Dube, J:—This is an appeal from an assessment by the Minister of National Revenue on appellant’s income for 1962.
Appellant, who is now 69 years old, was the owner of 48 shares in the Compagnie de Marbre et de Tuile de Québec Ltée, the only two other shares being held by his wife and daughter.
During 1962, he decided to sell his business, which he had built up himself and which he had operated for many years. He gave two reasons for this decision: first, he was getting old and had no son to take over from him; second, his manager, a key person in the office, was seriously ill and would not be returning to work.
He met first with Charles Lacroix, a prominent businessman in Quebec, and showed him his balance sheet. Lacroix did not pursue the matter further. He subsequently heard of a deal made by another financier, Jean- Marc Baronet, who had just bought a new business by purchasing the shares in a company. He decided to meet with him with a view, as he said. to obtaining information on the way he should go about selling his business. It should be mentioned that appellant had left school at age 15, and this explains his inexperience regarding this type of transaction.
Baronet, on the other hand, was already an experienced financier at this time. He showed a keen interest in the matter and, according to Jobin, offered to buy the business himself for the sum of $375,000 on the following terms: $300,000 cash plus Baronet’s personal note for $75,000, provided that Jobin loaned the company $300,000 on a mortgage. According to Jobin, it was also agreed that commissions in the amount of $23,400 owed appellant by the company would be repaid to him as weekly wages paid by the company. These were rather simple terms in which appellant regarded the transaction; the manoeuvres behind the deal, however, were somewhat more sophisticated.
The deals were concluded on September 24 before three brokers to whom Baronet had taken Jobin. According to the latter, all the documents had already been prepared. He was a little taken aback to find himself alone in this group, but he signed without protest the minutes of meetings, the sales of shares and the cheques, which represented the essence of the deals.
On September 24, 1962 the company declared dividends of $5,800 per share (that is, 50 x $5,800, or $290,000), payable to shareholders appearing on the register on September 25. Appellant then sold the 50 shares to the three brokers for $6,000 a share (that is, 50 x $6,000, or $300,000). As president of the company, appellant signed three dividend cheques in the names of the three brokers dated September 25.
On September 25, the three brokers resold the company’s shares to Baronet for $260 a share (that is, 50 x $260, or $13,000). Appellant wrote a cheque for $200,000 in the company’s name and was given a mortgage in the same amount by the company.
It can be seen that Baronet became owner of the company for $13,000. The three brokers each collected $1,000 in commissions. Jobin received $100,000 in cash and held a mortgage of $200,000 on the company’s building and equipment. The company was stripped of its surplus. (The company’s surplus account, dated December 31, 1961, indicated a surplus of $290,230.74.)
By a contract of employment, the company hired Jobin for 84 weeks: 10 weeks at $200 and 74 weeks at $300. Jobin explained that this payment represented the amount of commissions which the company owed him at that time. Baronet, on the other hand, maintained that the contract was to ensure the continued services of Jobin.
In a written statement, Jobin undertook “not to carry on a similar business in the province of Quebec for a period of ten years’’.
By a letter dated September 24, Baronet undertook not to make any claim upon Jobin “in the event that demands ... are made on the said company for taxes’’. The latter document was prepared at the suggestion of Jobin’s attorney and accountant. In his testimony the accountant stated that the only information Jobin asked him for was whether the sale of his company was subject to tax. He said that it was not, but the attorney and accountant dictated the aforementioned document on the telephone to protect their client.
Baronet and Jobin also agreed that the cars in the possession of appellant and his wife would continue to be for their personal use and the company would be paid for them at their book value when they were changed.
To replenish the company’s funds, Baronet then went to the company’s bank with Jobin and personally guaranteed a loan to the company of $90,000.
Some time after, appellant retired to Florida, at least for the winter, and received the anticipated salary. In the spring he learned from his brother that the situation at the company was deteriorating and returned. He found the premises in a pitiful condition. The new owner had moved elsewhere in Quebec, taking the inventory and machinery with him. No payment had been made to appellant on his mortgage, and the mortgage covered the building and the machinery.
A meeting was held between Jobin and Baronet: there were harsh words between them. According to Jobin, Baronet tearfully suggested that he would go bankrupt if Jobin required payment of the mortgage. The note for $75,000 signed by Baronet was destroyed. Jobin resumed possession of the building. On August 17, 1964 the company was put into liquidation by Baronet. The latter withdrew $60,271 at the distribution.
Appellant tried to sell the building through a real estate agency. As there was no purchasers he decided to resume the marble business in 1965, on his own account but on a reduced scale. He first obtained a legal notice to the effect that “the liquidation of the company rendered the agreement void”, and that he could begin his business again.
Appellant sustained a loss as a result of all of this which he set at $227,470. This figure for his loss is based on a sale price of $375,000, allows the building a market value on the date it was re-transferred of $85,000 (an amount assumed on the basis of the company’s books but not established in evidence) and takes into consideration cancellation of the note of $75,000. Further, appellant was assessed by the Minister on interest of $15,000 owed on the mortgage but never received by Jobin.
The Minister is now claiming from appellant tax on the sum of $290,000, paid in dividends to the three brokers on September 24, 1972.
According to Baronet the purchase price of the shares was not $375,000, as Jobin understood, but actually $300,000. The relationship between the price of the shares, the cheques issued and the company’s surplus suggests that a price of $300,000 is more likely. The signature by Baronet of a note for $75,000 and its eventual destruction remain a mystery.
Baronet claimed that the note was not part of the initial price, but that he signed it at the last minute as an additional condition imposed by Jobin to cover a surplus of inventory. He admitted that the note was torn up in his interview with Jobin, when he treatened the latter with going into bankruptcy.
As to the salary paid to Jobin, Baronet described it as a legitimate employment contract intended to obtain Jobin’s services. According to Baronet, Jobin refused to co-operate and even caused trouble among the employees of the business before leaving for Florida. He regarded this lack of co-operation as one of the factors leading to the failure of the company.
Baronet insisted that he wanted the business to be a success, as indicated by his personal undertaking in the loan for $90,000 to get the company moving again. According to him, once stripped of its surplus the company was not worth more than $13,000, and that is what he paid for it. According to Baronet, another reason why the company ran into trouble was that existing contracts had been obtained by Jobin at figures that were too low.
In his reply to the notice of appeal, the Minister relied on subsections 2(1), 2(3), sections 3, 4, subsection 5(1), paragraph 6(1 )(a), subsections 8(1), 16(1), 16(2), 81(1), 81(3), 81(4), paragraphs 82(1)(a), 82(1)(b), 82(1)(c), subsections 137(2) and 139(5) of the Income Tax Act. The Minister’s notice of assessment, on the other hand, was based only on subsections 6(1), 16(1) and 135(2). However, the Minister did not confine his arguments to the section of the Act cited in the notice of assessment. In his reply to the notice of appeal, he may allege other facts and plead other sections of the Act (see Conn Stafford Smythe v MNR,  CTC 558; 69 DTC 536).
The most relevant clauses are the following:
6.(1) Without restricting the generality of section 3, there shall be included in computing the income of a taxpayer for a taxation year
(a) amounts received in the year as, on account or in lieu of payment of, or in satisfaction of
8.(1) Where, in a taxation year,
(b) funds or property of a corporation have been appropriated in any manner whatsoever to, or for the benefit of, a shareholder, or
(c) a benefit or advantage has been conferred on the shareholder by a corporation,
(i) on the reduction of capital, the redemption of shares or the winding-up, discontinuance or reorganization of its business,
(ii) by payment of a stock dividend, or
(iii) the conferring on all holders of common shares in the capital of the corporation a right to buy additional common shares therein
the amount of value there of shall be included in computing the income of the shareholder for the year.
16.(1) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.
(2) For the purposes of this Part, a payment or transfer in a taxation year of property made to the taxpayer or some other person for the benefit of the taxpayer and other persons jointly in a taxation year shall be deemed to have been received by the taxpayer in the year to the extent of his interest therein notwithstanding there was no distribution or division thereof in that year.
81.(1) Where funds or property of a corporation have, at a time when the corporation had undistributed income on hand, been distributed or otherwise appropriated in any manner whatsoever to or for the benefit of one or more of its shareholders on the winding-up, discontinuance or reorganization of its business, a dividend shall be deemed to have been received at that time by each shareholder equal to the lesser of
(a) the amount or value of the funds or property so distributed or appropriated to him, or
(b) his portion of the undistributed income then on hand.
137.(2) Where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatsoever is that a person confers a benefit on a taxpayer, that person shall be deemed to have made a payment to the taxpayer equal to the amount of the benefit conferred notwithstanding the form or legal effect of the transactions or that one or more other persons were also parties thereto; and, whether or not there was an intention to avoid or evade taxes under this Act, the payment shall, depending upon the circumstances, be
(a) included in computing the taxpayer’s income for the purpose of Part I,
(b) deemed to be a payment to the non-resident person to which Part III applies, or
(c) deemed to be a disposition by way of gift to which Part IV applies.
(3) Where it is established that a sale, exchange or other transaction was entered into be persons dealing at arm’s length, bona fide and not pursuant to, or as part of, any other transaction and not to effect payment, in whole or in part, of an existing or future obligation, no party thereto shall be regarded, for the purpose of this section, as having conferred a benefit on a party with whom he was so dealing.
The Minister accordingly relies on the provisions cited above in arguing, alternatively, that dividends received in the year (subparagraph 6(1 )(a)(i)); a payment of money made on appellant’s instructions to some other person for the benefit of appellant (subsection 16(1)); a surplus distributed to appellant at the time of liquidation (Subsection 81(1)); a benefit attributed by the company to appellant (paragraphs 8(1)(b) and 8(1)(c)); or a benefit conferred on appellant by the transaction, notwithstanding the form of the transaction, are taxable under the Act.
The Minister’s fundamental proposition is that the three brokers were appellant’s mandataries for the purposes of dividend stripping, and that the payments made to them were made to appellant for purposes of the Act.
Learned counsel for the appellant conceded that it was clearly a case of dividend stripping, but he submitted that it was Baronet who really benefited from this stripping and that the three brokers were his mandataries. He correctly pointed out that Jobin did not know the brokers and that they had been called in by Baronet. In fact, Baronet conceded that it was his accountant and adviser Guy Fortier who called in the brokers, prepared the documents and organized the meeting of September 24, 1972.
Counsel emphasized that according to Art 1702 of the Civil Code, a mandate is gratuitous, whereas the three brokers made a profit of $3,000 on the transactions. The calculation of the amounts concerned may support the conclusion that the $3,000 of commission came from the sum of $13,000 spent by Baronet. It is also inconceivable that a man with as little experience as appellant could even have imagined the type of deal concocted by Fortier and Baronet. If the brokers were Jobin’s mandataries, they obviously were so unknown to him. Morover, if Jobin had foreseen the liquidation of his company by Baronet, he surely would not have invested $200,000 without first having obtained a personal guarantee by Baronet. As he put it, if he had wanted to liquidate he would have done it himself, without going through Baronet.
It seems clear that the liquidation was not foreseen by either of the two parties. It is very difficult to believe that Jobin knowingly brought about the destruction of his life’s work. As to Baronet, if he had anticipated a liquidation it is hard to see why he would have offered a personal guarantee of $90,000 when the loan was obtained from the bank to get the company moving again. He also would not have continued to operate the company and to assume new contracts after the transaction of September 24, 1972.
Baronet had already been successful with this type of transaction, using brokers, in his earlier purchase of another company of the same kind. This other company had not been liquidated and he continues to operate it successfully. It is therefore not very hard to see that he was in a position to convince Jobin to adopt the same formula, not to benefit Jobin, of course, but to enable himself to purchase another profitable company in full operation for the relatively modest sum of $13,000. From Baronet’s point of view, it was a good deal. Does the Income Tax Act require Jobin to bear the cost?
Earlier decisions in the matter of dividend stripping indicate certain criteria which aid in penetrating the screen of complex operations behind which the true nature of the transaction is concealed. In the final analysis, however, every case is different and each one must be dealt with in terms of the particular circumstances surrounding it.
At the outset, it should be noted that this is an assessment for 1962 prior to the amendment, section 138A, which conferred on the Minister a discretionary power to assess any amount received by a taxpayer as a result of dividend stripping after June 13, 1963, including amounts received for the sale of shares. The purpose of this amendment, of course, was to prevent dividend stripping, hence the indication that the sections existing before that date did not have the desired result. As section 138A was not retroactive, the theory of agency, or mandate, was subsequently developed as a means of assessing transactions concluded before June 13, 1963, and according to it brokers involved in such sales were only agents (or mandataries under the Civil Code) of the taxpayer (see “Why Was Section 138A Enacted?”*).
In a case of contract, agency, or mandate, however, the agent must have the power or authority to represent the contracting party. This power may derive from an agreement (as in the case of the mandatary) or it may be legislative or judicial (see Les obligations, G L Beaudoin, p 168). The mandate may be written, verbal or implied. An implied mandate may result from a series of acts of the same type performed by the mandatary to the knowledge of the mandator. The person alleging the existence of a mandate must prove it, and in the absence of a document, an implied mandate remains subject to the general rules of contract, including the rules of evidence (see Traité de droit civil du Québec, Art 1701, pp 18 to 237). In the present context, it should be noted that the alleged mandator, in this case appellant, denies the mandate, and that the alleged mandataries, the three brokers, did not testify. As to Baronet, he admitted that it was his accountant Fortier who put together the entire deal.
In Simard-Beaudy Inc v MNR,  2 FC 131;  CTC 715; 74 DTC 6552, a dividend stripping case, my brother Addy, J came to the conclusion that an agent was the alter ego of the vendor companies and their shareholders, that the agent was acting for both parties to the transaction “in order to bring to fruition the planned financial operations’’, that the manoeuvres did not benefit appellant directly but indirectly, since otherwise the purchase would not have taken place at the agreed price, and that appellant was aware of the manoeuvres and of their ultimate aim. He nevertheless allowed the appeal. He observed, at 719 :
The law is too clear for any useful purpose to be served by citing jurisprudence to that effect, that a person may act as an agent of two people without thereby creating joint responsibility between them for all their actions or for those of the agent. The fact that Melançon was acting as an agent, but for different objects, for the Simard Brothers and their company on the one part and for Brillant and the appellant on the other part, could and should in the present circumstances impute a mutual knowledge of their respective actions but not necessarily a mutual responsibility as to those actions.
In Conrad David v The Queen,  FC 43;  CTC 197; 75 DTC 5136, my brother Walsh, J held that the liquidation was part of the plan and applied paragraph 81(1)(b). In the case at bar the evidence does not demonstrate that Jobin and Baronet concluded their deal in anticipation of the liquidation. On the contract, the actions of the two men clearly indicate their intention to continue the business. Both relied on the successful operation of the company.
The decision of the Supreme Court of Canada in Conn Stafford Smythe v MNR,  5 CR 65;  CTC 558; 69 DTC 5361, is a leading case in dividend stripping and concerns the taxation year 1961, which was not affected by the amendment in section 138A, cited above. In that case, the old company had considerable undistributed income on hand. A new company was formed with the same shareholders. All the assets of the old company were sold to the new in exchange for a note. When all the rather complex transactions were concluded, the undistributed income of the old company was in the hands of appellants. The Minister assessed them pursuant to subsection 81(1). The Exchequer Court affirmed the assessment, but based its judgment on the application of subsections 137(2) and 8(1) of the Act. The Supreme Court dismissed the shareholders’ appeals, establishing that subsection 81(1) of the Act clearly applied. The Court found that there had been a liquidation and termination of the business of the old company. It did not rule on the scope of subsection 137(2).
In Smythe the same shareholders in effect transferred the shares of an old company to a new, and then discontinued any commercial activity of the old company. In the case at bar, Jobin in effect transferred the shares of the company, not to himself, but to Baronet, and the company continued its activities.
In Smythe, supra, the transactions were artificial and their sole aim was to distribute the undistributed income on hand to the shareholders. In the case at bar, on the other hand, appellant’s objective was to sell his business at a price that suited him, and the aim of the purchaser was to obtain a thriving and ongoing business at a very low cost.
It is also unnecessary in the case at bar to express any opinion as to the scope of subsection 137(2), since in my view appellant benefits from the exception provided for in subsection 137(3). He dealt with Baronet in good faith and at arm’s length. They hardly knew each other before the deal and they testified freely. So far as Jobin was concerned, he concluded the sale, not in accordance with some other transaction or to discharge some obligation, but to dispose of his business at a Suitable price. The results were disastrous for him and this disaster is definitely not subject to assessment.
The appeal is accordingly allowed, the assessment of the Minister is vacated, and the taxable income for 1962 is the net income reported and paid. Respondent is ordered to pay costs.