Jerrold D. Paxton v. Her Majesty the Queen, [1995] 1 CTC 2229

O’Connor J.T.C.C.:—These appeals were heard in Toronto, Ontario on July 6, 1994 pursuant to the general procedure of this Court relative to the appellant’s 1986, 1987, 1988 and 1989 taxation years.

Issues

The two issues in these appeals arise from the fact that the Minister of National Revenue (’’Minister”) included in computing the income of the appellant for 1986 a net capital gain in the amount of $1,177,067.93 allegedly realized by the appellant on his disposition of 120,000 shares of Ronlar Investment Ltd. ("Ronlar"). The first issue is whether the appellant is entitled to take advantage of the intergenerational rollover provision of subsection 73(5) of the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act”) with respect to the transfer of 20,000 shares of Ronlar in 1986, Ronlar being a small business corporation. The second issue is whether the appellant was entitled to claim in 1986, 1987, 1988 and 1989 extended capital gains reserves pursuant to paragraphs 40(1 )(a) and 40(1.1)(c) of the Act in connection with the transfer in 1986 of 100,000 shares of Ronlar to his son Darryl Paxton ("Darryl").

Facts

The relevant facts are:

1. The appellant, in the relevant years, was a resident of Canada.

2. The appellant owned 120,000 shares of Ronlar representing a 50 per cent share interest in this corporation. The other 50 per cent interest was owned by Ronald A. Larmer ("Larmer”), also a resident of Canada.

3. Ronlar is a corporation incorporated under the laws of the province of Ontario.

4. In 1986, the appellant decided to retire from his active participation in the activities of Ronlar principally for health reasons which originated in 1984.

5. The appellant testified he wished to transfer his 120,000 shares to his three children Darryl, Cheryl and Penni and to his daughter- in-law Maureen but that they did not desire to carry on the business, except for Darryl who expressed an interest in a subsidiary named Prospeed Courier (Markham) Inc. ("Prospeed").

6. All four of them had had some involvement with Ronlar, and had been paid employees in various capacities. Darryl was the one most involved.

7. Because of this lack of desire to continue the business the appellant and Larmer had begun in 1984 to seek out a buyer for Ronlar.

8. Tandet Management Inc. ("Tandet”), a Canadian resident corporation dealing at arm’s length with the appellant and his children was found. Tandet agreed that the shares of Prospeed could be bought out of Ronlar at book value (to accommodate Darryl’s wishes) following which Tandet would purchase all the 240,000 shares of Ronlar for an aggregate purchase price of $2,400,000.

9. The appellant further testified that while the appellant’s counsel was still negotiating with Tandet’s Counsel, the children of the appellant, each of whom was at the material time an individual who had attained the age of 18 and was a resident of Canada agreed to purchase the appellant’s Ronlar shares as follows:

(i) each of Darryl, Maureen, Cheryl and Penni agreed to purchase 5,000 Ronlar shares for a purchase price of $40,000 (total of $200,000);

(ii) Darryl agreed to purchase an additional 100,000 Ronlar shares for $1,000,000.

10. Prior to documenting the agreements between the appellant and his children, the appellant’s counsel prepared an agreement of purchase and sale between the appellant and Larmer, as vendors and Tandet, as purchaser. This agreement was executed by these parties on November 6, 1986 (the "Tandet agreement").

11. The Tandet agreement (Article 3.3) allowed the appellant to proceed with a prior sale of his Ronlar shares to his children provided that they in turn would sell to Tandet.

12. On November 27, 1986, pursuant to separate share transfer agreements between the appellant and each of Darryl, Maureen, Cheryl and Penni (respectively, the "Darryl agreement", the "Maureen agreement", the "Cheryl agreement" and the "Penni agreement"), the appellant sold to each child 5,000 common shares in Ronlar for a purchase price of $40,000. Each purchase price was paid by the issuance of a non-interest bearing promissory note payable by each child in the amount of $40,000 maturing November 28, 1986.

13. On November 27, 1986, pursuant to another share transfer agree- ment with Darryl (the "second Darryl agreement") the appellant sold and Darryl purchased, 100,000 of Ronlar Shares for a purchase price of $1,000,000.

14. The second Darryl agreement required the purchase price to be paid by delivery of a secured promissory note in the amount of $1,000,000. This promissory note required payment of $100,000 on November 28, 1986 and $100,000 thereafter in nine equal annual instalments payable on January 1, 1987 and on each anniversary thereof. Interest was required to be paid at the average T-Bill rate as defined in the promissory note. This promissory note could be prepaid in whole or in part at any time or from time to time.

15. On November 28, 1986, Darryl sold and Tandet purchased, 105,000 common shares in Ronlar for a price of $1,050,000. On the same day each of Maureen, Cheryl and Penni sold 5,000 common shares to Tandet for a price of $50,000.

16. Immediately following the sales of the Ronlar Shares described above, Darryl paid to the appellant the $40,000 required to be paid pursuant to the promissory note issued under the Darryl agreement and the $100,000 payment required to be made pursuant to the promissory note issued under the second Darryl agreement. Each of Maureen, Cheryl and Penni similarly paid to the appellant the $40,000 required to be paid pursuant to her respective promissory note issued under the Maureen agreement, the Cheryl agreement and the Penni agreement.

17. Darryl continued to honour the terms of the promissory note issued under the second Darryl agreement until such time as the promissory note was repaid in full. The entire balance of the note was prepaid in 1989.

18. The appellant filed Form T2211 with Revenue Canada, electing that the dispositions of the 5,000 Ronlar shares from himself to Darryl pursuant to the Darryl agreement, the 5,000 Ronlar shares from himself to Maureen, pursuant to the Maureen agreement, the 5,000 Ronlar shares from himself to Cheryl pursuant to the Cheryl agreement and the 5,000 Ronlar shares from himself to Penni pursuant to the Penni agreement be governed by subsection 73(5) of the Act electing proceeds of disposition in respect of each such transfer of $37, for aggregate proceeds of $148 in respect of the 20,000 Ronlar shares.

19. At the time immediately preceding the sale of the 20,000 Ronlar shares by the appellant referred to in paragraph 18 above, Ronlar was a small business corporation as defined in paragraph 70(11)(c) of the Act and the appellant’s cumulative small business gains account as defined in paragraph 70(1 l)(a) of the Act was $200,000.

20. The appellant completed and filed his income tax return for the 1986 taxation year on a basis consistent with the filed Form T2211 reporting aggregate proceeds of disposition of $148 in respect of the 20,000 Ronlar shares sold to his children. Further, the appellant duly reported the capital gain arising on the sale of the 100,000 Ronlar shares to Darryl pursuant to the second Darryl agreement and claimed an extended capital gains reserve in accordance with paragraphs 40(1)(a) and 40(1.1)(c) of the Act.

21. By reassessments, notices of which are dated October 18, 1990, the Minister disallowed the appellant’s election under subsection 73(5) with respect to the transfer of 20,000 of his Ronlar shares and disallowed the extended capital gains reserve claimed by the appellant for each of 1986, 1987, 1988 and 1989.

22. The appellant objected to the above reassessments.

23. The Minister replied by notification dated January 16, 1992 confirming the above reassessments.

Questions in issue

The questions in issue as mentioned above are:

1. Are the transfers by the appellant of 20,000 Ronlar shares to his children in 1986 governed by the election filed under the provisions of subsection 73(5) so as to give rise to proceeds of disposition in respect of those transfers of $148

and

2. Is the appellant entitled to claim in each of 1986, 1987, 1988 and 1989 the extended capital gains reserve?

The resolution of these issues depends upon one underlying issue namely, did the appellant transfer the Ronlar shares to his children or is that transfer some how or other rendered ineffective by reason of the appellant having entered into the Tandet agreement.

Law

The applicable provisions of the Act are 73(5), 40(1), 40(1.1), 55(1) and 56(2) which, so far as material, read as follows:

73.(5) For the purposes of this Part, where at any particular time a taxpayer has transferred property to his child who was resident in Canada immediately before the transfer and the property was, immediately before the transfer, a share of the capital stock of a small business corporation...the following rules apply:

(a) the taxpayer shall be deemed to have disposed of the share at the time of the transfer and to have received proceeds of disposition therefor equal to the amount, if any, by which

(i) the fair market value of the share at that time

exceeds the lesser of

(ii) the taxpayer’s capital gain otherwise determined from the disposition of the share, and

(iii) the amount of the taxpayer’s cumulative small business gains account immediately before the transfer or such lesser amount as the taxpayer specifies in respect of the transfer of the share;

(b) the child shall be deemed to have acquired the share at a cost equal to the proceeds of disposition deemed to have been received by the taxpayer under paragraph (a); and....

40.(1) Except as otherwise expressly provided in this Part

(a) a taxpayer’s gain for a taxation year from the disposition of any property is the amount, if any, by which

(i) if the property was disposed of in the year, the amount, if any, by which his proceeds of disposition exceeds the aggregate of the adjusted cost base to him of the property immediately before the disposition and any outlays and expenses to the extent that they were made or incurred by him for the purpose of making the disposition, or

(ii) if the property was disposed of before the year, the amount, if any, claimed by him under subparagraph (iii) in computing his gain for the immediately preceding year from the disposition of the property,

exceeds

(iii) subject to subsection (1.1), such amount as he may claim as a deduction, not exceeding the lesser of

(A) a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are not due to him until after the end of the year as may reasonably be regarded as a portion of the amount determined under subparagraph (i) in respect of the property, and

(B) an amount equal to the product obtained when 1/5 of the amount determined under subparagraph (i) in respect of the property is multiplied by the amount, if any, by which 4 exceeds the number of preceding taxation years of the taxpayer ending after the disposition of the property; and....

40(1.1) Where the property referred to in subparagraph (1 )(a)(iii) is property that the taxpayer disposed of to his child, who was resident in Canada immediately before the disposition, and was

(c) immediately before the disposition, a share of the capital stock of a small business corporation of the taxpayer,

in computing the amount of any claim in respect of such property under subparagraph (l)(a)(iii), that subparagraph shall be read as if the references therein to ”1/5’’ and ”4” were references to "1/10" and ”9” respectively.

55.(1) For the purposes of this subdivision, where the result of one or more sales, exchanges, declarations of trust, or other transactions of any kind whatever is that a taxpayer has disposed of property under circumstances such that he may reasonably be considered to have artificially or unduly

(a) reduced the amount of his gain from the disposition,

the taxpayer’s gain or loss, as the case may be, from the disposition of the property shall be computed as if such reduction, creation or increase, as the case may be, had not occurred."

56.(2) A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

Appellant’s submissions

Counsel for the appellant submits that the Tandet agreement did not operate to vest the shares in Tandet, that this vesting only took place after the appellant had transferred the shares to his children, who in turn transferred them to Tandet. She points out that the documents clearly indicate that this is what actually took place, that the appellant in entering the Tandet agreement was in essence acting as agent for his children, as the appellant and Darryl testified, and that the appellant intended to transfer the shares to his children prior to the closing with Tandet. She argues that it is clear from the Tandet agreement that no vesting in Tandet was to take place until closing and that closing did not take place until November 28 when Tandet finally took title to the shares.

In her written submission, counsel for the appellant stated as follows:

Principles of interpretation

the general approach to be taken is as set forth in the recent decision of the Supreme Court of Canada in Canada v. Antosko, [1994] 2 C.T.C. 25, 94 D.T.C. 1529. In that case the issue before the Court was whether the taxpayer was entitled to a deduction under subsection 20(14). In finding in favour of the taxpayer, Mr. Justice Iacobucci citing with approval the decision of Estey J in Stubart Investments Ltd. v. The Queen, [1984] S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305...described the proper approach to the interpretation of taxing statutes, at paragraphs] 23 and 24:

Estey J. relied at page 578 (C.T.C. 316, D.T.C. 6323) on the following passage from Dreidger, Construction of Statutes (2nd ed. 1983) at page 87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

It is this principle that must prevail unless the transaction is a sham or is so blatantly synthetic as to be effectively artificial. As Estey J. concludes at page 580 (C.T.C. 317, D.T.C. 6324):

Where the substance of the Act, when the clause in question is contextually construed, is clear and unambiguous and there is no prohibition in the Act which embraces the taxpayer, the taxpayer shall be free to avail himself of the beneficial provision in question.

This principle is determinative of the present dispute.

Mr. Justice Iacobucci held that, absent a sham or blatant artificiality, once the factual elements entitling a taxpayer to a beneficial provision of the Act are present, it is not open to the court to conclude that the transaction is outside the scope of the section, rather, as he held at paragraph 28:

If the terms of the section are met, the taxpayer may rely on it, and it is the option of Parliament specifically to preclude further reliance in such situations.

Subsection 73(5), as it read in 1986, permitted a taxpayer to transfer shares of a small business corporation to a child and to elect for income tax purposes proceeds of disposition below fair market value. Essentially, the subsection allowed an intergenerational rollover to shelter a maximum of $200,000 in capital gains that would otherwise have been incurred on a transfer at fair market value.

Did the appellant transfer shares to his children?

The precise criterion that has to be met in the context of subsection 73(5) is whether the appellant "has transferred"...shares, to his children.

In the decision of the Exchequer Court in German v. M.N.R., [1957] C.T.C. 291, 57 D.T.C. 1216 (Exch.)...the Court was required to consider the meaning of that term in the context of what was then subsection 21(1), a predecessor to the spousal attribution rule in subsection 74(1). Mr. Justice Thurlow held at page 295 (D.T.C. 1218):

In my opinion, the expression "has transferred" in subsection! 21(1) of the Income Tax Act has a similar meaning. I read that expression as referring to an act whereby the husband has divested himself of property and vested it in his wife; that is to say, has passed the property from himself to her.

[Emphasis added.]

Thurlow J. took a similar interpretation...in the subsequent decision of the Exchequer Court in Dunkelman v. M.N.R., [1959] C.T.C. 375, 59 D.T.C. 1242 (Ex. Ct.).

In my submission, the only transactions which occurred that divested the appellant of the common shares of Ronlar and vested them in another person were the transactions undertaken on November 27, 1986, when the appellant sold these shares to his children.

The intention of the parties to the Tandet agreement was not to transfer any shares to Tandet until November 28, 1986 and by then, the parties agreed that subsequent vendors, that is members of the appellant’s family, might effect that transfer.

There is an additional factor in this case which affects the timing of the share transfers. Ronlar was a private corporation. The transfer of its shares was restricted by its articles of incorporation which provided that no share could be transferred without the consent expressed by resolution of either 51 per cent of its shareholders or a majority of its directors.

It is trite law that no property in the stock of a private company passes until the appropriate resolution to address these private corporation restrictions on transfer has been passed.

The only transfers that were consented to by the directors of Ronlar were the transfers by the appellant to his children on November 27, 1986 and the subsequent transfers by the children to Tandet on November 28, 1986.

Were the transfers to the children a "sham" or "so blatantly synthetic as to be artificial"?

The respondent has not pleaded nor is there any evidence to support a finding of sham. The transactions and the form in which they were cast cannot be said "to have been so constructed as to create a false impression in the eyes of a third party", so as to constitute a sham as that term has been held to mean by the Supreme Court of Canada in Stubart, supra, at page 572 (C.T.C. 313, D.T.C. 6320).

Having read Article 3.3 of the Tandet agreement and all of the other documentary evidence, there is no basis to suggest that any third party could be misled or surprised that the appellant transferred his Ronlar shares to his children and that they, in turn, transferred their Ronlar shares to Tandet.

In my submission, there is no evidence to support a finding that the transfers to the children were in any way "blatantly synthetic".

Subsection 56(2) does not apply

Subsection 56(2) is an anti-avoidance rule intended to prevent taxpayers from making indirect transfers of property to others.

The scope of subsection 56(2) was considered at length in the decision of the Supreme Court of Canada in The Queen v. McClurg, [1990] 3 S.C.R. 1020, [1991] 1 C.T.C. 169, 91 D.T.C. 5001....

The McClurg case, supra, confirmed the basic principle that subsection 56(2) has no application to transactions which are conducted for adequate consideration, Chief Justice Dickson stated at page 1051 (C.T.C. 183, D.T.C. 5011):

In attempting to discern the purpose of subsection 56(2), it is helpful to refer to the body of jurisprudence dealing with the subsection. A useful starting point is an early case dealing with the predecessor section to subsection 56(2): Miller v. M.N.R., [1962] C.T.C. 199, 62 D.T.C. 1139 (Ex. Ct.). In that case, Thurlow J., as he then was, in examining subsection 16(1) of the Act, made some general comments as to the anti-avoidance purpose of the provision which remain relevant today:

In my opinion, subsection 16(1) is intended to cover cases where a taxpayer seeks to avoid receipt of what in his hands would be income by arranging to have the amount received by some other person whom he wishes to benefit or by some other person for his own benefit. The scope of the subsection is not obscure for one does not speak of benefiting a person in the sense of the subsection by making a business contract with him for adequate consideration (at page 212 (D.T.C. 1147)).

Strayer J. noted in respect of the Miller case, at page 4 of the Federal Trial Reports:

Two important qualifications are noted here: the first is that the taxpayer seek "to avoid receipt’ of funds, presumably funds that would otherwise be payable to him; and the second is that the concept of payment of a "benefit" is contrasted to payments for adequate consideration.

In my opinion, the views of Thurlow J. and Strayer J. provide a sound foundation for the interpretation of subsection 56(2). The subsection obviously is designed to prevent avoidance by the taxpayer, through the direction to a third party, of receipts which he or she otherwise would have obtained. I agree with both Thurlow J. and Strayer J. in their characterization of the purpose of the section and, specifically, I concur with their view that the section reasonably cannot have been intended to cover benefits conferred for adequate consideration in the context of a legitimate business relationship.

In the present case, the transfers by the appellant of the common shares of Ronlar to his children were certainly made for "adequate consideration”. Each of them paid a substantial price for their shares. Further, the children had all worked in the family business. In the appellant’s view, they had earned the right to participate in the ownership of the business. Accordingly, in my submission, there is ample evidence to support the proposition that the transfers made by the appellant to the children were the result of legitimate business contracts. It follows, therefore, that the children’s entitlement to the proceeds realized from the transfers by them on November 28, 1986 to Tandet of the Ronlar common shares were founded on legitimate business contracts for adequate consideration.

Further, in my submission subsection 56(2) cannot be applied to the trans- fers of the Ronlar common shares by the appellant to the children or to the transfers by the children of those shares to Tandet because in either case, there was no indirect payment of any amount that would otherwise been included in the appellant’s income. All payments related to the transfer of Ronlar common shares were made directly to the parties legally entitled to those payments.

Subsection 55( 1) does not apply

The respondent contends that the transfer of the Ronlar common shares to the appellant’s children can be attacked on the basis of subsection 55(1). Where a transaction artificially reduces a capital gains, subsection 55(1) essentially allows that artificial reduction to be ignored.

As a technical matter, subsection 55(1) is of no application to transactions seeking to benefit from subsection 73(5). Subsection 55(1) as it read in 1986 applies only for purposes of the then subdivision c. Subsection 73(5) as it read in 1986 was in subdivision f and accordingly, subsection 55(1) cannot apply to override the compliance with the provisions of subsection 73(5) followed by the appellant. See Orr v. M.N.R., [1989] 2 C.T.C. 2348, 89 D.T.C. 557 (T.C.C.)...at page 2361 (D.T.C. 563).

But further...subsection 55(1) is of no application to any of the transactions conducted by the appellant or his children. The transfers by the appellant to the children did not "artificially and unduly reduce" any gain of the appellant’s. Further, the transfers by the children to Tandet did not "artificially or unduly reduce" any gain of the appellant’s.

...once it is established that the appellant conducted the November 27, 1986 transfers in conformance with the prerequisite conditions set out in subsection 73(5) and claimed reserves in accordance with subsections 40(1) and 40(1.1), subsection 55(1) cannot be applied to deny him the benefit of the rollover contemplated by subsection 73(5) or the extended capital gains reserves contemplated by subsections 40(1) and 40(1.1).

It is common ground that an anti-avoidance rule designed to prevent recognition of transactions that "artificially or unduly" reduce income or gains, cannot be used to deny the application of a beneficial section of the Act if the taxpayer brings himself within the provisions of that section.

If there was any reduction in a capital gain to the appellant, it was as a result of the transfer by him of the Ronlar common shares to his children done in conformance with subsection 73(5) and as a result of a series of reserves taken by the appellant in conformance with subsections 40(1) and 40(1.1). That reduction occurred solely because of the statutory deeming provisions in subsection 73(5) that countenanced the transfers to occur at an amount selected by the appellant and because of the permissive reserve deductions specifically allowed by subsections 40(1) and 40(1.1) when small business corporation shares are transferred to a child.

The appellant used a rollover and reserves specifically provided for in the Act. There can be no "artificiality" about any benefit that consequently resulted.

Respondent's submissions

Respondent submits that the most relevant provisions of the Tandet agreement are the following:

3.1 Subject to the terms and conditions hereof, each of the vendors jointly and severally covenants and agrees to sell, assign and transfer to the purchaser and the purchaser covenants and agrees to purchase from the vendors all (but not less than all) of the issued and outstanding common shares in the capital of Ronlar (the "purchased common shares") for an aggregate purchase price (the "purchase price”) of $2,400,000 to be satisfied at the time of closing by delivery of a certified cheque in the amount of $2,265,000 payable to the vendors or whomsoever they may direct.

3.2 The purchaser agrees to deliver to the vendors’ solicitors upon the execution of this agreement the sum or $135,000 as a deposit to be held by the vendors’ solicitors in an interest-bearing account pending the closing of the transaction herein contemplated and applied to the purchase price on closing. In the event that the transaction does not close by reason of the non-fulfilment of one or more of the conditions contained in Article 8 or the condition contained in clause 9.1(4), the said deposit and all interest thereon shall be returned to the purchaser forthwith without deduction. In the event that the transaction does not close by reason of the non-fulfilment of one or more of the conditions contained in clause 9.1(1), clause 9.1(2) or clause 9.1(3), then the deposit and all interest thereon shall be non-refundable and may be retained by the vendors in full satisfaction of their costs incurred in connection with this agreement of purchase and sale.

3.3 Each of the vendors shall have the right exerciseable by written notice to the purchaser at any time prior to two business days before the closing date to elect to make an interim transfer of all or part of the purchased common shares to other family members of the vendors (the "subsequent vendors") provided that such transfers are only valid if the subsequent vendors complete the sale and transfer of the purchased common shares to the purchaser in accordance with the terms of this agreement. Each of the vendors undertakes that in the event of any such election the vendors shall take all such steps as are necessary to cause and require the subsequent vendors to complete all the transactions contemplated by this agreement and each of the vendors warrants to the purchaser that all such transactions will be so completed.

4,1 Each of the vendors jointly and severally covenants, represents and warrants as follows and acknowledges that the purchaser is relying upon such covenants, representations and warranties in connection with the purchase herein:

(5) all of the purchased common shares are now owned by the vendors and will be owned at the closing date by the vendors or the subsequent vendors as the beneficial owners of record, with good and marketable title thereto, free and clear of all mortgages, liens, charges, security interests, adverse claims, pledges, encumbrances and demands whatsoever;

(7) no person, firm or corporation has or will have at the closing date any agreement or option or any right or privilege (whether by law, preemptive or contractual) capable of becoming an agreement or option for the purchase from the vendors or the subsequent vendors of any of the purchased common shares or any of the special shares (except the purchaser pursuant to the put agreement), or the purchase from Ronlar of any shares in the capital of the corporation;

5.1 Each of the vendors jointly and severally covenants and agrees with the purchaser that on or before the closing date (or after the closing date with respect to the covenants in clause 5.1(16) and clause 5.1(17)) he will do or will cause to be done the following:

(5) the vendors will take all necessary steps and proceedings as approved by counsel for the purchaser to permit all of the purchased common shares to be duly and regularly transferred to the purchaser or its nominee(s);

8.2 If any of the foregoing conditions shall not be fulfilled and/or performed by the vendors at or before the closing date to the satisfaction of the purchaser, the purchaser may rescind this agreement by notice to the vendors and in such event the purchaser shall be released from all obligations hereunder and unless the purchaser can show that the condition or conditions for the non- performance of which the purchaser has rescinded such agreement are reasonably capable of being performed or caused to be performed by the vendors or either of them, then the vendors shall also be released from all obligations hereunder; provided that any of the said conditions may be waived in whole or in part by the purchaser without prejudice to its rights of rescission in the event of the non-fulfilment of any other condition or conditions, any such waiver to be binding on the purchaser only if the same is in writing.

9.2 If any of the foregoing conditions shall not be fulfilled and/or performed by the purchaser at or before the closing date to the satisfaction of the vendors, the vendors may rescind this agreement by notice to the purchaser and in such event the vendors shall be released from all obligations hereunder and unless the vendors can show that the condition or conditions for the non- performance of which the vendors have rescinded such agreement are reasonably capable of being performed or caused to be performed by the purchaser, then the purchaser shall also be released from all obligations hereunder; provided that any of the said conditions may be waived in whole or in part by the vendors without prejudice to their rights of rescission in the event of the non-fulfilment of any other condition or conditions, any such waiver to be binding on the vendors only if the same is in writing signed by both of them.

11.1 Each of the vendors jointly and severally covenants and agrees to indemnify and save harmless the purchaser, the corporation and Ronlar (subject to the limitations as to time set forth in Article 7) of and from any loss whatsoever arising out of, under or pursuant to:

Counsel for the respondent refers to Article 3.1 and points to the fact that it is the appellant and his co-vendor who have the discretion to direct to whom the payment cheques for the shares are to be directed, 1.e., to "whomsoever they may direct". He also refers to Article 3.2 and argues that all of the conditions were under the control of the appellant. The children were not responsible in any way for conditions, only the appellant. As to Article 3.3 counsel notes that the transfers to the children are only valid if they, in turn, sell to Tandet.

He also refers to Articles 4.1(5) and (7) which indicate that the inter- generational transfer was not to affect the Tandet agreement. He also refers to Articles 5.1, 8.2, 9.2 and 11.1 which indicate the whole deal was with the appellant, not the children. He concludes that the agreement operated to pass a real interest in the shares to Tandet and that after the execution of said agreement, the appellant was not in a position to transfer full ownership of the shares, which counsel argues is what is contemplated in subsection 73(5) of the Act. He also submits that subsections 56(2) and 55(1) should apply and that the appellant has effected either an indirect payment or was involved in tax avoidance.

Analysis

The Court, after reviewing the evidence, written and oral, and after consideration of counsels’ submissions, finds that the Tandet agreement did not effect a transfer of the Ronlar shares. It clearly obliged the appellant to effect a transfer on the closing date, or as anticipated in Article 3.3, to cause a transfer to be made. Moreover the incidents of title, possession, use and risk did not pass to Tandet until the closing. It is true that the children were not parties to the Tandet agreement. However this is not sufficient to justify a conclusion that the Tandet agreement must be considered as effecting a transfer. Tandet obviously wanted the covenants from the two persons who had run the corporation and its subsidiaries over the years. Tandet also recognized that the appellant was free, prior to closing, to structure the transaction in the best possible fiscal manner and that is what he did. He took advantage of the benefits which the Act provided with respect to transfers of shares of a small business corporation and with respect to deferring recognition of a capital gain. Again it is true that the transfers to the children were only valid if they subsequently sold to Tandet. However they did so and consequently the transfers to them were valid.

Numerous authorities were cited by counsel as to the proper interpretation of a taxing statute and the concepts of business purpose, substance over form, tax avoidance, conferral of benefits and indirect payments.

One decision which touched upon most of these concepts was that of Brulé J.T.C.C. in Orr, supra. This case involved a carefully thought out plan involving, inter alia, a gift by a father to his two sons of shares in the father’s company and the redemption of these shares on the same day, resulting in payment to the sons of $100,000 in total which they immediately loaned back to the company. This redemption resulted in a total deemed dividend of $150,000 thus increasing the company’s cumulative deduction account by that amount. Further the father would escape tax on the deemed capital gain resulting from the gifts by virtue of the small business deduction rollover provisions of subsection 73(5). The overall tax and interest saving was approximately $75,000. The Minister took the position that the series of transactions constituted an abuse of the purpose of subsection 73(5). The Minister also alleged that the avoidance provisions of subsection 55(1) applied to deny such rollover treatment and further that under the indirect payment provisions of subsection 56(2) the deemed dividend resulting from the redemption should be attributed to the father.

The formal holding in Orr reads as follows (D.T.C. headnote, page 558):

Held: The taxpayer’s appeal was allowed. The transactions in issue involved no sham. They were legally effective and complete, properly documented, not prohibited by any provisions of the Act, and not designed to defeat the express intentions of Parliament, which was one of the tests laid down by the Supreme Court of Canada in Stubart Investments Ltd. v. The Queen, [1984] S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305. The taxpayer had merely arranged his affairs to minimize tax which he was entitled to do in accordance with Lord Tomlin’s dictum in I.R.C. v. Duke of Westminster (1936) A.C. 1, 19 T.C. 490 (H.L.). In addition, subsections 55(1) and 56(2) of the Act were inapplicable and merited no further comment. For all of these reasons, the Minister was ordered to reassess accordingly.

Brulé J.’s detailed analysis reviews the leading authorities on the interpretation of tax statutes and I have concluded that that analysis applies equally to this case.

Consequently the appeals are allowed, with costs, and the assessments are referred back to the Minister for reconsideration and reassessment.

Appeals allowed.