The Queen v. Demers, 86 DTC 6411, [1986] 2 CTC 321 (FCA)

Pratte, J. (MacGuigan, J. concurring) [TRANSLATION]:—In each of these two cases Her Majesty is appealing from a judgment of the Trial Division allowing an appeal by one of the respondents from income tax assessments for the 1976, 1977 and 1978 taxation years.

Both appeals raise a single problem: how should the respondents have calculated the gain they made on the sale in 1976 of their shares in Chibou- gamau Lumber Ltée?

This company was incorporated under the statutes of Quebec. The respondents were its sole shareholders. On June 8, 1976 they agreed to sell their shares to Donohue St-Félicien Inc. Under the deed of sale they undertook, in clause 3(t), to pay certain amounts which other companies owed Chibougamau Lumber Ltée. That clause read as follows:

3- ...

The sellers jointly and severally declare, guarantee and agree that:

(t) . . . On the closing date the company [Chibougamau Lumber Ltée] received reimbursement in cash from the sellers for all investments in any of the subsidiaries and for all loans and advances made to those subsidiaries . . . and for all accounts receivable from those subsidiaries . . . at the company’s expense.

The price agreed on in this deed of sale was $7.8 million, and only a part of this, $4.3 million, was paid in cash at the closing date. The contract stated that the amount of $4.3 million would be paid by two cheques made “one payable jointly to the sellers and the company [Chibougamau Lumber Ltée] in an amount equal to the sum of the advances and investments to be reimbursed by the sellers in accordance with clause 3(t)’’ and the other, for the balance, payable to the sellers.

It was common ground that under clause 3(t) the respondents were required to pay Chibougamau Lumber Ltée the sum of $1,402,225 owed to it by a company named Samoco. The respondents did this on the closing date of the contract by endorsing to Chibougamau Lumber Ltée the cheque for $1,402,225 just received by them from the buyer. In consideration of this payment, Chibougamau Lumber Ltée then assigned to the respondents its debt against Samoco.

The problem with calculating the gain made by the respondents from this sale of shares arises from the fact that the debt which they thus acquired against Samoco for $1,402,225 had a market value at the time of only $600,000. In calculating their gain, the respondents assumed that they should deduct from the profit they would otherwise have made the sum of $802,225, representing the difference between the sum of $1,402,225 which they had to spend to acquire the debt against Samoco and the sum of $600,000 which was the market value of that debt. The question here is whether, as the trial judge held, they were right to do so.

The rule to be followed in calculating the gain from the disposition of property is stated in section 40 of the Income Tax Act:

40. (1) Except as otherwise expressly provided in this Part

(a) a taxpayer’s gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which the proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition . . .

Under this rule, therefore, in calculating the gain resulting from the disposition of property the proceeds of the disposition must first be determined. From this amount it is then necessary to deduct the sum of the adjusted cost base to the taxpayer and any outlays and expenses which have been made or incurred by him for the purpose of making the disposition.

In the case at bar, calculating the “adjusted cost base" of the Chibouga- mau Lumber Ltée shares presents no difficulty since the parties were agreed on this. Accordingly, the only point at issue is the calculation of the “proceeds of disposition" or the “outlays and expenses . . . made or incurred by him for the purpose of making the disposition".

The respondents argued, first, that in calculating the amount of the “proceeds of disposition" the sum of $802,225, which represents the difference between the sum of $1,402,225 paid to acquire the debt against Samoco and the amount of $600,000 representing the value of that debt, should be deducted from the selling price of $7.8 million.

The appellant rebutted this argument by reference to subparagraph 54(h)(i) of the Act, which states:

54. In this subdivision,

(h) . . . “proceeds of disposition” of property includes

(i) the sale price of property that has been sold

In the submission of counsel for the appellant, it can be seen simply from reading the deed of sale by which the respondents sold their shares to Donohue St-Félicien Inc. that the selling price for the shares was set at $7.8 million. This is the amount which in the circumstances constitutes the “proceeds of disposition".

There can be no question that if one looks only at the clause in the deed of sale setting the selling price of the shares and at the wording of clause 3(t), under which the sellers guaranteed that before the closing date they would have paid the debts owed to Chibougamau Lumber Ltée by its subsidiaries, it appears that the respondents by that deed of sale agreed to sell the shares of a company after receiving payment of the amounts referred to in clause 3(t). It could then be said that the sum of $7.8 million represents the true price of the shares sold by the respondents.

However, a different conclusion is reached if one also looks at the clause in the deed of sale which indicates the way in which the price was to be paid. That clause makes it clear, in my opinion, that the parties agreed that the sellers would use part of the selling price they received from the buyer to pay off their obligations under clause 3(t). This being the case, it logically follows that the sum of $7.8 million represents not only the price of the shares but also of the undertaking by the sellers to pay the amounts referred to in clause 3(t). In determining the selling price of the shares, which under subparagraph 54(h)(i) constitutes the proceeds of their disposition, therefore, one must deduct from the agreed price of $7.8 million the sum of $802,225 which the respondents allegedly received in consideration of their undertaking to pay the debt of $1,402,225 owed by Samoco to Chibou- gamau Lumber Ltée.

The trial judge made no error in deciding as he did.

I would dismiss the appeal with costs.

Hugessen, J. [TRANSLATION]:—I have had the benefit of reading the reasons prepared by my brother Pratte, J. I have arrived at the same result but by a different route.

The respondents sold all the shares in Chibougamau Lumber Ltée. The price stated in the contract of sale was $7.8 million. However, as a condition of the sale they had at the same time to use part of the price, some $1.4 million, to buy from Chibougamau a debt owed to it by its subsidiary Samoco. It was common ground that the actual value of this debt was only $600,000. The question is whether this difference of some $800,000, between the amount paid for the debt and its actual value, can be taken into consideration so as to reduce the capital gain made by the respondents when they sold the Chibougamau shares.

In my view, the only relevant provision of the Act is subparagraph 40(1)(a)(i):

The emphasized portion of the section authorizes a taxpayer to deduct from what would otherwise be his gain any “débours” made in the course of the disposition of the property. What is a “débours”? Le Petit Robert, Paris, Société du Nouveau Littré, 1981, gives:

Somme déboursée.

The English version of the Act speaks of an “outlay”, which is defined in the Shorter Oxford English Dictionary, Oxford, Clarendon Press, 1970:

The act or fact of laying out or expending; expenditure (of money upon something).

In both languages, therefore, the term means the expending of a sum of money.

In my opinion it is not necessary for a payment to be made without any consideration for there to be a “débours” or “outlay” within the meaning of the Act. One thinks, for example, of the commission paid to a real estate agent or of the fees paid to a notary in connection with the sale of a house. No one would dispute that this is an outlay which must be added to the adjusted cost base in calculating the capital gain.

Further, if a payment which would otherwise be an outlay within the meaning of a provision results in the taxpayer acquiring property with a value equal to that of the payment, it would be contrary to common sense to treat it as an outlay made “for the purpose of making the disposition”. For example, a taxpayer who as a condition of selling his shares in a company repays the latter's loan to him and is given a release for it could not claim this payment as an outlay because it was not made exclusively for the purposes of the sale, but in order to extinguish the debt. The same would be true of an owner who paid real estate tax arrears when he sold his real property. In both cases, the sale would be the occasion but not the cause of the payment.

However, the provision recognizes that an outlay can be for more than one purpose: it is only “to the extent” that it is made for the purposes of making the disposition that it can be taken into account in calculating the capital gain. This will clearly be a question of fact, which has to be decided on the circumstances of each particular case.

As it was not in dispute that in the case at bar the payment of $1.4 million vested in the respondents property worth only $600,000, it follows that the sum of $800,000 was spent for purposes other than purchasing this property, namely for the disposition of their shares in Chibougamau. The respondents were therefore correct in adding this amount to their adjusted cost base for purposes of calculating their capital gain and the trial judge correctly allowed their appeals from the reassessments made by the Minister.

I would dismiss the appeal with costs.

Appeal dismissed.