Appleby v. M.N.R., [1975] 2 SCR 805

Supreme Court of Canada

Appleby v. M.N.R., [1975] 2 S.C.R. 805

Date: 1974-10-01

Jack Appleby Appellant;

and

Minister of National Revenue Respondent.

1974: January 30; 1974: October 1.

Present: Martland, Judson, Ritchie, Pigeon and de Grandpré JJ.

ON APPEAL FROM THE FEDERAL COURT OF APPEAL

Taxation—Income tax—Prospector’s exemption—Sale of mining shares to public—Campaign by company controlled by one shareholder—Shareholder sold his own shares during the campaign—Whether campaign carried on by shareholder—Income Tax Act, R.S.C. 1952, c. 148, ss. 83(3) and (4).

The appellant is a mining companies promoter. As a result of arrangements made with a prospector to whom he advanced money, he became the owner of claims which he sold to newly incorporated companies, in consideration of the issue of shares some of which were free vendor shares. He also caused to be incorporated as a dealer in securities J. Appleby Securities Ltd., of which he was president and the beneficial owner of all the issued shares.

The securities company obtained the required licence and entered into underwriting agreements with the mining companies. Distribution to the public was made by usual promotion methods and arrangements were effected with broker-dealers W.D. Latimer Company Limited, for supporting the market. When he saw fit, appellant disposed of his free vendor shares. J. Appleby Securities Ltd. had nothing to do with such disposition. Appellant realized substantial profits which were assessed as income. The Minister contended that, because of s. 83(4)(a), appellant had lost the right to exemption contained in s. 83(3) of the Income Tax Act, as a result of his activities in the campaign by J. Appleby Securities Ltd. to sell shares of the mining Companies to the public. Appellant’s appeal was dismissed by both divisions of the Federal Court. Hence the appeal to this Court.

Held (Pigeon J. dissenting): The appeal should be dismissed.

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Per Martland J.: The application of s. 83(4) to the circumstances of this case does not involve the conclusion that if a limited company carries on a campaign to sell shares, the agents of that company can also be said to have carried on that campaign. That is not the position in this case. A person can be found to have carried on a campaign for the sale of shares if he causes his own company to carry it out on his behalf. He cannot avoid the application of the Act because he uses this means to effect his purpose.

Per Martland, Judson, Ritchie and de Grandpré JJ.: Appellant was personally instrumental in the making of the underwriting agreements that were entered into by the three mining companies. He ordered the writing of the sales literature that the securities company mailed to promote the sale of shares. He telephoned W.D. Latimer Company Limited every day himself in order to set the prices at which the latter was authorized to buy and sell the shares of the three mining companies. Appellant disposed of his shares in the mining companies while carrying on a campaign to sell shares of these companies to the public. The fact that he used a company, completely under his domination, as a participant in his activities did not enable him to escape the exclusion from exemption contained in s. 83(4) (a) of the Act.

Per Pigeon J., dissenting: Although the shares of a limited company may be beneficially owned by the same person who also manages it, its business is nevertherless in law that of a distinct entity, a legal person having its own rights and obligations. Consequently, the company was not a “personal corporation”. It follows that the campaign to sell shares of the mining companies to the public was not carried on by the appellant personally.

[Salomon v. Salomon & Co., [1897] A.C. 22; Lewis v. Graham (1888), 20 Q.B.D. 780; Carpenter v. Carpenter (1908), 15 O.L.R. 9; N.T. Whittall v. Minister of National Revenue, [1968] S.C.R. 413, referred to.]

APPEAL from a judgement of the Federal Court of Appeal[1], affirming a judgement of the trial division dismissing an appeal from an assessment of the Minister. Appeal dismissed,

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Pigeon J. dissenting.

W.B. Williston, Q.C., and Heather Henderson, for the appellant.

J. Scollin, Q.C., and C.H. Fryers, for the respondent.

MARTLAND J.—I agree with the reasons of my brother Judson. I would like to add the following comments.

In my opinion the application of s. 83(4) of the Income Tax Act, R.S.C. 1952, c. 148, to the circumstances of this case does not involve the conclusion that if a limited company carries on a campaign to sell shares, within the meaning of that subsection, the agents of that company can also be said to have carried on that campaign. That is not the position in this case.

The appellant was the president of J. Appleby Securities Limited, but, in addition, he was the sole beneficial shareholder of that company, which was completely and exclusively under his control. It is clear from the evidence that it was the appellant who conceived the plan for the sale of the shares of Winston Mines Limited to the public. He used his own company as a vehicle to achieve his purpose. The fact that his company undertook the underwriting and the sale of the shares, at his behest, does not prevent a finding that the appellant carried on a campaign to sell the Winston shares. In my opinion a person can be found to have carried on a campaign for the sale of shares if he causes his own company to carry it out on his behalf. He cannot avoid the application of the subsection to him because he uses this means to effect his purpose.

I would dismiss this appeal with costs.

The judgment of Judson, Ritchie and de Grandpré JJ. was delivered by

JUDSON J.—The Federal Court has held that the appellant, Jack Appleby, although he derived profits from the sale of certain mining

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shares which were within the exempting provisions of s. 83(3) of the Income Tax Act, had lost this exemption by s. 83(4)(a) as a result of his activities in a campaign to sell the shares of the corporation to the public.

Sections 83(3) and 83(4)(a) of the Income Tax Act, R.S.C. 1952, c. 148, read as follows:

83. (3) An amount that would otherwise be included in computing the income for a taxation year of a person who has, either under an arrangement with the prospector made before the prospecting, exploration or development work or as employer of the prospector, advanced money for, or paid part or all of, the expenses of prospecting or exploring for minerals or of developing a property for minerals, shall not be included in computing his income for the year if it is the consideration for

(a) an interest in a mining property acquired under the arrangement under which he made the advance or paid the expenses, or, if the prospector was his employee, acquired by him through the employee’s efforts, or

(b) shares of the capital stock of a corporation received by him in consideration for property described in paragraph (a) that he has disposed of to the corporation,

unless it is an amount received by him in the year as or on account of a rent, royalty or similar payment.

NON-APPLICATION

(4) Paragraph (b) of subsection (2) and paragraph (b) of subsection 3 do not apply:

(a) in the case of a person who disposes of the shares while or after carrying on a campaign to sell shares of the corporation to the public, or ….

I now set out in chronological order what Appleby’s activities were:

In September of 1954, he incorporated J. Appleby Securities Limited to carry on business as a general financial agent, broker, stockbroker and promoter. He was the president and sole beneficial shareholder of this company, which

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was completely and exclusively under his control. It began business on January 13, 1965.

On February 3, 1965, Appleby caused to be incorporated a company called Winston Mines Limited. On February 5, 1965, he made an arrangement with a prospector for the staking of mining claims in a certain area. On February 22, 1965, he sold the mining claims that he had acquired under this arrangement to Winston Mines Limited for 75,000 free shares and 675, 000 escrowed shares of that company. On the same day, February 22, Winston Mines Limited entered into an underwriting option agreement with J. Appleby Securities Limited. A prospectus was signed on February 24, 1965, by Appleby as promoter of the mining company and as president of J. Appleby Securities Limited, the underwriter. Appleby’s personal position was fully disclosed in the prospectus. Paragraphs 20 and 21 of the prospectus read as follows:

20. Jack Appleby, by reason of the beneficial ownership of securities of the company as set out in paragraph 12 hereof, is in a position to elect or cause to be elected a majority of the directors of the Company.

21. 75,000 free vendor shares owned by Jack Appleby, aforesaid, may be offered for sale under this prospectus but the proceeds therefrom will not accrue to the treasury of the Company.

The activities of Appleby and Appleby Securities Limited in the promotion of the sale of the shares of Winston Mines Limited are described in the following terms in the reasons for judgment given at trial:

As soon as the approval of the Ontario Securities Commission had been given, J. Appleby Securities Limited started to take up the shares of the mining company and engaged in a campaign for the sale of the shares of that company. This campaign consisted mainly in the sending by J. Appleby Securities Limited to its actual or prospective clients of the prospectus of Winston Mines Limited and of literature recommending the purchase of this stock. In addition, as a part of its campaign, J. Appleby Securities

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deemed it necessary to “support the market” of the shares of Winston Mines Limited; in order to achieve this Appleby Securities Limited entered into an agreement with another broker, W.D. Latimer and Company Ltd. Under this agreement the precise nature of which need not be determined, W.D. Latimer and Company Ltd. was to purchase, at prices set from day to day by J. Appleby Securities Limited, all the shares of Winston Mines Limited that would be offered to it; it was also to sell, at prices also to be fixed by J. Appleby Securities, as many of the shares so acquired as it could; finally, it was agreed that all the shares that W.D. Latimer and Company Ltd. would have acquired and that would remain unsold would be paid for by J. Appleby Securities Limited.

This campaign was being carried on when the appellant decided to sell his 75,000 free shares of Winston Mines Limited. He did not sell them (at least directly) to J. Appleby Securities though, but rather through other brokers who, knowing of the arrangement that had been made with W.D. Latimer and Company Ltd., sold them (with the exception of a few shares) to the latter. As W.D. Latimer and Company Ltd. could not dispose of these shares, they (or at least most of them) were acquired and paid for by J. Appleby Securities Limited at a time when this company could have gotten shares of Winston Mines Limited at a much cheaper price under the underwriting agreement. Having thus rid himself of his free shares, the appellant later disposed privately of his “escrowed” shares of Winston Mines Limited.

Appleby repeated this performance with the shares of two other mining companies which he had caused to be incorporated. These were Boeing Mines Limited and Marlboro Mines Limited. The trial judge also found that Appleby was personally instrumental in the making of the underwriting agreements that were entered into by the three mining companies; that if he did not personally write the sales literature that the securities company mailed to promote the sale of shares, he ordered the writing of this material and saw to it that none of it was sent out without his having read and approved of it. Finally, it was Appleby himself who every day telephoned W.D. Latimer Company Limited in order to set the prices at which the latter was authorized to buy and sell the shares of the

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three mining companies. The appellant’s factum filed in this Court states the position of Latimer in these terms: “Latimer was in the terms of the trade ‘running the box’ for J. Appleby Securities Limited.” It is obvious to me that it was running the box on the sole instructions of Appleby, who at the same time had his own shares to dispose of.

On these facts, both divisions of the Federal Court have found that Appleby disposed of his own shares in the Winston, Boeing and Marlboro mining companies while carrying on a campaign to sell shares of these companies to the public. They were also of the opinion that the fact that he used a company, completely under his domination, as a participant in his activities did not enable him to escape the exclusion from exemption contained in s. 83(4)(a) of the Income Tax Act, above quoted. With these conclusions I agree.

I would dismiss the appeal with costs.

PIGEON J. (dissenting)—The appellant is a mining companies promoter. As a result of arrangements made with a prospector to whom he advanced money, he became the owner of claims which he sold to newly incorporated companies, in consideration of the issue of shares some of which were free vendor shares. He also caused to be incorporated as a dealer in securities J. Appleby Securities Ltd., of which he was president and controlling shareholder being, in fact, the beneficial owner of all the issued shares.

The securities company obtained the required licence and entered into underwriting agreements with the mining companies. Distribution to the public was made by usual promotion methods and arrangements were effected with broker-dealers for supporting the market. When he saw fit, the appellant disposed of his free vendor shares. J. Appleby Securities Ltd. had

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nothing to do with such disposition. Substantial profits were thus realized by the appellant and these were assessed as income. It is conceded that these profits are income unless appellant is entitled to exemption by virtue of s. 83(3) of the Income Tax Act (R.S.C. 1952, c. 148 as amended), which was in force at the material time and is as follows:

Sec. 83(3)

(3) An amount that would otherwise be included in computing the income for a taxation year of a person who has, either under an arrangement with the prospector made before the prospecting, exploration or development work or as employer of the prospector, advanced money for, or paid part or all of, the expenses of prospecting or exploring for minerals or of developing a property for minerals, shall not be included in computing his income for the year if it is the consideration for

(a) an interest in a mining property acquired under the arrangement under which he made the advance or paid the expenses, or, if the prospector was his employee, acquired by him through the employee’s efforts, or

(b) shares of the capital stock of a corporation received by him in consideration for property described in paragraph (a) that he has disposed of to the corporation,

unless it is an amount received by him in the year as or on account of a rent, royalty or similar payment.

At the hearing of this appeal, counsel for the Minister stated that it was no longer contended that appellant did not come within the provisions above quoted. However, it was submitted that he is excluded from this benefit by virtue of para. (a) of subs.(4) which is as follows:

(4) Paragraph (b) of subsection (2) and paragraph (b) of subsection (3) do not apply:

(a) in the case of a person who disposed of the shares while or after carrying on a campaign to sell shares of the corporation to the public, or

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(b) to shares acquired by the exercise of an option to purchase shares received as consideration for property described in paragraph (a) of subsection (2) or paragraph (a) of subsection (3).

Thus, the only question on this appeal is in effect the following: Was the campaign to sell shares of the mining companies to the public admittedly carried on by J. Appleby Securities Ltd., a campaign “carried on” by the appellant within the meaning of the above quoted provision?

For the appellant, it is submitted that the securities company is a separate person in law, that it was at all material times carrying on its own business and was dealt with for income tax purposes as a separate taxpayer. It is contended that under such circumstances, the activities of the appellant as president of his securities company are to be considered as acts performed exclusively in connection with the selling of shares to the public for the account of that company. Therefore, it is asserted that while appellant did as president direct the campaign carried on to sell the mining companies shares, this does not mean that the campaign was “carried on” by him personally any more than a contract signed by him on behalf of his securities company would bind him personally or yield profits for which he would be personally assessable.

Ever since Salomon v. Salomon & Co.[2], it has been accepted that although the shares of a limited company may be beneficially owned by the same person who also manages it, its business is nevertheless in law that of a distinct entity, a legal person having its own rights and obligations. The Income Tax Act unmistakably implies that this rule holds good for tax purposes. There is a restrictive definition of “personal corporation” (s. 68), so that it is only when this definition applies that s. 67 comes into operation and the income of a corporation

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is “deemed each year to have been distributed to and received by” its shareholders. Those provisions show that the practical consequences of the incorporation of what is sometimes called a “one-man company” have not been overlooked in our income tax legislation. The circumstances under which such a company is to be identified with its shareholder for tax purposes are spelled out.

In the instant case, it is clear that J. Appleby Securities Ltd. was not a “personal corporation”. Therefore it could not, for income tax purposes, be considered as not being a separate person, which is of course, essentially the practical result of a company being a “personal corporation”, its income being then deemed to be distributed to the shareholders is taxed as their own. Here, however, although the appellant owned all the shares of the securities company, the latter was not a “personal corporation” because the definition covers only a corporation that, in the taxation year, besides other requirements,

(c) did not carry on an active financial, commercial or industrial business.

Thus, whenever a company is carrying on an active business, the concept of “personal corporation” is inapplicable so that the identification of the company with its shareholders for some tax purposes cannot apply. This shows that the incorporation of a “one-man company” for carrying on a business is looked upon as a legitimate operation, not as in itself a tax avoidance device.

It seems to me therefore, that the enquiry in this case must be for what reason should the appellant be identified for income tax purposes with the sales campaign carried on by J. Apple-

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by Securities Ltd. In Lewis v. Graham[3], Lord Coleridge C.J. said (at p. 782):

the words “carry on business” must mean carry on his business.

The question was as to the jurisdiction of the Lord Mayor’s Court in London under a statute reading “provided the defendant or one of the defendants shall dwell or carry on business within the city of London …”. The defendant was employed in the city as a clerk and it was held that he could not be said to be carrying on business within the city.

In Carpenter v. Carpenter[4], Chancellor Boyd said (at p. 11):

As to cases, I would just refer to Ex p. Smith (1874), 2 Pugs. (15 N.B.R.) 147, where it is laid down by Ritchie, C.J., that to carry on business implies that he who does so is the owner of the business and receiving its proceeds, and excludes one who is only an agent or manager; …

I can see no reason why “carrying on a campaign” should be construed otherwise than “carrying on business”. Subsection 4(a) clearly applies only to a person who carries on a campaign himself. The words of the enactment are: “in the case of a person who disposed of the shares while or after carrying on a campaign …”. Therefore, the question becomes: does this provision apply to a person who carries on a campaign as agent for a company? For the reasons previously indicated, it does not seem to me that it can make any difference whether such company is the taxpayer’s own company. For income tax purposes as for other legal purposes, it must be accepted that the incorporation results in the creation of a distinct person and, as a general rule, this distinct person cannot be identified with the shareholder or president or manager.

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In the Court of Appeal, Thurlow J. said:

In our view a distinction must be made between cases where one person contracts or carries on business on behalf of another and certain other cases. Where the question is one of which party is liable on the contract made by the agent it is not difficult to conclude that the principal is party to the contract and the agent is not. Similarly where the agent carries on business on behalf of a principal it is the principal who carries on the business and is party to its acts and the agent is not personally a contracting party. Where, however, an employee does an act for his employer, such as, for example, driving his car, the employee is the doer even though in the eyes of the law for some purposes his driving is also the act of his employer. So, in our view, if, as in the present case, an officer or employee in the course of his duties carries on a campaign to sell shares he is, in fact, personally carrying on that campaign even though he is doing it as part of the business activities of his employer. This distinction is the basis for our conclusion that the appellant falls within the terms of section 83(4) even though he is not taxable under section 3 of the Income Tax Act in respect of the profits from the business that he carries on on behalf of his employer.

With respect, I do not find this reasoning consonant with the principles of the law of agency. It is quite true that, materially, the agent is always the doer of the act. However, the question whether the act is to be considered as the principal’s or the agent’s does not depend on how one chooses to look at it, but on whether one is looking at it as a business operation or as a physical act. It is abundantly clear that when the act is to be considered from the business angle it is in law the principal’s act, not the agent’s. When the appellant was selling shares to the public in his company’s name or having advertisements published for his company’s account, he certainly was not binding himself personally and he could not have personally claimed the benefit of the operation. As long as he was acting legally, and it is not suggested he

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acted otherwise, he could never have been held personally liable for any of those operations or claimed any personal benefit therefrom. Of course, if he had been driving his car for his company and been involved in an accident, he could not have avoided liability for his negligence. That would be due to his tort. But if he had ordered gasoline or repairs for his company’s account in the company’s name, could he have been held personally liable?

Counsel for the Minister relied on the judgment of this Court in N.T. Whittall v. Minister of National Revenue[5]. In that case, the question was whether profits made by the taxpayer on the sale of securities acquired in his own name were capital profits on the realization of an investment or profits from the operation of a business. He was the president of a firm of investment dealers and stock brokers and consideration was given to his activities as such, with the result that the Court came to the conclusion that his personal operations did constitute a business. Nothing was said in that case which would imply that the operations of the firm were to be treated as if they had been the appellant’s own. They were considered only to the extent of helping to form a judgment as to the appellant’s intention in making his personal purchases, were they an investment or a business venture?

In the present case, it is conceded that the appellant’s personal operations were a business venture. But the question is whether the appellant is deprived of the benefit of s. 83(3) by reason of the sales campaign carried on by J. Appleby Securities Ltd. For the reasons previously stated, it does not appear to me that this campaign can be said to have been carried on by him.

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At the hearing in this Court, counsel for the Minister expressly stated that at no time the Crown tried “to lift the corporate veil”. He added that he was not saying that the securities company was “a sham or simulacrum”. What he urged was that the taxpayer participated in and used the campaign for distributing his own shares. He claimed that the appellant participated in the campain “to the extent of taking advantage of the market created”. It is apparent that the taxpayer did take advantage of the sales campaign to that extent but is that the criterion? What subsection 4(a) contemplates is not taking advantage of a campaign carried on by anyone, but of a campaign carried on by the taxpayer.

In the Trial Division, Pratte J., after expressly finding that “J. Appleby Securities was not acting as the appellant’s agent when it carried on the sales campaigns” went on to say:

Under section 83(3), those who, in consequence of their having provided a prospector with financial assistance, acquired mining properties that they disposed of to a corporation in consideration for shares in the capital stock of the corporation, are given the privilege of excluding from their income the consideration that they receive for these shares. This privilege, however, is denied under section 83(4) “in the case of a person who disposes of the shares while or after carrying on a campaign to sell shares of the corporation to the public ….” The obvious purpose of section 83(4) is to ensure that the amount, excluded from the income of the taxpayer under section 83(3) is the reward for his financial participation in prospecting, and not for his activities as a dealer in shares. If, as I think, such is the purpose of section 83(4), it would be meaningless if it did not apply to a situation like the present one where the appellant, taking advantage of the fact that he was at the same time the president and sole shareholder of a brokerage firm, the promotor of mining companies and the owner of mining properties, not only caused the sales campaigns to be carried on but actively and materially assisted in the carrying on of these companies.

With respect, I have to disagree with this line of reasoning. In construing the legislation, the

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question is not what may be supposed to have been intended but what has been said. Therefore, the wording of s. 83(4) is not to be extended so as to fit all that it might be considered desirable to cover. The enactment is to be applied as written. Unless there is ambiguity, it is to be applied literally in accordance with the general rules of law including the effect of the incorporation of limited companies.

For those reasons I would allow the appeal with costs throughout and order that the assessments under appeal be referred back to the Minister for reassessment in accordance with the above reasons.

Appeal dismissed with costs, PIGEON J. dissenting.

Solicitors for the appellant: Fasken & Calvin, Toronto.

Solicitor for the respondent: D.S. Thorson, Ottawa.