares were not an accretion of capital but were a dividend paid in money’s worth and represented taxable income: Pool v. The Guardian Investment Trust Co., [1922] 1 K.B. 347, a decision of Sankey, J., as he then was, approved, although distinguished, in Commissioners of Inland Revenue v. Fisher’s Executors, [1926] A.C. 395, by Viscount Cave, at 402, with the concurrence of Lord Atkinson. Here, as in the Pool case, the distributing company distributed, not shares in its own stock, but shares in the stock of another company. The fact that the shares were not freely distributed but were purchased at $100 per share means only that each shareholder, including the appellant, was receiving a profit to the extent of the difference between the price he could get for it and the price he had actually paid : Weight v. Salmon (1935), 19 T.C. 174, at pp. 193, 194, per Lord Atkin, with whom all the others peers agreed. Furthermore, it was a profit in 1944 when the money’s worth was received and not in 1945 when each share was sold for $750. It was an immediate distribution of profits and not a declaration of a distribution payable at some subsequent time such as was found in Associated Insulation Products Ltd. v. Golder, [1944] 2 All E.R. 203.

On the evidence, the true value was properly fixed by the trial judge at $600 per share in 1944. The appellant called as a witness Mr. J. C. Wilson, a member of the firm of auditors that acted for both companies. He fixed the value at $113 per share but, as the trial judge points out, the letter of June 20, 1944, from Mr. Wilson’s firm to the Income Tax Inspector, disagrees with his view at the trial that in 1944 the outlook for Salmon River was a poor one, since that letter states : 4 It appears that Salmon River will accumulate funds fairly rapidly from now on.’’ The trial judge, therefore, declined to accept Mr. Wilson’s estimate and with that conclusion I agree. Mr. Beer, called on behalf of the respondent, put the book value at approximately $400 with the value computed on earnings at something more, and he testified that in arriving at that figure he had made no allowance for wartime appreciation in fixed assets due to rising prices. On all the evidence $600 per share is a fair and just figure and the appellant is liable to income tax imposed upon the difference between that amount and the sum of $100 paid by the appellant on his purchase from Timberland of each share of Salmon River.

In this view of the matter, I find it unnecessary to deal with the respondent’s contention that Section 18 of the Act also applies. The appeal should be dismissed with costs.

RAND, J :—The investment by the Timberland Company in the Salmon River Company was made from funds representing accumulated profits; and if the shares so obtained had been distributed among the shareholders of Timberland there can be. no doubt that they would have been income within the meaning of Section 3 of the Income War Tax Act as ‘‘dividends or profits directly or indirectly received . . . from stocks’’. In Pool v. The Guardian Inv. Company, [1921] 1 K.B. 347, such a distribution took place and the judgment of Sankey, J. (as he was), was approved by Cave, L.C., in Commissioners of Inland Revenue v. Fisher’s Executors, [1926] A.C. 395 at p. 408; and Commissioners of Inland Revenue v. Reid Trustees, [1949] 1 All E.R. 304 shows that “dividends” are taxable regardless of the nature of the fund out of which they are paid.

But such a distribution can be made under the guise of a sale, and here Smith, J., has found that to have taken place. Shares purchased originally by Timberland for $100 each were, Seven years later, made the subject of an agreement purporting to sell them to the shareholders of Timberland for the same price. One year still later, they were disposed of by the shareholders for $750 each. Those striking facts were buttressed by the frank disclosure of the desire to make a distribution of the shares, as to the mode of which the advice of the Income Department was sought; and I agree with Smith, J., that the form adopted was simply what was'thought to be a means of avoiding the taxation consequences of declaring a dividend.

The remaining question is of the value of the shares found, namely, $600 when they were received. In this, Smith, J., has, I think, dealt carefully and thoroughly with all relevant factors, and I am quite unable to say that his conclusion was unwarranted or indeed that it was not dictated by what was before him.

I would therefore dismiss the appeal with costs.

Appeal dismissed.