Seaman v. MNR, 90 DTC 1909, [1990] 2 CTC 2469 (TCC)

Taylor, T.C.J.:—This is an appeal heard in Charlottetown, Prince Edward Island, on August 3, 1990, against an assessment of income tax for the year 1983 and which the Minister of National Revenue disallowed the claim of the appellant for a reserve against amounts not due, arising out of provisions of subsection 40(1) and 40(1.1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) ("the Act”). There was no real dispute about the facts of the case as they were summarized in the notice of appeal and reply to notice of appeal.

For the appellant:

— The agreement between Rundell Seaman Sr. and the purchasers (related parties) provided for a price adjustment and an amending agreement in the event of a disagreement concerning fair market value with Revenue Canada.

— The parties have agreed to exchange promissory notes in the full amount of the Revenue Canada reassessment.

— The notes issued are non-interest bearing and repayable in equal installments over a 10-year period. This information was missing from the Notice of Objection.

For the respondent:

— The Appellant sold 194 shares in Seaman's Beverages Ltd. to Rundell U. Seaman, Adele Seaman and Rundell U. Seaman as Trustee for his infant children in the 1983 taxation year for proceeds of $388,000. The shares had an adjusted cost base of $272,570 (194 x $1,405).

— The Appellant and the Respondent have subsequently agreed that the shares had a fair market value of $921,500 at the time of their disposition to the trust.

— The consideration to the Appellant for the disposition of the shares was totally comprised of promissory notes payable on demand.

— In reassessing the Appellant, the Minister of National Revenue assumed, inter alia, that the Appellant is not entitled to the deduction of a reserve in respect of any portion of the proceeds of disposition, since no portion of the proceeds was due to him after the end of the 1983 taxation year.

The details of the transactions noted above are irrelevant to a determination of this matter, other than to recount the following:

— the agreement under which the sale for $388,000 (above) was effected, was dated May 23, 1983, and contained the following clauses:

The promissory note shall be on demand without interest.

— The Vendor agrees to accept the demand note referred to in Paragraph 4 as payment in full for the 194 common shares in the capital stock of the company.

— The Parties further declare that it is their intention to comply in all respects with the requirements of subsection 73(5) of the Income Tax Act, as amended to date. If, however, it is determined by Revenue Canada, Taxation, or if that determination is contested, it is finally determined as a result of appeal proceedings that the adjusted cost base of the subject shares to the Vendor differs from the elected amount of $1,405, or that in any other respect this Agreement fails to comply fully with the requirements of subsection 73(5) of the Income Tax Act, the Parties undertake to make all such adjustments to the terms of this Agreement as are necessary or desirable and are most consistent with the purpose of this Agreement.

After the reassessment by Revenue Canada in 1988, which is the subject of this appeal the parties concluded the agreement referred to in the notice of appeal, supra, which agreement accepted the value to be $921,500, as determined by the Minister of National Revenue, but included promissory notes for payment over a ten-year period. As a part of the evidence submitted the appellant provided to the Court, with the agreement of counsel for the respondent, a letter dated January 20, 1983, from the auditors of Seaman's Beverages Ltd., which previewed the agreement of May 23,1983 and detailed for the parties the various steps involved including benefits and possible risks of the rather complicated operation. One paragraph from the letter contained the following comments: "Agreements should be drawn up with a price adjustment clause such that the notes would be adjusted if the price were found to be different than the value calculated.”

It was the basic position of counsel for the appellant that the second agreement in 1988 had not rescinded the agreement of May 23, 1983, but had merely translated into action the intention of the parties from the above advisory letter of January 20, 1983 to be reflected in the May 23,1983 agreement. Conversely, it was the contention of counsel for the respondent that the 1988 actions had completely altered a fundamental clause of the 1983 agreement, and an "on demand" note (1983) could not be transformed into a series of promissory notes payable over ten years. I agree with the view of counsel for the respondent. The reasons for which the precise phraseology of the May 23, 1983 agreement referencing a "demand note" were used—if there were any specific reasons—were not made known to the Court. But used they were, and under circumstances in which the appellant, and the other parties to the agreement had available a detailed and complete analysis of the proposed transactions (Exhibit A-1 the advisory letter from the accountant) long before the agreement was consummated. I find nothing in the critical clause from Exhibit A-1, supra, "Agreements should be drawn up with a price adjustment clause such that the notes would be adjusted if the price were found to be different than the value calculated", which indicates to me that a change from a demand note to a series of promissory notes payable at specified dates, and for precise amounts was contemplated. The "adjustment" (if necessary) which was noted in Exhibit A-1, supra, dealt with any change to the demand notes issued to the parties in the event that some mathematical or calculation error came to light at a later date. That did not arise—there is no dispute regarding that aspect of the matter. The entire transaction was carefully structured to produce either a non-taxable status for the parties, or at least a minimal tax situation. The effect of the "demand note" element, either was or should have been foreseen at that time. It is not something falling into a category permitting the retroactive restructuring of a vital clause of the agreement as a result of the Minister of National Revenue assessing based directly on the terms of the original agreement. I would refer to a recent judgment of this Court John A. Amirault v. M.N.R., [1990] 1 C.T.C. 2432; 90 D.T.C. 1330, in which a subject similar to the instant matter was considered. In my opinion, the analysis of the jurisprudence in Amirault, supra, is detailed and complete. One sentence therefrom is (page 2438 (D.T.C. 1334)): "The change in exercise price could not therefore be said to be fundamental to the option as in Weibe . . .”.

In this appeal I am of the view that the contested change was indeed fundamental.

Appeal dismissed.