Muldoon, J.:—The plaintiff sues, appealing an assessment by the Minister of National Revenue, dated June 28, 1983, and subsequently confirmed by the Minister, who contends that the assessment is in conformity with paragraph 7(1)(c) of the Income Tax Act. The plaintiff, however, invokes paragraph 7(1)(b) of the Act. Those statutory provisions run as follows:
7. (1) Subject to subsection (1.1), where a corporation has agreed to sell or issue shares of the capital stock of the corporation or of a corporation with which it does not deal at arm’s length,
(b) if the employee has transferred or otherwise disposed of rights under the agreement in respect of some or all of the shares to a person with whom he was dealing at arm’s length, a benefit equal to the value of the consideration for the disposition shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which he made the disposition;
(c) if rights of the employee under the agreement have, by one or more transactions between persons not dealing at arm’s length, become vested in a person who has acquired shares under the agreement, a benefit equal to the amount by which the value of the shares at the time that person acquired them exceeds the amount paid or to be paid to the corporation therefor by that person shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which that person acquired the shares; ...
Subsection 7(1.1) is not relevant here.
Opposing counsel have most helpfully co-operated in formulating an agreed statement of facts, which is Exhibit 1, and which proceeds as follows:
1. Clarebeau Management Corp. Ltd. (““Clarebeau’’) is a body corporate under the laws of the Province of Alberta and was incorporated on March 15, 1979.
2. At all relevant times one-half of the issued shares of Clarebeau were owned by 217814 Investments Ltd. of which the Plaintiff and Anne McKerricher, his common law wife, owned all of the issued shares.
3. At all relevant times one-half of the issued shares of Clarebeau were owned by 217816 Investments Ltd. of which Patrick Claridge and Louise Claridge, his wife, owned all of the issued shares.
4. The Plaintiff has at no time been related to Patrick Claridge or Louise Claridge by blood, marriage or adoption.
5. As a result of an agreement between Nortek Engines Ltd. (presently known as Nortek Energy Corp.), a public corporation, and the Plaintiff dated June 22, 1979 Nortek granted to the Plaintiff an option to purchase 60,000 common shares in the capital stock of Nortek for a price of $1.00 per share. A true copy of the said agreement is attached as Schedule “A” hereto.
6. By an agreement between the Plaintiff and Clarebeau dated June 22, 1979 the Plaintiff assigned and transferred all of his rights, title and interest in the option referred to in paragraph 5 hereof to Clarebeau in consideration for the payment of $1.00 by Clarebeau to the Plaintiff. A true copy of the said agreement is attached as Schedule “B” hereto.
7. As a result of the agreement between the Plaintiff and Clarebeau referred to in paragraph 6 hereof and the exercise of the option referred to in paragraph 5 hereof Clarebeau acquired in the 1979 calendar year 60,000 shares in the capital stock of Nortek Energy Corp. in consideration of the payment by Clarebeau to Nortek Energy Corp. of the sum of $60,000.
8. By Notice of Reassessment dated June 28, 1983 the Minister of National Revenue reassessed the Plaintiff by adding to his income for the 1979 taxation year the amount of $199,000 described by the Minister as a “Stock option benefit received from Nortek Energy Corp.”
9. By Notice of Objection dated August 11, 1983 and duly served on the Minister of National Revenue the Plaintiff objected to the Notice of Reassessment referred to in paragraph 8 hereof.
10. By Notice of Confirmation by the Minister of National Revenue dated March 30, 1984, the Minister of National Revenue confirmed the reassessment in respect of the Plaintiff’s 1979 taxation year.
The question of whether paragraph 7(1)(b) or 7(1)(c) is to be applied will be determined by whether or not the plaintiff and Clarebeau were “dealing at arm’s length.” If so, paragraph 7(1)(b) governs the treatment of the value of the shares: if not, paragraph 7(1)(c) governs. Since the law does not deem the plaintiff and Clarebeau to have dealt not at arm’s length, the question is one of fact, to be determined on the evidence in light of authoritative jurisprudence.
The narrative may conveniently begin over two decades ago when the plaintiff and Sidney Patrick Claridge were team-mates in professional football. Mr. Claridge retired from the sport in 1968 and went into other work in Calgary. Eventually the two former team-mates met in Edmonton and discovered that they were both employed in 1978 by the same firm in real estate sales. As Mr. Claridge put it: “we amalgamated forces, joined efforts and shared commissions, fifty-fifty.” The firm’s head office in Vancouver was notified of this amalgamation of efforts, as was the office manager, and despite their employer’s disapproval, the plaintiff and Mr. Claridge were thenceforth issued equal pay cheques. According to Mr. Claridge, the plaintiff had some background in the business, which Mr. Claridge lacked, ut the latter had “lots of contacts” and was able to “find people.”
The two partners utilized Clarebeau specifically in the real estate business and shared their profits and losses through that vehicle. It was the instru- ment or expression of their partnership to which they brought investment opportunities and other exploitable business dealings found or generated by each of them individually for the purpose of pooling their respective talents and energies in order to share the gains and, if necessary, the losses. They both were required to authenticate resolutions and corporate minutes and both had to sign the corporation’s cheques. The arrangement had the inherent potential for deadlock, but the partners enjoyed a good relationship. Indeed, article 59 of the corporation’s articles of association, Exhibit 3, provided that in the case of an equality of votes at a meeting, the chairman would have the casting vote. In fact that right was Mr. Claridge’s and not the plaintiff's. It appears that the two partners were not aware of that provision among the 139 articles, until after the commencement of this litigation.
Both Mr. Claridge and the plaintiff were credible witnesses.
The plaintiff and two others became involved in Nortek of which the plaintiff became a director in 1977 and president in 1979. They sought to nave this company become profitably involved in the oil and gas business. The plaintiff discussed these aspirations with Mr. Claridge before the latter was prepared to devote time and effort to the business of Nortek in concert with his partner, the plaintiff, upon their existing basis of 50-50 partnership.
In June, 1979, the three directors of Nortek agreed with that company and among themselves to take share options in accordance with the time and effort expended or intended to be expended by each in the development of Nortek's business. The other two directors obtained options for 10,000 shares each. The plaintiff obtained an option, expressed in Ex. 1(A), for 60,000 shares in view of his being the main person among the three who was willing to spend time in the business. At that time, June 22, 1979, the plaintiff had already in mind his arrangement with Mr. Claridge to invoke their partnership in pooling their efforts for Nortek, whereby they expected to raise the value of the shares of Nortek. Accordingly, it was as of that same date, June 22, 1979, that the plaintiff and Mr. Claridge expressed their concurrence in Ex. 1(B) to the plaintiff's assignment of his option to Clare- beau for one dollar. In fact, however, the document represented by Ex. 1(B) was created some time after its stated date. The two partners realistically acknowledged therein that “the option is of no value at the present time and it may never be of any value in the future.”
It must be noted that paragraph 3 of the option (Ex. 1(A)) prohibits its assignment; but the plaintiff testified that the other two directors were not the least bit concerned by his assignment to Clarebeau, and they actually approved such assignment at the annual meeting of Nortek.
The plaintiff evidently received the aid in effort which he needed from his partner. Through Clarebeau, they paid the requisite $60,000 to Nortek. As is admitted in the pleadings herein, Clarebeau disposed of the Nortek shares in 1980 and it reported the gains derived from the sale thereof in its 1980 income tax return.
It is of some slight weight in this matter to consider how the two partners finally, in March 1983, wound up their dealings in and with Clarebeau. Mr. Claridge wanted to sell Clarebeau’s main asset, land on Salt Spring Island. The plaintiff was opposed, and after obtaining independent advice in law and negotiating the price of Mr. Claridge’s shares, the plaintiff purchased them. The price was secured by realty mortgages on Clarebeau's land, which were cleared over the course of six months. The plaintiff testified that although he reposed a certain degree of trust in Mr. Claridge which he would not have given to a stranger, he nevertheless dealt in his own interest. It is apparent that plaintiff never did control Clarebeau any more than he controlled Mr. Claridge.
At all material times the plaintiff and his partner Mr. Claridge believed that they (with their respective mates) each enjoyed precisely equal de jure and de facto control of Clarebeau. In truth, as they would have discovered sooner or later, and as they did finally discover, greater control of Clarebeau reposed in Mr. Claridge's hands by virtue of his presidential office and of article 59 of Ex. 3, the articles of association. However, in the event of an agreed winding-up or liquidation of assets the two stood in precise equality as may be discerned from paragraphs 2 and 3 of Ex. 1, the agreed facts. This conclusion is amply supported by the evidence. Furthermore, neither the plaintiff nor his partner (unless by invocation of article 59) could absolutely precipitate a winding-up at will, as may be noted by perusal of the share transfer provisions of the articles, notably articles 21, 22, 23, 24 and 25. Each partner enjoyed, in effect, a right of first refusal to purchase the other's shares.
In argument, counsel for the plaintiff referred to the Court the following jurisprudence:
M.N.R. v. Sheldons Engineering, Ltd. [1955] C.T.C. 174; 55 D.T.C. 1110; M.N.R. v. Kirby Maurice Co. Ltd., [1958] C.T.C. 41; 58 D.T.C. 1033;
Ancaster Development Co. Ltd. v. M.N.R., [1961] C.T.C. 91; 61 D.T.C. 1047;
Pender Enterprises Ltd. v. M.N.R., [1965] C.T.C. 343; 65 D.T.C. 5202; M.N.R. v. Merritt Estate, [1969] C.T.C. 207; 69 D.T.C. 5159;
Swiss Bank Corp. v. M.N.R., [1972] C.T.C. 614; 72 D.T.C. 6470;
Robson Leather Co. Ltd. v. M.N.R., [1977] C.T.C. 132; 77 D.T.C. 5106; Busby v. The Queen, [1986] 1 C.T.C. 147; 86 D.T.C. 6018.
Counsel for the defendant cited the following jurisprudence:
Viking Food Products Ltd. v. M.N.R., [1967] C.T.C. 101; 67 D.T.C. 5067; Swiss Bank Corporation and Swiss Credit Bank v. M.N.R., [1971] C.T.C. 427; 71 D.T.C. 5235; [1972] C.T.C. 614; 72 D.T.C. 6470;
The Queen v. Imperial General Properties Limited (formerly Speedway Realty Corporation Limited), [1985] 2 C.T.C. 299; 85 D.T.C. 5500.
The case of Busby v. The Queen (above) is not relevant here. There, Mr. Justice McNair makes it plain (151 (D.T.C. 6020)) that he is dealing with the meaning of “employment” pursuant to section 248 of the Act, and not “employee”. Accordingly, whether the plaintiff was an employee, or only an unpaid officer, of Nortek is not material, since the section defines “employee” to include “officer”.
The case at bar is also distinguishable from Windsor Plastic Products Limited v. The Queen, T-1943-81 [[1986] 1 C.T.C. 331; 86 D.T.C. 6171] in this court, because here Clarebeau was not the gain-producing enterprise but was merely the vehicle or expression of the plaintiff's partnership with Mr. Claridge. Clarebeau was the entity to which they brought their business deals for purpose of recording, accounting and sharing the fruits of their co-operative, individual, efforts and talents: of itself it produced nothing. Neither the plaintiff nor his partner controlled from day to day or year to year the distribution of Clarebeau’s gains, because that distribution was always predetermined by their agreement to share equally, and neither one could exert control over the other in that regard. In effect, each one trusted the other to make the most effective use of his time and talents and that investment of time and talents produced the gain in Nortek’s shares. Clare- beau produced nothing.
In this circumstance, the plaintiff was in no position at all to dictate the terms of his assignment of the Nortek share option to Clarebeau, because there could have been no effective assignment if Mr. Claridge had not been persuaded, as he was, to co-operate with his time and talents in promoting Nortek. If Mr. Claridge had considered that it was not worth his time and talents, the plaintiff would have been left with his share option to do with it as he could. The defendant has certainly not shown that Mr. Claridge's declining to accept the plaintiff’s proposal would have resulted in a winding-up of Clarebeau. Indeed, on the evidence, such a result cannot even be inferred. The relevant principles enunciated in the cited jurisprudence are applicable in the circumstances. The evidence, in sum, fails to indicate that, at the material time, the plaintiffs dealing with Clarebeau was not at arm's length. On the contrary the evidence does positively indicate that the plaintiff, in the words of paragraph 7(1)(b) of the Act, “... has transferred or otherwise disposed of rights under the agreement [Ex. 1(A)] in respect of ... the shares to a person [Clarebeau] with whom he was dealing at arm’s length . . . .”
The plaintiff's appeal is allowed, with costs, and the impugned assessment is referred to the Minister to be revised in accordance with the resolution of the questions in issue expressed in these reasons.
Appeal allowed.