McArthur
T.CJ.:
In
calculating
its
income
for
the
1986,
1987
and
1988
taxation
years,
the
Appellant
included
amounts
of
$599,115,
$1,039,521
and
$669,805,
respectively,
as
deemed
dividends
in
respect
of
the
proceeds
it
received
upon
the
redemption
of
certain
shares:
Deductions
were
claimed
in
those
amounts,
pursuant
to
subsection
112(1)
of
the
Income
Tax
Act
(the
“Act”).
Applying
subsection
55(2)
of
the
Act
the
Minister
reassessed
the
Appellant
in
respect
of
those
taxation
years,
denying
the
deductions
claimed
under
subsection
112(1)
and
adding
to
the
Appellant’s
income
the
amounts
of
$299,557,
$519,760,
and
$446,537,
respectively,
pursuant
to
subsection
55(2).
The
issue
is
whether
subsection
55(2)
applies
to
the
present
circumstances.
Relevant
Facts
Prior
to
July
1983,
the
Appellant
carried
on
a
successful
General
Motors
Automobile
Dealership
under
the
name
Parkway
Chevrolet
Oldsmobile
Cadillac
Inc.
(“Parkway”).
For
personal
reasons
H.T.
Hoy,
the
operating
mind
of
the
Appellant
and
Parkway,
commenced
a
series
of
steps
resulting
in
Pierre
Cloutier
and
the
companies
he
controlled
becoming
the
owner
of
what
had
been
Parkway.
The
entire
transaction
was
structured
to
take
advantage
of
the
redemption
of
shares
to
trigger
subsection
84(3)
deemed
dividends
and
the
deductions
permitted
under
subsection
112(1).
On
July
1,
1983,
Parkway
sold
most
of
its
operating
assets
to
a
numbered
company
later
renamed
Plaza
Chevrolet
Oldsmobile
Cadillac
Inc.
(“Plaza”).
This
transfer
of
assets
was
made
through
the
election
provisions
of
subsection
85(1)
of
the
Act.
Also
on
July
1,
1983,
Plaza
issued
Class
B,
D
and
E
shares
to
the
Appellant.
On
July
2,
1983,
the
Appellant
and
Les
Placements
Pierre
Cloutier
Inc.
(“Cloutier
Inc.”)
entered
into
a
unanimous
shareholder
agreement
(the
“agreement”)
for
the
purpose
of
enabling
Cloutier
Inc.
to
become
the
owner
and
shareholder
of
the
dealership.
Mr.
Hoy
retained
the
ownership
of
the
land
and
buildings
from
which
Plaza
operated,
charging
Plaza
an
annual
rental
of
$467,000
on
a
long
term
lease
providing
for
an
escalation
of
rent.
On
the
same
day
Plaza
issued
Class
A
and
C
shares
to
Cloutier
Inc.
At
that
time,
the
Appellant
retained
99.88%
of
the
voting
rights
of
Plaza.
The
Parkway
dealership
continued
on
business
under
the
name
Plaza
and
under
the
direction
of
Mr.
Cloutier
although
Mr.
Hoy
had
ultimate
control.
Plaza
was
bound
by
two
clauses
of
its
dealership
agreement
with
General
Motors
of
Canada.
The
first
required
that
Plaza
maintain
a
minimum
level
of
net
working
capital,
set
at
$800,000.
The
second
was
a
clause
referred
to
as
“paragraph
3”,
whereby
in
the
event
that
Cloutier
Inc.
failed
to
remedy
a
default
of
any
terms
of
the
dealership
agreement,
thus
resulting
in
its
termination,
Mr.
Hoy
was
named
as
the
successor
for
the
control
and
operation
of
Plaza.
The
“agreement”
also
provided
for
the
redemption
of
the
Class
B,
Class
D,
Class
E,
and
Class
H
shares
held
by
the
Appellant
in
Plaza
in
a
certain
order
and
according
to
various
valuation
mechanisms.
On
January
1,
1984,
the
Appellant
and
Parkway
were
amalgamated,
with
the
Appellant
being
the
continuing
corporation.
From
June
1985
to
March
1988,
Plaza
redeemed
all
its
shares
held
by
the
Appellant
and
paid
$3,317,121
in
the
form
of
dividends
to
the
Appellant.
In
particular,
the
Class
B
shares
were
redeemed
for
a
total
of
$2,315,941.
The
redemption
of
the
Class
B
shares
forms
the
basis
of
the
Minister’s
reassessment
of
the
Appellant.
Position
of
the
Appellant
The
thrust
of
counsel’s
submissions
was
that
the
two
corporations,
the
Appellant
and
Cloutier
Inc.,
were
dealing
with
each
other
at
non-arm’s
length,
either
factually
or
legally
and
as
such,
subsection
55(2)
does
not
apply
pursuant
to
the
exceptions
in
subsections
55(3)
and
55(5).
Counsel
presented
three
arguments:
(1)
Subsection
55(2)
does
not
apply
because
based
on
the
facts,
there
was
a
nonarm’s
length
relationship
between
Mr.
Hoy
and
Mr.
Cloutier
and
between
the
companies
which
they
controlled.
(2)
Under
the
provisions
of
the
Act
at
law,
these
companies
are
all
deemed
to
be
related
parties
and
are
therefore
deemed
not
to
deal
at
arm’s
length.
(3)
This
is
not
the
kind
of
income
tax
paid
dollars
from
annual
earnings
that
should
be
subject
to
the
provisions
of
subsection
55(2).
Expanding
on
these
arguments,
the
Appellant
submitted
the
following:
Factual
Non-Arm’s
Length
Transaction
Subsection
55(3)
provides
that
subsection
55(2)
does
not
apply
to
a
dividend
received
by
a
corporation
unless
the
parties
were
dealing
at
arm’s
length.
Messrs.
Hoy
and
Cloutier
acted
so
interdependently
that
they
did
not
deal
at
arm’s
length
and
the
corporations
they
controlled
were
not
dealing
at
arm’s
length
with
each
other.
Before
the
series
of
transactions
started
and
even
after
they
were
meant
to
have
ended
factually,
they
did
not
deal
in
relation
to
Plaza
at
arm’s
length.
Mr.
Hoy
chose
Mr.
Cloutier
to
take
over
his
ownership
of
the
dealership
over
other
candidates
because
Mr.
Cloutier
was
reputed
to
be
a
very
able
young
man
who,
at
the
age
of
27
or
28,
had
earned
a
very
positive
reputation
in
the
industry.
Mr.
Cloutier
was
offered
the
same
favourable
terms
and
conditions
for
Plaza
that
Mr.
Hoy
offered
his
daughter
for
another
adjoining
dealership
at
Parkway
that
Mr.
Hoy
owned
or
controlled.
Mr.
Cloutier
was
to
pay
for
the
dealership
from
profits,
a
common
practice
in
the
takeover
of
General
Motors
franchises
which
is
referred
to
as
an
“earn-out”.
Mr.
Hoy
continued
to
give
counsel
and
concessions
to
Mr.
Cloutier
even
after
the
shares
had
been
redeemed.
There
was
something
more
to
this
than
a
relationship
in
which
each
party
is
looking
out
for
his
own
best
interests.
During
the
time
that
Mr.
Hoy
and
Mr.
Cloutier
were
shareholders
of
Plaza,
Mr.
Hoy
monitored
the
management
of
Plaza,
although
Mr.
Cloutier
ran
the
day-to-day
operations.
“Paragraph
3”
of
the
dealership
agreement
between
Plaza
and
General
Motors
provided
that,
if
Mr.
Cloutier
did
not
meet
expectations,
Mr.
Hoy
would
have
had
to
re-take
control
of
the
dealership.
Following
the
final
redemption
of
the
Appellant’s
shares,
Mr.
Hoy’s
support
of
Mr.
Cloutier
was
still
necessary.
Since
Mr.
Hoy
remained
responsible
pursuant
to
“paragraph
3”,
he
supported
Mr.
Cloutier
with
favourable
terms,
such
as
lowering
Plaza’s
monthly
rental
payments
during
difficult
times
in
the
early
1990s
and
permitting
the
subordination
of
his
company’s
collateral
security
on
inventory
in
favor
of
a
bank.
Counsel
added
that
Mr.
Hoy
was
in
a
position
to
effectively
dictate
the
terms
of
the
bargain
when
he
approached
Mr.
Cloutier
and
it
was
a
great
opportunity
for
Mr.
Cloutier,
something
that
he
probably
would
not
have
dreamed
would
come
his
way.
He
would
have
been
imprudent
not
to
do
it
and
it
was
achieved
through
a
technique
known
to
General
Motors
dealers.
Mr.
Hoy
retained
the
ultimate
control
of
both
parties
to
the
agreement
of
July
1,
1983
until
the
final
shares
had
been
redeemed.
The
essential
purpose
of
the
“agreement”
was
to
enable
Cloutier
to
become
owner
of
the
dealership.
Mr.
Hoy
and
Mr.
Cloutier
were
not
related
in
the
familial
sense.
Position
of
the
Appellant
applying
provisions
of
the
Act
A
plain
reading
of
the
Act
reveals
that
the
Appellant,
Cloutier
Inc.
and
Plaza
were
legally
related
during
the
period
in
question
and,
therefore,
they
were
not
dealing
with
each
other
at
arm’s
length.
The
Appellant
was
related
to
Plaza,
pursuant
to
subparagraph
251(2)(b)(i)
of
the
Act,
because
it
controlled
Plaza
through
a
majority
ownership
of
the
voting
shares.
Cloutier
Inc.
was
also
related
to
Plaza,
pursuant
to
paragraph
251(5)(b),
because
Cloutier
Inc.
had
a
right
to
cause
the
redemption
of
the
Appellant’s
shares
and,
thus,
to
control
the
voting
rights
of
Plaza.
Since
all
three
corporations
are
related
to
each
other,
paragraph
251(1)(a)
deems
that
they
are
not
dealing
at
arm’s
length.
Nothing
to
be
Taxed
The
Appellant
claims
that
the
redemptions
were
made
from
after-tax
profits,
not
from
gains
on
shares
issued
for
the
sale
of
assets.
Subsection
55(2)
is
concerned
with
catching
unrealized
capital
gains,
not
gains
from
after-tax
profits.
The
assets
included
in
the
July
1,
1983
transfer
were
essentially
just
equipment
and
furniture,
and
not
of
the
type
that
has
latent
capital
gains,
such
as
real
estate.
There
was
no
monetary
allocation
for
goodwill
because
the
Appellant
did
not
control
the
assignment
of
the
General
Motors
dealership.
Only
General
Motors
had
control
over
the
assignment.
The
interaction
between
the
redemption
provisions
and
the
working
capital
requirements
results
in
the
fact
that
any
increase
in
the
redemption
value
of
the
Class
B
shares
was
the
product
of
Plaza’s
after-tax
profitability.
Where
the
working
capital
requirement
was
met,
accumulated
dividends
still
had
to
be
paid
prior
to
any
redemption.
The
redemptions
were
dependent
upon
there
being
a
surplus
of
working
capital,
not
whether
the
value
of
Plaza’s
fixed
assets
appreciated
and
therefore
subsection
55(2)
does
not
apply.
Position
of
the
Respondent
Subsection
55(2)
prevents
the
avoidance
of
tax
on
capital
gains
by
taxpayers
taking
advantage
of
subsections
84(3)
and
112(1)
in
order
to
bring
about
tax-free
dividends
as
opposed
to
taxable
capital
gains
upon
the
disposition
of
shares.
The
Appellant
structured
a
series
of
transactions
to
convert
what
otherwise
would
be
taxable
capital
gains
into
tax-free
dividends.
Subsection
55(2)
was
enacted
to
prevent
this.
One
must
consider
the
transactions
col-
lectively
as
a
series
and
not
individually.
The
series
of
transactions
started
in
1983
and
were
concluded
in
1988
with
the
last
share
redemption.
From
the
evidence
before
the
Court
one
must
conclude
that
the
parties
to
the
“agreement”
were
dealing
at
arms’
length.
Mr.
Hoy,
directing
the
Appellant,
wanted
to
sell
the
business
and
Mr.
Cloutier,
directing
Cloutier
Inc.,
wanted
to
purchase
it.
There
were
two
directing
minds.
While
they
had
a
common
objective,
being
the
sale
and
purchase
of
the
automobile
dealership,
it
was
a
transaction
of
approximately
$4,000,000
and
it
is
obvious
that
the
vendor
sought
a
high
purchase
price
and
the
purchaser
sought
a
low
purchase
price.
Both
parties
had
separate,
conflicting
interests
to
protect
in
arriving
at
a
common
goal.
One
of
the
results
of
the
series
of
transactions
that
occurred
with
the
redemption
of
the
Class
B
shares
was
a
significant
reduction
in
the
capital
gain
that,
but
for
the
subsection
84(3)
dividend,
would
have
been
realized
on
the
disposition
at
fair
market
value
of
the
shares
immediately
before
the
dividend.
Furthermore,
the
capital
gain
that
would
have
been
realized
for
the
applicable
period
could
reasonably
be
considered
to
be
attributable
to
anything
other
than
the
income
earned
or
realized
by
Plaza
for
that
period.
The
capital
gain
that
would
have
otherwise
resulted,
but
for
the
dividend,
is
as
follows:
|
March
21,
|
|
March
16,
|
March
17,
|
|
1986
|
|
1987
|
|
1988
|
F.M.V.
of
Class
B
|
$
602,365
|
$
1,042,531
|
$
671,045
|
shares
of
Plaza
|
|
A.C.B.
|
($
|
3,250)
|
($
|
3,010)
|
($
|
1,240
|
Capital
gain
|
$
599,115
|
$
1,039,521
|
$
669,805
|
The
income
earned
or
realized
from
Plaza’s
date
of
incorporation
(June
30,
1983)
until
the
commencement
of
the
series
of
transactions
(July
2,
1983)
is
equal
to
nil.
Also,
the
Appellant,
being
connected
to
Plaza
at
the
relevant
time,
was
not
subject
to
a
Part
IV
tax
on
the
dividend
it
received
from
Plaza,
pursuant
to
subsection
186(4).
Legislation
Subsection
55(2)
is
an
anti-avoidance
provision.
Subsection
55(3)
provides
that
subsection
55(2)
does
not
apply
to
parties
that
are
not
dealing
at
arm’s
length.
It
also
ensures
that
of
subsection
55(2)
does
not
apply
to
an
internal
reorganization
of
companies
where
the
ownership
of
the
corpora-
tion
does
not
change.
It
is
the
arm’s
length
part
of
subsection
55(3)
with
which
we
are
concerned
in
this
appeal.
During
the
relevant
period,
the
applicable
sections
of
the
Act
read
as
follows:
55.
(2)
Deemed
proceeds
or
capital
gain
-
Where
a
corporation
resident
in
Canada
has
after
April
21,
1980
received
a
taxable
dividend
in
respect
of
which
it
is
entitled
to
a
deduction
under
subsection
112(1)
or
138(6)
as
part
of
a
transaction
or
event
or
a
series
of
transactions
or
events
(other
than
as
part
of
a
series
of
transactions
or
events
that
commenced
before
April
22,
1980),
one
of
the
purposes
of
which
(or,
in
the
case
of
a
dividend
under
subsection
84(3),
one
of
the
results
of
which)
was
to
effect
a
significant
reduction
in
the
portion
of
the
capital
gain
that,
but
for
the
dividend,
would
have
been
realized
on
a
disposition
at
fair
market
value
of
any
share
of
capital
stock
immediately
before
the
dividend
and
that
could
reasonably
be
considered
to
be
attributable
to
anything
other
than
income
earned
or
realized
by
any
corporation
after
1971
and
before
the
transaction
or
event
or
the
commencement
of
the
series
of
transactions
or
events
referred
to
in
paragraph
(3)(a),
notwithstanding
any
other
section
of
this
Act,
the
amount
of
the
dividend
(other
than
the
portion
thereof,
if
any,
subject
to
tax
under
Part
IV
that
is
not
refunded
as
a
consequence
of
the
payment
of
a
dividend
to
a
corporation
where
the
payment
is
part
of
the
series
of
transactions
or
events)
(a)
shall
be
deemed
not
to
be
a
dividend
received
by
the
corporation;
(b)
where
a
corporation
has
disposed
of
the
share,
shall
be
deemed
to
be
proceeds
of
disposition
of
the
share
except
to
the
extent
that
it
is
otherwise
included
in
computing
such
proceeds;
and
(c)
where
a
corporation
has
not
disposed
of
the
share,
shall
be
deemed
to
be
a
gain
of
the
corporation
for
the
year
in
which
the
dividend
was
received
from
the
disposition
of
a
capital
property.
(3)
Exception
-
Subsection
(2)
does
not
apply
to
any
dividend
received
by
a
corporation,
(a)
unless
such
dividend
was
received
as
part
of
a
transaction
or
event
or
a
series
of
transactions
or
events
that
resulted
in
(i)
a
disposition
of
any
property
to
a
person
with
whom
that
corporation
was
dealing
at
arm’s
length,
or
(ii)
a
significant
increase
in
the
interest
in
any
corporation
of
any
person
with
whom
the
corporation
that
received
the
dividend
was
dealing
at
arm’s
length;
or
(4)
Arm’s
length
dealings
—
Where
it
may
reasonably
be
considered
that
the
principal
purpose
of
one
or
more
transactions
or
events
was
to
cause
two
or
more
persons
to
be
related
or
to
not
deal
with
each
other
at
arm’s
length,
or
to
cause
one
corporation
to
control
another
corporation,
so
as
to
make
subsection
(2)
inapplicable,
for
the
purposes
of
this
section,
those
persons
shall
be
deemed
not
to
be
related
or
shall
be
deemed
to
deal
with
each
other
at
arm’s
length,
or
the
corporation
shall
be
deemed
not
to
control
the
other
corporation,
as
the
case
may
be.
25].
Arm’s
length
-
(1)
For
the
purposes
of
this
Act,
(a)
related
persons
shall
be
deemed
not
to
deal
with
each
other
at
arm’s
length;
and
(b)
it
is
a
question
of
fact
whether
persons
not
related
to
each
other
were
at
a
particular
time
dealing
with
each
other
at
arm’s
length.
(2)
Definition
of
“related
persons"
-
For
the
purpose
of
this
Act,
“related
persons”,
or
persons
related
to
each
other,
are
(b)
a
corporation
and
(i)
a
person
who
controls
the
corporation,
if
it
is
controlled
by
one
person,
For
the
1988
taxation
year,
there
are
two
versions
of
the
Act,
the
58th
and
59th
editions.
These
versions
differ
in
respect
to
pararagraph
251(5)(b),
the
relevance
of
which
is
outlined
below.
In
the
58th
edition
of
the
Act,
the
relevant
paragraph
is
as
follows:
251(5)
Control
by
related
groups,
options,
etc.
For
the
purposes
of
paragraph
125(7)(b),
subsection
(2)
and
section
256,
(b)
a
person
who
had
a
right
under
contract,
in
equity
or
otherwise,
either
immediately
or
in
the
future
and
either
absolutely
or
contingently,
to,
or
to
acquire,
shares
in
a
corporation,
or
to
control
the
voting
rights
of
shares
in
a
corporation,
shall,
except
where
the
contract
provided
that
the
right
is
not
exercisable
until
the
death
of
an
individual
designated
therein,
be
deemed
to
have
has
the
same
position
in
relation
to
the
control
of
the
corporation
as
if
he
owned
the
shares;
and
In
the
59th
edition
of
the
Act,
the
relevant
paragraph
is
as
follows:
257(5)
Control
by
related
groups,
options,
etc.
For
the
purposes
of
paragraph
125(7)(b)
and
subsection
(2),
(b)
a
person
who
has
a
right
under
a
contract,
in
equity
or
otherwise,
either
immediately
or
in
the
future
and
either
absolutely
or
contingently,
(ii)
to
cause
a
corporation
to
redeem,
acquire
or
cancel
any
shares
of
its
capital
stock
owned
by
other
shareholders
of
the
corporation
shall,
except
where
the
right
is
not
exercisable
until
the
death,
bankruptcy
or
permanent
disability
of
an
individual
designated
therein,
be
deemed
to
have
the
same
position
in
relation
to
the
control
of
the
corporation
as
if
the
shares
were
redeemed,
acquired
or
canceled
by
the
corporation;
and
Analysis
The
majority
of
the
Appellant’s
submissions
were
directed
toward
establishing
that
the
Appellant
and
Cloutier
Inc.
were
not
dealing
at
arms’
length.
In
the
reasons
that
follow,
I
come
to
the
conclusion
that
they
were
dealing
with
one
another
at
arm’s
length.
(A)
Were
the
Appellant
and
Cloutier
Inc.
Dealing
at
Arm
s
Length?
The
following
tests
are
much
used
in
determining
whether
parties
to
a
transaction
are
factually
dealing
at
arm’s
length:
(a)
the
existence
of
a
common
mind
which
directs
the
bargaining
for
both
parties
to
the
transaction,
(b)
parties
to
a
transaction
acting
in
concert
without
separate
interests,
and
(c)
“de
facto”
control.
(a)
The
common
mind
test
was
discussed
in
the
decision
of
Cattanach,
J.
in
Minister
of
National
Revenue
v.
Merritt,
(1969),
69
D.T.C.
5159
(Can.
Ex.
Ct.).
At
pages
5165-66
he
said:
In
my
view,
the
basic
premise
on
which
this
analysis
is
based
is
that,
where
the
“mind”
by
which
the
bargaining
is
directed
on
behalf
of
one
party
to
a
contract
is
the
same
“mind”
that
directs
the
bargaining
on
behalf
of
the
other
party,
it
cannot
be
said
that
the
parties
were
dealing
at
arm’s
length.
In
other
words
where
the
evidence
reveals
that
the
same
person
was
“dictating”
the
“terms
of
the
bargain”
on
behalf
of
both
parties,
it
cannot
be
said
that
the
parties
were
dealing
at
arm’s
length.
(b)
The
acting
in
concert
test
illustrates
the
importance
of
bargaining
between
separate
parties,
each
seeking
to
protect
his
own
independent
interest.
The
Appellant
referred
the
Court
to
the
decision
of
the
Exchequer
Court
in
Swiss
Bank
Corp.
v.
Minister
of
National
Revenue,
(1971),
71
D.T.C.
5235
(Can.
Ex.
Ct.).
At
page
5241
Thurlow
J.
said:
To
this
I
would
add
that
where
several
parties
--
whether
natural
persons
or
corporations
or
a
combination
of
the
two
-
act
in
concert,
and
in
the
same
interest,
to
direct
or
dictate
the
conduct
of
another,
in
my
opinion
the
“mind”
that
directs
may
be
that
of
the
combination
as
a
whole
acting
in
concert
or
that
of
any
of
them
in
carrying
out
particular
parts
or
functions
of
what
the
common
object
involves.
Moreover
as
I
see
it
no
distinction
is
to
be
made
for
this
purpose
between
persons
who
act
for
themselves
in
exercising
control
over
another
and
those
who,
however
numerous,
act
through
a
representative.
On
the
other
hand
if
one
of
several
parties
involved
in
a
transaction
acts
in
or
represents
a
different
interest
from
the
others
the
fact
that
the
common
purpose
may
be
to
so
direct
the
acts
of
another
as
to
achieve
a
particular
result
will
not
by
itself
serve
to
disqual-
ify
the
transaction
as
one
between
parties
dealing
at
arm’s
length.
The
Sheldon’s
Engineering
case,
1955
S.C.R.
637
[55
DTC
1110],
as
I
see
it,
is
an
instance
of
this.
(c)
With
reference
to
the
third
test
it
may
be
noted
that
the
existence
of
an
arm’s
length
relationship
is
excluded
when
one
of
the
parties
to
the
transaction
under
review
has
de
facto
control
of
the
other.
In
this
regard
reference
may
be
made
to
the
decision
of
the
Federal
Court
of
Appeal
in
Robson
Leather
Co.
v.
Minister
of
National
Revenue,
(1977),
77
D.T.C.
5106
(Fed.
C.A.).
I
will
apply
these
tests
to
the
present
facts.
The
Appellant
had
the
burden
of
establishing
that
arm’s
length
bargaining
and
conduct
was
not
present
during
the
transfer
of
control
of
Plaza
from
Mr.
Hoy
to
Mr.
Cloutier.
No
evidence
was
given
by
anyone
who
had
advised
the
parties
to
this
transaction,
such
as
accountants
or
lawyers.
The
only
evidence
adduced
was
from
Mr.
Hoy
who
stated
that
he
wanted
to
sell
the
dealership
and
found
a
willing
and
very
capable
purchaser
in
Mr.
Cloutier.
Common
sense
leads
me
to
conclude
that
the
parties
were
price-sensitive.
Of
importance
in
establishing
that
the
vendor
and
purchaser
dealt
with
each
other
at
arm’s
length
is
of
course
the
fact
that
Mr.
Cloutier
did
not
have
to
purchase
Plaza
nor
did
Mr.
Hoy
have
to
sell
to
him.
Each
party
had
his
or
its
own
individual
needs.
Mr.
Hoy
did
not
make
all
of
the
decisions
for
both
parties.
While
both
wanted
to
make
money,
Mr.
Hoy
wanted
to
sell
the
automobile
business
and
Mr.
Cloutier
wanted
to
purchase
it.
No
one
was
obligated
to
act.
Each
participant
was
looking
after
his
or
its
own
interests
while
having
a
common
goal.
While
Mr.
Hoy
may
have
offered
favorable
terms
to
Mr.
Cloutier,
one
cannot
conclude
from
this
that
Mr.
Hoy
directed
the
bargaining
of
the
terms
on
behalf
of
both
parties.
There
was
no
reason
for
Mr.
Cloutier
to
have
agreed
to
terms
which
were
inopportune
to
him.
Messrs.
Hoy
and
Cloutier
are
very
able
businessmen
who
are
not
related
to
each
other
in
a
familial
way.
One
was
at
the
end
of
a
successful
career
and
the
other
beginning
one.
Mr.
Cloutier
was
under
no
obligation
to
accept
the
terms
of
the
“agreement”
which
obviously
resulted
from
independent
bargaining.
They
were
not
acting
in
concert.
The
transaction
was
not
unilaterally
imposed
upon
Mr.
Cloutier.
In
providing
concessions
and
business
advice
to
Mr.
Cloutier
and
Plaza,
Mr.
Hoy’s
course
of
conduct
was
not
inconsistent
with
that
of
a
normal
arm’s
length
business
relationship.
The
existence
of
a
common
goal
should
not
be
equated
with
having
a
common
interest.
Although
Mr.
Hoy
and
Mr.
Cloutier
shared
a
common
goal
in
seeking
to
further
the
success
of
Plaza
in
order
to
finance
the
redemption
of
shares,
distinct
interests
were
to
be
served
in
so
doing.
Mr.
Hoy
sought
to
divest
himself
of
the
dealership
and
Mr.
Cloutier
sought
to
attain
full
ownership.
It
is
not
uncommon
for
concessions
to
be
made
in
business
dealings,
particularly
in
circumstances
such
as
these,
where
one
party
has
an
interest
in
the
continued
financial
well-being
of
another.
While
Mr.
Hoy
still
controlled
the
Appellant,
he
remained
bound
by
“paragraph
3”of
the
agreement.
Following
the
divestiture
of
his
ownership
share,
he
continued
to
have
a
financial
stake
through
the
leasing
of
the
premises
while
still
remaining
bound
by
“paragraph
3”.
Therefore,
Mr.
Cloutier’s
success
was
in
the
best
interest
of
Mr.
Hoy.
Based
on
the
facts
one
must
conclude
that
the
Appellant
and
Cloutier
Inc.
dealt
at
arm’s
length.
There
is
insufficient
evidence
before
the
Court
to
conclude
that
the
actions
of
the
Appellant
and
Cloutier
Inc.
in
negotiating
the
share
sale
transaction
were
governed
by
anything
but
their
respective
perceptions
of
their
own
self-interest.
The
fact
that
the
tax
savings
potentially
accruing
to
the
Appellant
as
a
consequence
of
the
sale,
formed
the
boundaries
within
which
the
sale
price
might
be
negotiated,
does
not
suggest
that
the
Appellant
and
Cloutier
Inc.
acted
in
concert.
Buyer
and
seller
do
not
act
in
concert
simply
because
the
agreement
which
they
seek
to
achieve
can
be
expected
to
benefit
both.
In
the
present
case
the
Appellant’s
shares
were
redeemed
by
Plaza
in
a
gradual
and
chronological
manner,
as
dictated
by
the
terms
of
the
“agreement”.
Until
all
shares
were
redeemed,
Mr.
Hoy
had
the
right
to
receive
$40,000
in
expenses
and
was
given
the
use
of
two
cars.
Both
these
advantages
were
withdrawn
when
he
ceased
being
a
director
of
Plaza.
While
it
is
not
determinative
of
my
decision,
I
note
that
no
evidence
was
given
to
corroborate
the
self-serving
evidence
of
Mr.
Hoy.
The
question
of
whether
the
impugned
transaction
was
conducted
at
arm’s
length
is
the
substantive
issue
before
this
Court.
Neither
Mr.
Cloutier
nor
any
of
his
advisers
regarding
this
transaction
were
made
available
to
corroborate
Mr.
Hoy’s
evidence.
It
strains
one’s
common
sense
not
to
conclude
that
such
evidence
may
have
adversely
affected
Mr.
Hoy’s
cause.
Were
the
Appellant
and
Cloutier
Inc.
Legally
Related
Persons?
In
the
event
this
Court
found
that
the
parties
were
factually
dealing
at
arm’s
length,
the
Appellant
submitted,
in
the
alternative,
that
pursuant
to
paragraph
251(5)(b)
of
the
Act
they
are
deemed
at
law
to
be
related
persons
and,
thus,
they
were
dealing
at
non-arm’s
length.
The
relevant
section
was
amended
in
1988
to
include
in
subparagraph
251(5)(&)(ii).
Both
are
reproduced
earlier
in
these
reasons.
The
Appellant
submitted
that
the
amended
59th
version
of
the
Act
applies
to
the
present
appeals.
I
accept
the
argument
of
the
Respondent
that
the
58th
version
of
the
Act
is
the
relevant
one.
In
any
event,
I
do
not
believe
that
either
version
assists
the
Appellant’s
position.
Immediately
after
the
59th
version,
being
paragraphs
251(5)(a),
(b)
and
(c),
is
the
history
of
this
legislation
which
reads
in
part
as
follows:
That
portion
of
subsec.
251(5)
preceding
para.
(c)
substituted
by
1988,
c.
55,
subsec.
190(1)
applicable
(a)
for
taxation
years
commencing
after
1988,
and
I
interpret
this
to
mean
that
the
application
of
the
59th
edition
commences
in
1989.
The
present
appeals
are
for
the
1986,
1987
and
1988
taxation
years.
Applying
the
earlier
edition
to
the
present
appeal,
I
find
the
Appellant’s
argument
fails.
Paragraph
251(5)(b)
includes
the
words
“a
person
who
has
a
right
under
a
contract
...
(i)
to
acquire
shares
in
a
corporation...”.
Cloutier
Inc.
did
not
have
an
unrestricted
right
under
contract
to
acquire
the
Appellant’s
shares
in
Plaza.
It
had
a
right
of
redemption
under
a
formula
contained
in
the
“agreement”.
The
majority
of
voting
shares
of
Plaza
were
not
turned
over
to
Cloutier
Inc.
until
all
of
the
shares
had
been
redeemed.
The
“agreement”
contained
a
mandatory
redemption
clause.
The
redemption
was
contractual
and
in
no
way
permitted
Cloutier
Inc.
to
exercise
a
redemption
arbitrarily.
Thus,
Cloutier
Inc.
did
not
have
the
right
to
acquire
the
shares
of
the
Appellant
in
a
manner
that
would
meet
the
requirements
of
subsection
251(5).
In
addition,
subsection
55(4)
would
apply
to
negate
a
finding
that
Plaza
and
Cloutier
Inc.
are
deemed
related
pursuant
to
the
interconnecting
paragraphs
251(l)(a),
251(5)(b)
and
subparagraph
251(2)(t)(i).
Subsection
55(4)
reads
as
follows:
Where
it
may
reasonably
be
considered
that
the
principal
purpose
of
one
or
more
transactions
or
events
was
to
cause
two
or
more
persons
to
be
related
or
to
not
deal
with
each
other
at
arm’s
length,
or
to
cause
one
corporation
to
control
another
corporation,
so
as
to
make
subsection
(2)
inapplicable,
for
the
purposes
of
this
section,
those
persons
shall
be
deemed
not
to
be
related
or
shall
be
deemed
to
deal
with
each
other
at
arm’s
length
or
the
corporation
shall
be
deemed
not
to
control
the
other
corporation,
as
the
case
may
be.
Mr.
Hoy
continued
to
exercise
full
voting
control
over
Plaza
until
the
final
redemption
took
place.
What
would
otherwise
be
an
arm’s
length
sale
of
shares,
either
as
a
single
transaction
or
as
a
series
of
transactions
over
time,
had
been
carefully
structured
so
as
to
cause
the
parties
to
be
related
over
the
course
of
the
series.
Although
the
redemption
mechanism
was
structured
so
as
to
ensure
compliance
with
the
working
capital
requirement
set
by
General
Motors,
there
is
no
reason
why
this
could
not
have
been
achieved
through
a
direct
sale
of
shares
by
the
Appellant
to
Cloutier
Inc.
I
conclude
that
the
share
redemption
was
structured
to
circumvent
the
application
of
subsection
55(2).
Does
Subsection
55(2)
apply
to
the
Redemption
of
the
Class
B
Shares
Held
by
the
Appellant?
The
parties
have
made
submissions
on
the
issue
of
the
timing
of
subsection
55(2),
particularly
as
to
whether
the
subsection
applies
at
the
end
of
an
individual
transaction
or
solely
at
the
end
of
a
series
of
transactions.
The
subsection
clearly
states
that
it
applies
to
taxable
dividends
that
are
entitled
to
a
deduction
under
subsections
112(1)
or
138(6)
and
that
are
part
of
a
transaction
or
a
series
of
transactions
that
had
a
purpose
or
effect
of
reducing
the
capital
gain
that,
but
for
the
dividend,
would
have
resulted.
In
the
present
case,
the
facts
are
clear
that
there
was
a
series
of
transactions
which
was
aimed
at
gradually
reducing
Mr.
Hoy’s
holdings
in
Plaza
while
gradually
increasing
Mr.
Cloutier’s
ownership
stake
through
the
redemptions
of
the
shares
in
Plaza
held
by
the
Appellant.
That
series
began
on
July
2,
1983,
when
Cloutier
Inc.
subscribed
to
shares
of
Plaza.
The
share
redemptions
are
not
to
be
considered
individually
but
taken
as
one
at
the
conclusion
of
the
series
of
transactions.
Sarchuk
J.,
in
454538
Ontario
Ltd.
v.
Minister
of
National
Revenue,
(1993),
93
D.T.C.
427
(T.C.C.),
stated
at
page
431:
...it
seems
reasonable
to
conclude
that
in
order
for
the
events
to
form
part
of
a
series
they
must
follow
each
other
in
time
and
must
somehow
be
logically
or
reasonably
connected
to
one
another.
This
reasoning
can
be
applied
to
the
present
facts
and
leads
one
to
the
conclusion
that
subsection
55(2)
applies
at
the
end
of
the
series
of
redemptions
in
1988.
As
previously
stated,
subsection
55(2)
is
aimed
at
preventing
the
avoidance
of
tax
on
what
would
otherwise
be
a
capital
gain
where
an
inter-corporate
dividend
is
issued.
Subsection
84(3)
deems
that
upon
a
corporation’s
redemption
of
its
capital
stock,
the
corporation
is
deemed
to
have
paid
a
dividend
at
that
time.
Subsection
112(1)
permits
a
corporation
to
deduct
an
amount
equal
to
any
taxable
dividends
received
from
a
taxable
Canadian
corporation.
Subsection
55(2),
in
turn,
catches
transactions
where
subsections
84(3)
and
112(1)
would
otherwise
apply,
treating
what
would
normally
be
a
tax-free
inter-corporate
dividend
as
a
capital
gain.
The
Appellant
argued
that
subsection
55(2)
is
not
concerned
with
gains
arising
from
after-tax
profits
but
rather,
it
is
meant
to
catch
unrealized
capital
gains
arising
from
the
appreciation
of
fixed
assets.
I
disagree.
The
source
of
the
gain
is
irrelevant,
unless
it
could
reasonably
be
considered
to
be
attributable
to
income
earned
by
any
corporation
between
1971
and
the
time
that
the
transaction
or
series
of
transactions
commence.
In
this
instance
that
time
is
July
1983.
The
Appellant
conceded
that
Plaza
earned
no
income
from
the
time
of
its
incorporation
on
June
30,
1983
to
July
2,
1983.
On
July
1,
1983,
Parkway
sold
most
of
its
operating
assets
to
Plaza
for
a
total
value
of
$4,864,846.34.
Subsequently,
the
Appellant
and
Cloutier
Inc.
subscribed
to
shares
of
Plaza
for
a
total
consideration
of
$800,000,
which
enabled
Plaza
to
meet
the
working
capital
requirements
set
by
General
Motors.
At
that
time,
Class
B,
Class
D
and
Class
E
shares
were
issued
to
the
Appellant.
The
Class
D
and
Class
E
shares
held
by
the
Appellant
were
later
redeemed
for
an
amount
equal
to
their
paid-up
capital.
The
Class
B
shares
held
by
the
Appellant,
meanwhile,
were
redeemed
between
March
21,
1986,
and
March
17,
1988,
for
a
total
consideration
of
$2,315,941,
resulting
in
a
net
gain
of
$2,308,441.
The
redemption
mechanism
was
not
essential
if
the
Appellant’s
goals
were
as
stated,
namely
to
conduct
a
gradual
earn-out
which
would
enable
Cloutier
Inc.
to
assume
ownership
of
Plaza
at
a
rate
which
it
could
afford
while
conforming
to
General
Motors
working
capital
requirements.
Similar
ends
could
have
been
met
if
Cloutier
Inc.
simply
bought
the
Appellant’s
shares
in
Plaza
over
a
gradual
period,
whenever
it
could
afford
to
do
so.
A
sale
of
shares,
however,
would
have
resulted
in
capital
gains
which
would
have
been
taxable
in
the
hands
of
the
Appellant,
in
the
amounts
of
$599,115
in
1986,
$1,039,521
in
1987
and
$669,805
in
1988.
The
Appellant
chose
a
route
which
would
allow
it
to
divest
itself
of
its
shares
in
Plaza
by
receiving
tax-free
dividends.
I
find
that
the
Minister
correctly
applied
subsection
55(2)
which
is
designed
to
capture
transactions
such
as
in
this
case
and,
as
such,
prevent
avoidance
of
taxable
capital
gains.
The
appeals
are
dismissed
with
costs.
Appeal
dismissed.