Carlo Baldassarra v. Minister of National Revenue, [1991] 1 CTC 2085, 91 DTC 289

Bonner, T.C.J.:—The appellant appeals from assessments of income tax for the 1982 and 1983 taxation years. The sole issue is whether common shares of Baldassarra Construction Ltd. "the company") were transferred by the appellant to his three sons with the consequence that subsection 75(1) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act") applies. That provision in the form applicable at the time in question read as follows:

75.(1) Where a taxpayer has, since 1930, transferred property to a person who was under 18 years of age, either directly or indirectly, by means of a trust or by any other means whatever, any income or loss, as the case may be, for a taxation year from the property or from property substituted therefor shall, during the lifetime of the transferor while he is resident in Canada, be deemed to be income or a loss, as the case may be, of the transferor and not of the transferee, unless the transferee has, before the end of the year, attained the age of 18 years.

The respondent assessed tax on the basis that dividends on the common shares were deemed to be the income of the appellant. It was the position of the appellant that there had been no transfer of property to the children because”. . . as of and from the date of incorporation both the intended and the actual beneficial owners of the shares were the three children equally. The Appellant. . . merely acted as an accommodating party in subscribing for and holding the registered ownership of the shares . . .".

The company was incorporated on May 23, 1980 pursuant to the Business Corporations Act, R.S.O. 1980, c. 54. The appellant was named in the articles of association as the incorporator and sole first director. The articles provided that no shares were to be taken by the appellant upon incorporation. On May 23, 1980 the appellant, as director of the company, consented to a number of resolutions. One of the resolutions provided for the allotment and issuance to the appellant of 30 common shares with a par value of $1 each, 100 first preference shares with a par value of $1 each and one-third preference share with a par value of $1. The resolution fixed the consideration for the allotment and issuance of the shares at $131, recited receipt by the corporation of that sum in full payment of the subscription prices and declared that the shares were issued and were to be held as fully paid and non-assessable. Still on May 23, the appellant, as sole shareholder of the company, elected himself as sole director. He resigned as president and secretary and in the capacity of sole director, elected his wife, Angela, as president and secretary. He then consented to the transfer of the shares held by him as follows:

Here, there is found the first reference in the corporate documents to the existence of a trust. The appellant signed formal transfers of the shares to his wife. Ten common shares were transferred to her in trust for each of the three children. She then signed a form of acknowledgement and declaration that she held ten common shares of the corporation for each of the three children. The appellant then resigned as director. Nowhere in the corporate documentation is there any suggestion that the appellant acted in a fiduciary capacity.

At this point I will note that there was some evidence that payment for the shares may not have been made until long after May 23, 1980. The reporting letter written September 30, 1980 by Harvey L. Rechtsman, the lawyer who incorporated the company, stated that: “In order to perfect the allotment and issuance of the 131 shares, each of the shareholders should pay the appropriate consideration for shares into the corporation's bank account.” The accountant for the company, Mr. A. Larson, produced the bank deposit book of the company. A carbon copy of the slip which records a deposit apparently made on November 5, 1980 shows the sum of $30 opposite the names Mauro, Armand and Michael. Those are the names of the appellant's three sons. It shows opposite the name A. Baldassarra the sum of $101. The evidence is silent as to when the funds deposited on November 5 were received by the company.

If, as may be the case, the shares were issued prior to receipt by the company of the subscription price, then there was a contravention of subsection 42(4) of the Business Corporations Act. It read:

42.(4) No share shall be issued until it is fully paid and a share is not fully paid until all the consideration therefor in cash, property or services, as determined under this section, has been received by the corporation.

In Welling, Corporate Law in Canada, the following is stated at page 575:

The share cannot be issued until the full price is paid in money, property or past service. [1] The statutory wording suggests that failure to collect the full amount renders a purported share issue invalid, rather than resulting in an effective issue coupled with a breach of director's duty. This is because a share does not exist until it has been properly and fully paid for. Directors cannot issue shares where the statutory requirements have not been fulfilled and any shares they purport to issue are invalid until such time as full consideration has passed.

The matter of the possible invalidity of the issuance of the shares was not raised by either party. It is possible that the company simply held the consideration from May until November and that all was therefore done properly. In the circumstances I will proceed on the assumption that the shares were validly issued.

Evidence was given by Harvey Rechtsman. His recollection of the details of events that occurred about ten years before the hearing was, understandably, not clear. He did not remember who gave him instructions to incorporate the company but reasoned that it could only have been Mr. Larson, the accountant. With the aid of undated, handwritten notes which he thought were made when instructions were given him, he stated that the initial plan was that he and the appellant's brother be secretary and president respectively and as well, directors of the company and that they be trustees of ten common shares for each of the three sons. Those instructions were subsequently amended to call for Mrs. Baldassarra to be trustee for the three sons as sole director and signing officer. Mr. Rechtsman explained that the organization of the company too the form that it did because the precedent that he had for incorporating companies had the incorporator taking all the shares and transferring them to the beneficial owners on the date of incorporation. Whatever the reason may be, the fact remains that the appellant did subscribe for and receive shares.

Phillip Rechtsman, secretary of Greenpark Homes stated that it was he who filled in the deposit slip of November 5, 1980. The following is an excerpt from his evidence concerning the slip:

Q. Can you explain the relevance of the names there?

A. It's three times ten, is 30, that's Mauro, Armando and Michael, and that was a total $30, and there was a cheque from Angela Baldassarra for $101.

Q. Can you explain the relevance of why the names Mauro, Armando and Michael are there on the sheet?

A. Mr. Larson instructed me to do it that way.

Q. To do it what way? Why were the names written there?

A. Because he felt that I should do it that way and I did it that way.

Q. The A. Baldassarra you said was a cheque, you indicated there was a cheque there.

A. I don’t remember for sure, but the way I wrote it down I presume it was a cheque.

The source of the $30 paid as consideration for the common shares was not identified. The evidence is silent on the question whether the children had bank accounts or funds of their own. Mrs. Baldassarra did not testify. The appellant did say that he did not give anyone the money to pay for the shares but he did not shed any further light on the source of the $30.

The appellant testified as to the origin of the company. He stated that in 1977 or 1978 he, his wife and Mr. Larson discussed his desire to get his sons involved with him in business. Mr. Larson pointed out to him that the children were not yet eighteen and that somebody was ” . . . supposed to be in charge to represent them until they are eighteen . . .”; that". . . we decided to put my brother and the lawyer in control, whatever, but then she decided—we decided she [was] supposed to be the control of the company for the kids until they're eighteen years old”. The appellant did not suggest that the children shared that desire or asked him to act for them in any way in connection with formation of the company.

In support of the position set out at the beginning of these reasons, counsel for the appellant argued that it was the intention of the appellant as registered owner that [he] not be the beneficial owner and that he hold the shares for the children. He submitted that beneficial ownership was vested in the children immediately upon incorporation when the appellant signed the documents and that for a trust arrangement to be established there is no requirement that it be in writing. He said that if a person intends that ownership be held for someone else then that is enough. He did not refer to any authority which supports this position.

I can find no basis in the evidence for a conclusion that a trust was created. No doubt the appellant intended that the children derive benefit from the operation of the company and that they ultimately become the owners of the common shares. However, the existence of that rather imprecise intention is not sufficient to create a trust binding upon the appellant from the moment the shares were issued to him. There was no evidence of a prior declaration of trust, of issuance to the appellant as trustee or of the use of trust funds as consideration for the issuance of the shares.

In Milroy v. Lord, (1862) 4 De G.F. & J. 264 at 274-75 Turner, L.J. stated:

I take the law of this court to be well settled, that, in order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him. He may, of course, do this by actually transferring the property to the persons for whom he intends to provide, and the provision will then be effectual, and it will be equally effectual if he transfers the property to a trustee for the purposes of the settlement, or declares that he himself holds it in trust for those purposes; and if the property be personal, the trust may, as I apprehend, be declared either in writing or by parol; but, in order to render the settlement binding, one or other of these modes must, as I understand the law of this court, be resorted to, for there is no equity in this court to perfect an imperfect gift. The cases, I think, go further to this extent: that if the settlement is intended to be effectuated by one of the modes to which I have referred, the court will not give effect to it by applying another of those modes. If it is intended to take effect by transfer, the court will not hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would be made effectual by being converted into a perfect trust. These are the principles by which, as I conceive, this case must be tried.

The written contemporaneous evidence is entirely consistent with the existence of intention on the part of the appellant to effect a settlement by way of transfer of the common shares to Angela Baldassarra in trust for the children. It may be that Mr. Larson devised a plan whereby the appellants wishes in relation to the children might be carried out in such a way as to avoid the clutches of subsection 75(1). Assuming that such a plan was devised there is simply no evidence that it was carried out. The desire to avoid an adverse tax consequence is not sufficient by itself to conjure up a trust at the precise point in time required to achieve the desired tax result nor is it evidence of a declaration of trust. The appeals will be dismissed.

Appeals dismissed.