Horkoff v. The Queen, 97 DTC 621, [1996] 3 CTC 2737 (TCC)

Beaubier J.T.C.C.: — These appeals were heard jointly on common evidence at Calgary, Alberta on August 8, 1996 pursuant to the General Procedure. Both Appellants testified and called their chartered accountant, Larry Shelley. The Respondent called Patricia McCulloch, an employee of Revenue Canada.

The Appellants were assessed on the basis that they received taxable dividends in 1990 in the following amounts:

Edward N. Horkoff: $81,992.70

Marion Horkoff: $78,777.30

They appealed and alleged that they received the dividends in 1991, the year in which they reported the dividends.

The dividends were paid to them by Horkoff Surveys Ltd. (“HSL”). The Appellants’ shares in HSL were sold to DataSpan Technology Inc. (“DSI”). It is the agreements and occurrences respecting this sale which lie at the root of the dispute between the parties.

The chronology is as follows:

1. January 14, 1991 - Horkoffs and DSI signed an offer by DSI to purchase Horkoffs’ shares in HSL. Paragraphs 1, 2 and 3 of the offer read:

January 11, 1991

MR. and MRS. ED HORKOFF 123 Mount Victoria Place S.E. Calgary, Alberta T2Z 1P1

Dear Mr. and Mrs. Horkoff:

Re: OFFER TO PURCHASE ALL ISSUED AND OUTSTANDING SHARES OF HORKOFF SURVEYS LTD. (“HORKOFF’ OR THE “COMPANY”)

The undersigned, DataSpan Technology Inc. (the “Purchaser”) hereby offers to purchase all of the issued and outstanding shares in the capital stock of the Company from Ed Horkoff and Marion Horkoff (collectively referred to as the “Vendors”) for the consideration and on the terms and conditions following:

1. The Purchased Shares

1.1 The shares which are subject to this offer are 100% of the issued and outstanding shares in the capital stock of the Company (the “Purchased Shares”) to be purchased as follows:

(a) effective December 31, 1990, the Purchaser shall purchase 2,475 Class “B” shares from Ed Horkoff, 25 Class “B” shares from Marion Horkoff, and 24 Class “A” shares from Marion Horkoff; and

(b) effective January 1, 1991, the Purchaser shall purchase 51 Class “A”

shares from Ed Horkoff and 25 Class “A” shares from Marion Horkoff.

2. The Purchase Price

2.1 The Purchaser, subject to the terms and conditions of this Agreement, agrees to purchase and the Vendors agree to sell the Purchased Shares for the sum of One Million Dollars ($1,000,000.00) (the “Purchase Price”).

2.2 The Purchase Price shall be satisfied by the Purchaser issuing the Vendors 4,000,000 common shares in the capital stock of the Purchaser (the “Common Shares”) duly registered in the names of the Vendors as follows:

(a) effective December 31, 1990, as to 990,000 common shares to Ed Horkoff and 730,000 common shares to Marion Horkoff; and

(b) effective January 1, 1991, as to 1,530,000 common shares to Ed Horkoff and 750,000 common shares to Marion Horkoff,

being the pro rata holdings of the Vendors in the Company.

2.3 At the Vendor’s sole election, the purchase and sale evidenced by this Agreement shall be effected in such a manner so as to ensure minimum tax liability under the Income Tax Act of Canada (the “ITA”). Should the Vendors so elect:

(a) both parties shall thereafter execute all forms and documents and effect all filings within the time limits prescribed by the ITA necessary to effect a tax- deferred sale of the Purchased Shares pursuant to section 85 of the ITA and the parties hereby elect the Purchase Price as the “proceeds of disposition” and “cost” of the Purchased Shares; and

(b) the parties acknowledge that they consider the Purchase Price to be the fair market value of the Purchased Shares as at the Closing Date. If the aggregate of the fair market value of the Purchased Shares should be determined, whether:

(i) by a tribunal or court of competent jurisdiction,

(ii) by agreement with Revenue Canada, Taxation, or

(iii) otherwise by agreement between the Vendor and the Purchaser,

to be greater or less than the Purchase Price, then the Purchase Price shall be adjusted by being increased or decreased so as to equal the aggregate of the fair market value so determined and the Purchase Price payable pursuant to paragraph 2.1 shall be adjusted accordingly, such adjustments to be effective as of the Closing Date.

3. Closing Date and Effective Date

3.1 The completion of the purchase of the Purchased Shares pursuant to this offer shall occur on January 18, 1991, or such other date as may be agreed to as between the parties (the “Closing Date”), and shall take place at the offices of DataSpan Technology Inc., Suite 400 Aquitaine Tower, 540 - 5th Avenue S.W., Calgary, Alberta. The effective date of the purchase and sale shall be 11:59 p.m. Calgary time on December 31, 1990 in respect of the shares set out in paragraph 2.2(a) above and 1:00 p.m. Calgary time on January 1, 1991, in respect of the shares set out in paragraph 2.2(b) above.

Paragraph 4 contains numerous conditions that both parties had to comply with by closing date. One, that the Horkoffs be released from their bank guarantees on behalf of HSL, was not met and was waived by the Horkoffs at the closing. Paragraph 5 makes these conditions in law which must be complied with by each party at or prior to closing.

2. February 13, 1991, closing occurred and all resolutions and documents were signed, including the resignation of Marion Horkoff as a director of HSL.

3. January 16, 1991 is the date on the share certificates of DSI that the Appellants received on February 13, 1991 at closing.

The Notices of Appeal state that the Horkoffs passed a resolution dated as of December 30, 1990 declaring a dividend which was to be paid no later than May 1, 1991 to the holders of common shares of record at the close of business on December 30, 1990. The Reply admits that the Horkoffs passed a resolution dated December 30, 1990 declaring a dividend. The answer states that the Appellants did not receive a taxable dividend from HSL in the 1990 taxation year. Rather it was received in the 1991 taxation year. On the evidence before the Court, the dividends were declared on February 13, 1991 to be paid to the holders of common shares of record “on the date of this resolution”, (see Exhibit A-l, Tab 18). The actual amount of the dividend was not known until the morning of February 13, 1991.

Thus, on the evidence before the Court:

1. The offer dated January 13, 1991 had specific conditions which had to by complied with before closing. The condition that the Horkoffs’ guarantees must be released was not only a very important condition of the transaction, it is a vital condition in any such contract.

2. No dividend was declared until February 13, 1991.

3. No dividend was paid or transferred to the Appellants until after the amount of the dividend was known and the resolution was passed on February 13, 1991.

4. HSL would not have declared or paid any such dividend, had the sale of its shares to DSI not proceeded on February 13, 1991.

In this case the Respondent proposes to backdate the dividend and the receipt of the dividend to the date fixed in the dividend declaration. However the assessments of the Horkoffs must be based upon the date they received the dividend. Receipt did not occur and could not have occurred in 1990. It occurred in 1991. On the evidence before the Court the dividend was actually paid to the Appellants by a transfer of assets, funds, and a loan in 1991.

The appeals are allowed. These matters are referred to the Minister of National Revenue for reconsideration and reassessment pursuant to these reasons. The Appellants are awarded their party and party costs.

Appeal allowed.