Pallan v. MNR, 90 DTC 1102, [1990] 1 CTC 2257 (TCC)

Christie, A.CJ.T.C.:— These appeals were heard together on common evidence. They relate to the 1984 taxation year of each appellant. In respect of that year the respondent reassessed Bhagat Ram Pallan by including in his income $142,491.49 being an alleged unreported deemed dividend on the redemption of 45 shares of Pallan Holdings Ltd. ("Holdings"). The same reas- sessment was made in relation to Sadi Ram Pallan. In reassessing Jaght Ram Pallan the respondent included in his income $87,249.15 with respect to an alleged unreported deemed dividend on the redemption of nine shares of Pallan Timber Products Ltd. ("Timber Products”). In reassessing the respondent invoked subsection 84(3) of the Income Tax Act ("the Act") under which the acquisition by a corporation resident in Canada of its own shares can result in the corporation being deemed to have paid and shareholders being deemed to have received a dividend that is the amount paid for the shares minus the paid-up capital in respect of those shares.

The origin of this litigation lies in the appellants having been shareholders in corporations in which three of their brothers, Dhial Ram Pallan, Sadoo Ram Pallan and Sant Ram Pallan and two sisters, Shanti Manhas and Peggy Phipps, were also shareholders. Severe acrimony among these individuals that existed for a considerable period led to a desire to terminate the business relationships that existed by reason of the shareholdings. They were split into two factions. Bhagat Ram Pallan and Sadi Ram Pallan versus the others. In the principal agreement relevant to these appeals and elsewhere in documentary evidence the appellants and the others are referred to as indicated in brackets and those designations will, with some exceptions, be used in these reasons: Bhagat Ram Pallan (Tom), Sadi Ram Pallan (Bill), Jaght Ram Pallan (Juggie), Dhial Ram Pallan (Jerry), Sadoo Ram Pallan (Sadoo), Sant Ram Pallan (Sant), Shanti Manhas (Shanti) and Peggy Phipps (Peggy). The appellant, Bhagat Ram Pallan, informed the Court that he is known as Tom and the appellant, Sadi Ram Pallan, is known as Bill.

At least as far back as 1982 the appellants and their siblings had been receiving detailed advice from a prominent firm of chartered accountants and legal advice in respect of the proposed breakup. It was the intention of Tom and Bill to continue in business together after the commercial ties with the others had been severed. There were four companies involved. Timber Products was in the lumber remanufacturing business. It was managed by Tom and Bill. The other shareholders played a passive role regarding the operation of this company. Its shares were distributed in this way: Tom — 35, Bill — 17, Juggie — 9, Jerry — 9, Sadoo — 9, Sant — 9, Shanti — 4, Peggy — 4 and Holdings — 4. Trout Creek Sawmills Ltd. ("Trout Creek") was in the business its name indicates and all of its issued shares were owned by Timber Products. The share distribution of Tamarac Terminals Ltd. (“Tamarac”) was the same as in Timber Products. Tom described it as just a land holding company. The shares of Holdings were held equally by each of the appellants and their siblings. He said Holdings was strictly a holding company and all it did was receive rents.

A preliminary agreement which recites that it is "dated for reference the 1st day of January, 1983" is in evidence. The intended parties were all of the individuals mentioned, the four companies and the executors of the estates of the appellants' father and mother. Its purpose was a final resolution of all the differences between the factions. The copy entered as an exhibit shows that it was not signed by Holdings, Jerry, Sadoo, Shanti and Peggy. It is a somewhat complex document that was prepared under professional supervision. Its relevance is only as evidence of the carefully considered efforts that were being made to resolve the differences. The key agreement is dated September 26, 1983. It is also the product of professional expertise. The parties are Timber Products, Tamarac, Trout Creek (therein called collectively "the Companies") AND Holdings AND the executors of the estates of the appellants' father and mother (therein called "the Estates’) AND Tom AND Bill AND Jerry, Juggie, Sant, Sadoo, Shanti and Peggy (therein called collectively "the Family”) AND Marg Pallan who is Bill’s wife. Included in the recitals are these:

WHEREAS Tom, Bill and the Family control the Companies and Pallan Holdings;

AND WHEREAS Tom, Bill and the Family have decided to divide their respective interests in Pallan Holdings, the Companies and the Estates;

AND WHEREAS the directors of Pallan Holdings and the Companies are all of the opinion that this agreement is in the best interests of Pallan Holdings and the Companies;

AND WHEREAS the parties now wish to enter into a binding agreement for division of their respective interest in Pallan Holdings and the Companies, and the Estates to resolve longstanding disputes between Tom and Bill on the one hand and the Family on the other as to the management of Pallan Holdings, the Companies and the Estates.

Clause 22 reads:

This agreement is intended to be a final resolution of all differences between the parties or any of them arising out of circumstances existing before the execution of this agreement, and all claims arising therefrom except the rights of Tom, Bill and the Family to share in distribution of the assets of the Estates situate outside Canada, if any, and the rights of the Family to share in distribution of the assets of the Estates situate in Canada. On execution of this agreement, all parties will discontinue all litigation heretofore commenced against any other parties, and on completion of all transactions contemplated hereby, each party will be deemed to have given to all other parties an unconditional release and remission of and from any and all claims, debts, demands, actions, causes of action and liability whatsoever arising out of or connected with circumstances existing prior to the date of execution of this agreement.

Under the agreement there was to be a corporate amalgamation, real estate was to be transferred, promissory notes were to be issued, shares were to be subdivided, two corporations were to purchase their own shares respectively from shareholders, debts owing by the estates were to be assumed, debts were to be assigned and set-offs made, etc. What is contained in the agreement and in other documentary evidence that I regard requires special mention is this:

1. The Companies were to be amalgamated and the directors of the amalgamated company were to be Tom and Bill. They were also to be president and secretary respectively. The share distribution in the amalgamated company was to be the same as that already indicated for Timber Products and Tamarac, i.e., Tom — 35, Bill — 17, Juggie — 9, Jerry — 9, Sadoo — 9, Sant — 9, Shanti — 4, Peggy — 4 and Holdings — 4. An amalgamation agreement to effect the amalgamation, as required by section 272 of the Company Act of British Columbia, was entered into among Timber Products, Tamarac and Trout Creek on October 19, 1983. Included in what is said in it is that the desirable date for amalgamation is on the close of business on December 31, 1983 and that the Registrar of Companies of the Province of British Columbia has approved the form of memorandum and articles of the amalgamated company. This prior approval is also required under section 272. The name chosen for the amalgamated company was Pallan Timber Products Ltd.

2. After amalgamation the amalgamated company was to transfer all its interest in an apartment in Campbell River called the Princess Tricia to Holdings. In clause 2 of the agreement the present fair market value of this property is set at $1,376,000. Clause 14 states in part: “All parties have agreed on the present fair market value of the Princess Tricia." The purchase price was to be paid by way of the assumption of existing mortgages, other debt and a set-off. The balance owing to the amalgamated company was anticipated to be “approximately” $163,000, to be secured by a demand promissory note, without interest. On January 31, 1984, Holdings executed a demand promissory note for $176,586.32 without interest in favour of Pallan Timber Products Ltd., i.e. the amalgamated company.

3. Immediately before the transfer of the Princess Tricia to Holdings, Tom, Bill and the members of the family were to vote in favour of special resolutions that subdivided the 45 issued shares of Holdings into 360 shares so that each of these persons would hold 45 shares. On December 31, 1983, they all signed special resolutions whereby the capital of Holdings was altered by subdividing the 45 shares into 360 shares.

4. Concurrently with the transfer to it of the Princess Tricia, Holdings would offer to purchase shares held by its shareholders: “for fair market value, agreed to be $2,111.11 per share. Each of the family will refuse the offer but Tom and Bill will accept. The purchase price of $94,999.95 payable to each of Tom and Bill will be evidenced by a demand promissory note, without interest." By resolution passed on January 25, 1984, with the consent in writing of all of the directors of Holdings it offered to purchase from its shareholders a total of 90 of its shares for the price of $2,111.11 per share. Tom and Bill accepted the offer in writing the day it was made and on that date it was declined in writing by the members of the family. On January 31, 1984, Holdings executed two promissory notes, one in favour of Tom and the other in favour of Bill. Both were demand notes without interest in the sum of ($2,111.11 x 45) $94,999.95.

5. Concurrently with the purchase by Holdings of its shares from Tom and Bill, the amalgamated company would offer to purchase shares from its shareholders: “for fair market value, agreed to be $6,473 per share as established by prior agreement. Tom and Bill will refuse the offer, but each member of the family and Holdings will accept." After the purchase by the amalgamated company of its shares from the family and Holdings, the members of the family were to assign the debts owing to them by the amalgamated company in respect of those purchases to Holdings as shareholder's loans. Holdings would then owe each of the family the purchase price of his or her shares in the amalgamated company. The amalgamated company offered to purchase 48 of its common shares, which was the number held by the members of the family and Holdings, for $6,473 per share. The members of the family and Holdings accepted this offer in writing on January 25, 1984, and by document dated January 31, 1984, the assignments were made in the amounts shown in brackets: Jerry ($58,257), Juggie ($58,257), Sant ($58,257), Sadoo ($58,257), Shanti ($25,892) and Peggy ($25,892).

6. Concurrently with the assignment referred to in the immediately preceding paragraph, Tom and Bill were each to assign to the amalgamated company as shareholder's loans the sum of $73,852. This assignment was made by document dated January 31, 1984, but the amounts assigned were adjusted down to $67,058.84.

The calculation applied in reassessing Tom and Bill is:

The calculation applied in reassessing the other appellant is:

The position of the appellant, Bhagat Ram Pallan, is in large measure an outright repudiation of what is described in the documentary evidence that has been summarized. In his examination-in-chief the appellant, Sadi Ram Pallan simply adopted the evidence given in his presence by Bhagat Ram Pallan. The only point made in the cross-examination of Sadi Ram Pallan is that the $67,058.84 that he assigned to the amalgamated company on January 31, 1984, was reflected in his shareholder's loan account.

Reverting to the testimony of Bhagat Ram Pallan, he said that it was never intended that Holdings and the amalgamated company would purchase their own shares. There was to have been an exchange of shares, but he did not explain the precise nature of this exchange. The lawyers and accountants were responsible for the procedure adopted. He denied that the figure $1,376,000 related to the fair market value of the Princess Tricia. It was an artificial figure to “facilitate this agreement" although he did confirm that the $1,376,000 was the price fixed on the transfer of the apartment from the amalgamated company to Holdings.

The amount of $2,111.11 per share for the shares of Holdings was, he said, also artificial. Again it was chosen by the lawyers and the accountants to make the agreement work. In his opinion the shares were not worth more than $700 each. He said the value of the shares of the amalgamated company was $3,500 each, not $6,473. The latter amount was also set by the accountants and lawyers. He never received the promissory note in his favour for $94,999.95. This, notwithstanding that the evidence establishes that a substantial part of the $67,058.84 that he assigned to the amalgamated company on January 31, 1984, was included in the debt evidenced by the note.

The agent acting for him at trial showed Bhagat Ram Pallan a statement of the financial position as at December 31, 1984, with comparative figures for 1983, regarding Holdings and the opening balance sheet for the amalgamated company as at January 1, 1984, and he criticized the veracity of both documents.

The evidence of the third appellant, Jaght Ram Pallan, is that he signed the agreement of September 26, 1983, without challenging it on any point, but with the understanding that there would simply be an exchange of the shareholdings. There were lawyers looking after the matter and we did what we were told. He thought the shares of Holdings were worth between $650 and $700 each. When asked if the $58,257 that he assigned to Holdings on January 31, 1984, was credited to his shareholder's loan account, he replied he imagined it was. He also expressly adopted the evidence of Bhagat Ram Pallan, which had been given in his presence.

Each appellant is seeking to contradict the agreement of September 26, 1983, that was carefully prepared by lawyers and accountants acting for them and which was signed by the appellants. The agreement was also executed by four corporations, six other individuals and the executors of two estates, one of whom was the appellant, Bhagat Ram Pallan. In litigation between parties to the agreement this might well have been precluded by the parol evidence rule. It has been held, however, that the rule has no application to appeals under the Income Tax Act. In Salter v. M.N.R., [1947] Ex. C.R. 634; [1947] C.T.C. 29; 2 D.T.C. 918, the appellant sought to contradict the terms of an agreement that he had entered into with the Sun Publishing Company Ltd. regarding the termination of his employment with that company. Mr. Justice Cameron concluded that evidence of the appellant to establish what he alleged was the true nature of the transaction and the real consideration was not excluded. His Lordship said at page 920:

In Phipson on Evidence, 8th Edition, exceptions to the rule are dealt with on page 566 under the heading “Private Documents where inter alios” and at p. 567 it is said:

Where a transaction has been reduced into writing merely by agreement of the parties, intrinsic evidence to contradict or vary the writing is excluded only in proceedings between such parties or their privies, and not in those between strangers, ora party and a stranger; since strangers cannot be precluded from proving the truth by the ignorance, carelessness, or fraud of the parties (R. v. Cheadle, 3 B. & Ad. 833); nor, in proceedings between a party and a stranger, will the former be estopped, since there would be no mutuality. (Emphasis in reasons for judgment) [1]

See also M.N.R. v. Ouellette and Brett, [1971] C.T.C. 121;71 D.T.C. 5094, per Walsh, J. at pages 5102-03 where Salter is cited with apparent approval.

With some exceptions [2] it is trite that on appeals under the Act the appellant must show that the assessments or reassessments are in error. This can be done on a balance of probabilities. Within that formula there can, however, be varying degrees of probability required in order for an appellant to discharge the onus resting on him.

In The Continental Insurance Co. v. Dalton Cartage Co. and McPherson Warehousing Co. and St. Paul Fire & Marine Insurance Co., [1982] 1 S.C.R. 164; 131 D..R. (3d) 559, Dalton Cartage and McPherson Warehousing (the insured) had entered into contracts of insurance with Continental and St. Paul. Under the contract with Continental the insured were insured as a motor truck carrier, bailee or warehouseman for damages to goods while in their custody or control while in transit. Excluded was loss by infidelity by the insured or their employees. The St. Paul policy indemnified the insured against losses which they sustained through any fraudulent or dishonest act committed by their employees.

A temporary driver, one Morkin, who had driven for Dalton on numerous occasions was directed to drive a truck loaded with goods to a warehouse, about eight miles away. The goods were never delivered and the vehicle was found abandoned and empty. Morkin was arrested, charged with theft and acquitted. The value of the lost, and presumably stolen goods, was paid to the owners by Dalton. Laskin, C.J.C., who delivered the judgment of the Court said at pages 168-171 :

The main point in the appeal was the third point raised which was that the trial judge and the Court of Appeal had mis-stated the burden of proof and, indeed, were applying a sliding burden of proof rather than a straight burden of proof on a balance of probabilities. The issue was raised because of the way the trial judge dealt with the provisions respecting fraud and dishonesty in the St. Paul policy and infidelity in the Continental policy. There are two observations on the question of burden of proof by Keith J., as follows (at pp. 82-83 of the Appeal Case):

In order to fix St. Paul with liability, the plaintiff Dalton must satisfy the onus resting upon it, to establish upon the balance of probabilities and by a degree of proof commensurate with the gravity of the allegation that requires proof, namely that the loss was occasioned by a fraudulent or dishonest act on the part of Morkin. The act alleged in the Proof of Loss is theft of the goods. (See Hanes v. Wawanesa Mutual Insurance Co., (1963) S.C.R. 154 [sic] per Ritchie, J., at pp. 160-161 et seq.)

It will be seen at once that in order to escape liability, the same onus of proof rests on The Continental to bring itself within the terms of the specific exclusion, as rests on the Plaintiff Dalton to bring itself within the insuring agreement contained in the St. Paul policy.

Having regard to the paucity of the evidence, am I justified in finding as a fact that Morkin was party to and hence responsible for the theft of the goods? There is no doubt that the goods were stolen, and there is no doubt that Morkin was accused of that theft and acquitted.

Admittedly, the standard of proof that was applicable in the criminal Court was proof beyond a reasonable doubt that Morkin was the thief. The standard of proof in the civil case has been repeatedly held to be somewhat less, and how much less is a matter that depends on all the circumstances and the gravity of the accusation.

Where there is an allegation of conduct that is morally blameworthy or that could have a criminal or penal aspect and the allegation is made in civil litigation, the relevant burden of proof remains proof on a balance of probabilities. So this Court decided in Hanes v. Wawanesa Mutual Insurance Co., [1963] S.C.R. 154. There Ritchie J. canvassed the then existing authorities, including especially the judgment of Lord Denning in Bater v. Bater, [1950] 2 All E.R. 458, at p. 459, and the judgment of Cartwright J., as he then was, in Smith v. Smith and Smedman, [1952] 2 S.C.R. 312, at p. 331, and he concluded as follows (at p. 164):

Having regard to the above authorities, I am of opinion that the learned trial judge applied the wrong standard of proof in the present case and that the question of whether or not the appellant was in a state of intoxication at the time of the accident is a question which ought to have been determined according to the “balance of probabilities”.

It is true that apart from his reference to Bater v. Bater and to the Smith and Smedman case, Ritchie J. did not himself enlarge on what was involved in proof on a balance of probabilities where conduct such as that included in the two policies herein is concerned. In my opinion, Keith J. in dealing with the burden of proof could properly consider the cogency of the evidence offered to support proof on a balance of probabilities and this is what he did when he referred to proof commensurate with the gravity of the allegations or of the accusation of theft, by the temporary driver. There is necessarily a matter of judgment involved in weighing evidence that goes to the burden of proof, and a trial judge is justified in scrutinizing evidence with greater care if there are serious allegations to be established by the proof that is offered. I put the matter in the words used by Lord Denning in Bater v. Bater, supra, at p. 459, as follows;

It is true that by our law there is a higher standard of proof in criminal cases than in civil cases, but this is subject to the qualification that there is no absolute standard in either case. In criminal cases the charge must be proved beyond reasonable doubt, but there may be degrees of proof within that standard. Many great judges have said that, in proportion as the crime is enormous, so ought the proof to be clear. So also in civil cases. The case may be proved by a preponderance of probability, but there may be degrees of probability within that standard. The degree depends on the subject-matter. A civil court, when considering a charge of fraud, will naturally require a higher degree of probability than that which it would require if considering whether negligence were established. It does not adopt so high a degree as a criminal court, even when it is considering a charge of a criminal nature, but still it does require a degree of probability which is commensurate with the occasion.

I do not regard such an approach as a departure from a standard of proof based on a balance of probabilities nor as supporting a shifting standard. The question in all civil cases is what evidence with what weight that is accorded to it will move the Court to conclude that proof on a balance of probabilities has been established.

To my mind where, as here, appellants seek to challenge reassessments of their liability to tax by, in effect, repudiating what they and others have said in an agreement reduced to writing and things done in consequence of that agreement that are evidenced by documents such as the resolutions whereby Holdings and the amalgamated company each offered to purchase its shares from its shareholders; the acceptance of those offers in writing by the appellants; the issuance of promissory notes regarding the shares bought and sold and the assignments of debts arising out of those transactions, they must adduce evidence establishing a high degree of probability that their attacks on the reassessments are valid. Only that would constitute proof commensurate with the gravity of the allegations being made. In my opinion not only are the appellants impugning their own conduct, but also that of the other parties and that of the professional advisers who obviously played a significant role in what was said and done. They are alleging that what was done to realize a final settlement among the members of the family was morally blameworthy in that in large part it was a sham. Further to say that it was never intended that Holdings and the amalgamated company would purchase shares from their shareholders must adversely reflect on the integrity of the lawyers and accountants involved because if that was intended the wording of the agreement and what was done under it contradicts that and could not have occurred by mere oversight. Further it is my view that the appellants cannot discharge the burden resting on them by their oral testimony alone and that is what they are relying on. They were the only witnesses called in support of the appeal and through them the only documents offered in evidence were copies of the agreement of September 26, 1983, the statement of the financial position of Holdings as at December 31, 1984 with comparative figures for 1983 and the opening balance sheet for the amalgamated company as at January 1, 1984, and they disputed the correctness of these documents.

It must be understood that if taxpayers create a documented record of things said and done by them, or by them in concert with others, to achieve a commercial purpose and then seek to repudiate those things with evidence of allegations of conduct that is morally blameworthy in order to avoid an unanticipated assessment to tax, they face a formidable task. And that task will not be accomplished, in the absence of some special circumstance, an example of which does not occur to me, by their oral testimony alone. That evidence must be bolstered by some other evidence that has significant persuasive force of its own. The appellants have not done this.

The appeals are dismissed.

Appeals dismissed.