The president (McArdle) of a private company had been issued “employee redeemable shares,” whose terms provided that they participated on a per share basis equally with the common shares but that they were redeemable by the company and that the company could also require their holders to sell the shares to the company for their redemption price. Following the death of McArdle, the company required his executors to sell his shares to the company, with such shares for the most part being acquired by other employees at the same purchase price and with their purchase price being paid directly to the executors. The Minister assessed on the basis that the company was deemed to pay a dividend to the estate under s. 81(2) of the pre-1972 Act, which in relevant part applied where a corporation having undistributed income on hand had “redeemed or acquired any of its common shares or reduced its common stock.”
In finding that there was no deemed dividend, Mr. Boisvert stated (at pp. 408-9):
[The sum received by the Estate from [the Company] was not paid by the latter out of its own funds but out of the proceeds of resale of the said shares to some of its eligible employees, and, in my view, the issue of shares to the new shareholders was a re-allotment rather than an original issue. What took place cannot have been the payment of a deemed dividend because the financial position of the Company was not affected in any way by the payment made by it to the Estate. In other words, the amount paid to the Estate by the Company did not come from the company's till but from what the company received from the re-sale of the shares. As long as the capital surplus of the Company was not affected by the change of shareholders, the names of the holders of the said shares are immaterial. I fail to see how it could be held, in this case, that the relevant transactions with respect to the McArdle shares amounted to a redemption of stock within the meaning of section 81(2) of the Income Tax Act, for a true redemption of stock would have resulted in the reduction of the undistributed income of the Company.