Special Risk Holdings Inc. v. Her Majesty the Queen and Minister of National Revenue, [1994] 1 CTC 274, 94 DTC 6151

Muldoon, J.:—This is a complicated income tax case which probably should never have had to be litigated. It has, however, been much litigated, in the following cases: R. v. Special Risk Holdings Inc., [1983] C.T.C. 36, 83 D.T.C. 5046 (F.C.A.); Special Risk Holdings Inc. v. The Queen, [1984] C.T.C. 71, 84 D.T.C. (F.C.T.D.; Walsh, J.); appeal dismissed [1984] C.T.C. 563, 84 D.T.C. 6215 (F.C.A.); Special Risk Holdings Inc. (formerly known as Special Risk Insurance Agencies Ltd.) v. The Queen, [1984] C.T.C. 553, 84 D.T.C. 6505 (F.C.T.D.; Reed, J.); appeal dismissed [1986] 1 C.T.C. 201, 86 D.T.C. 6035, 63 N.R. 390 (F.C.A.); Special Risk Holdings v. M.N.R., [1988] 2 C.T.C. 244, 88 D.T.C. 6444 (F.T.C.D.; Teitelbaum, J.); appeal dismissed [1989] 1 C.T.C. 128, 89 D.T.C. 5039 (F.C.A.). Then there is the present case.

Counsel aver that this is a case of "first impression" and that factor may be why this case has been through both divisions of this Court so often.

In the present case, which was tried in Montreal on November 21 and 22, 1991, the respective counsel had estimated that the trial would require only two days. Alas, they underestimated, thereby evincing the invincible optimism by which the law profession almost invariably gauges the prospective length of proceedings. By the end of the second day, it being apparent that no time was left for argument, the respective counsel agreed, with the Court's assent, that written arguments — without strict time limits — would be the appropriate means of proceeding. So it transpired that the plaintiff's final response was filed on June 25, 1992, when the Court had long since lost the window of opportunity to deal with this case expeditiously, because this judge was then engaged in, and about to be further deployed on, a round of travel, trials and other hearings which could not be avoided. The file does, however, record that the tendering of all written submissions had finally "dried up” on August 14, 1992.

Agreed amendments to the plaintiff's pleadings

Upon the commencement of the trial the parties agreed that the amended statement of claim ought properly to be further amended to include reference to a second assessment performed by the Minister of National Revenue (hereinafter: the "Minister", or the "M.N.R.") in regard to another of the plaintiff's payments of dividend out of tax-paid undistributed surplus ("T.P.U.S.") and 1971 capital surplus on hand ("C.S.O.H."). These acronyms, adopted by the parties, are drawn from the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act" or the "I.T.A."). The amended statement of defence, having already referred to such matters as if pleaded by the plaintiff, did not need any corresponding amendment. The record discloses this.

So, in important, pertinent passages admitted by the defendants, the statement of claim as finally reamended runs thus:

2. By virtue of elections by the plaintiff with reference to dividends payable by it on March 31, 1978 and December 29, 1978, which elections were duly made on March 19, 1978 under subsection 83(1) of the Income Tax Act as enacted by subsection 37(5) of c. 1 of 1977-78, the rules in subsection 83(1) became applicable to such dividends. Such elections were required to be made, and were made, prior to the time the dividends became payable.

[The defendants admit the above, except to plead that subsection 83(1) was not enacted by subsection 37(5) of Chap. 1 of 1977-78, but rather by S.C. 1970-71-72, Chap. 63.]

3. By virtue of the "Rules" referred to in paragraph 2, the dividends

(a) were deemed to have been paid out of the plaintiff’s [T.P.U.S.] and 1971

[C.S.O.H.] to the extent that the dividends did not exceed such amounts; and

(b) were not included in computing the income of the shareholder of the plaintiff for purposes of Part I of the I.T.A.

4. By virtue of subsection 184(1) of the I.T.A. (as enacted by S.C. 1977-78, c. 1, subsection 83(6) and assented to on December 15, 1977), if the amount of the said dividends exceeded the plaintiff’s T.P.U.S. and its C.S.O.H. accounts at the time of the elections, the plaintiff became liable to pay, at the time of the election, a tax under Part III of the I.T.A. equal to '/2 the excess; and the [Minister] was required by subsection 185(1) of the I.T.A., with all due dispatch, to examine the elections and assess the tax, if any, so payable.

5. By notices of assessment bearing date March 19, 1981, notice was given that the plaintiff had been assessed under Part 111 "on excess of dividend paid over portion deemed payable out of tax-paid undistributed surplus or 1971 capital surplus”, in respect of the aforesaid dividends for $2,247 as tax, for $250 as penalty and for $483.97 as interest and $673,115.50 tax and $147,947.74 interest, respectively.

6. On June 2 and 3, 1981, notices of objection were served on the Minister, in respect of the aforesaid assessments, pursuant to section 165 of the I.T.A., which was made applicable to Part III of the I.T.A. by subsection 185(3) thereof.

10. On June 17, 1981, the plaintiff made an election, in respect of each of the aforesaid dividends, in the amounts respectively of $4,494 and $1,346,231, (as contemplated b subsection 184(3.1) of the I.T.A.) and its shareholder made a concurring election. Suc elections were duly communicated to the Minister together with payment of the specified penalty.

[The defendants admit paragraph 10, with the exception of the phrase in the parentheses.]

12. The plaintiff's objections were rejected by the Minister and, after appeals to this Court and the Federal Court of Appeal, the aforesaid assessments were upheld.

18. The Minister has refused to recognize that subsection 184(3.1) of the I.T.A. has had any operative effect in the circumstances and has insisted, on pain of collection procedures, on payment of the Part lll taxes, penalty and interest as assessed which the plaintiff has accordingly paid.

The plaintiff, therefore, claims

(a) a declaration

(i) that the plaintiff has paid the Part III taxes, penalty and interest in accordance with the aforesaid assessments as confirmed by this Honourable Court,

(ii) that the elections made PY the plaintiff on June 17, 1981 pursuant to subsection 184(3.1) of the I.T.A. were filed in due time,

(iii) that the said elections became operative only when a final determination was made by a court of competent jurisdiction that the plaintiff had made excessive elections under subsection 83(1) of the I.T.A.,

(iv) that the plaintiff made a reasonable attempt to determine its T.P.U.S. and C.S.O.H. for the purpose of its elections made pursuant to subsection 83(1) of the I . LA.

(v) that, upon repayment of the aforesaid dividends (loans) to the plaintiff, subsection 184(3.1) of the I.T.A. became operative for the first time in respect of the aforesaid circumstances as if it had been enacted at that time as a special statute in respect thereof.

(vi) that, upon such repayments (which were made after confirmation of the assessment by this Honourable Court), subsection 184(3.1) of the I.T.A. became operative as a statutory enactment to the effect that, for the purposes of the I.T.A., the portion of the dividends deemed thereby to be loans are deemed not to be dividends, which gives rise to the necessary implication that the Part III tax, penalties and interest that were payable and paid in respect of the "loans" are "deemed", as of the time when subsection 184(3.1) so became operative, not to have been payable when they were otherwise payable in accordance with Part III,

and

(vii) that, as such statutory enactment became operative after the final disposition of the appeals from the Part 111 assessment, it is effective, notwithstanding subsection 152(8) of the ITA, to confer on the plaintiff the relief from Part III tax contemplated by subsection 184(3.1);

(b) a judgment

(i) requiring that, in view of the retroactive change in the law applicable to the plaintiff’s liability for Part III tax in the circumstances, the Minister exercise his subsection 152(4) power to "at any time assess tax, interest or penalties. . .or notify. . .that no tax is payable”, which power is applicable to Part III "with such modifications as the circumstances require" by virtue of subsection 185(3) of the I.T.A., or

(ii) declaring that the plaintiff is entitled to repayment of the aforesaid Part III taxes, penalties and interest, with interest thereon, as moneys that have been paid and have become repayable,

(a) as moneys whereby Her Majesty has, or is deemed to have, been enriched by mistake at the plaintiff's expense;

(b) as moneys payable and paid to Her Majesty in respect of which there has been an implied statutory remission or cancellation of liability, or

(c) otherwise;

The evidence reveals that the plaintiff and its principal, (president and sole shareholder) Arthur Frederick Melling, in order to achieve their purposes, entered into a series of frightfully complex transactions, revealed in the exhibited documents. Now, the Court must remain ever mindful that in Stubart Investments Ltd. v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, the Supreme Court of Canada held the taxpayers are entitled to organize their affairs so as to reduce lawfully their tax burden. Here, it is to be remembered, too, that some of the law in question is somewhat strangely formulated. Subsection 184(3.1) at all material times contained this expression of legislative will: ”. . . and the corporation made a reasonable attempt to correctly determine its tax-paid undistributed surplus on hand immediately before the particular time and its [1971] capital surplus on hand immediately before the particular time . . .” [emphasis added]. Remembering the old adage that "there is no equity in tax law", one must observe that what is to be noted in regard to the statutory passage immediately above quoted is that the Court must heed not only the taxpayer's words at the material time, and long after, but also the taxpayer's deeds. The taxpayer’s self-advantaging negligence or wilful or wanton recklessness would surely set at naught the taxpayer's alleged reasonable attempt to determine correctly its T.P.U.S. and its C.S.O.H. Cogent evidence, or the strong inference arising from such evidence, such as misrepresentations, and not mere speculation, would be needed to overcome the operation of the statutory indulgence. The plaintiff's counsel notes in written argument that subsection 184(3.1) falls within Part III of the Act, which, he asserts, is an in terrorem part of the Act.

Pertinent statutory passages

83(1) Where a qualifying dividend has been paid by a public corporation to shareholders of a series of tax-deferred preferred shares of a class of the capital stock of the corporation that were outstanding on March 31, 1977, the following rules apply:

(a) no part of the Qualifying dividend shall be included in computing the income of any shareholder of the corporation by virtue of this subdivision, and

(b) in computing the adjusted cost base to any shareholder of the corporation of any tax-deferred preferred share of the corporation owned by him, there shall be deducted in respect of the qualifying dividend an amount as provided by subparagraph 53(2)(a)(i).

(2) Where at any particular time after 1971 a dividend becomes payable by a private corporation to shareholders of any class of shares of its capital stock and the corporation so elects in respect of the full amount of the dividend, in prescribed manner and prescribed form and at or before the particular time or the first day on which any part of the dividend was paid if that day is earlier than the particular time, the following rules apply:

(a) the dividend shall be deemed to be a capital dividend to the extent of the corporation's capital dividend account immediately before the particular time; and

(b) no part of the dividend shall be included in computing the income of any shareholder of the corporation.

152(1) The Minister shall, with all due dispatch, examine a taxpayer's return of income for a taxation year, assess the tax for the year, the interest and penalties, if any, payable and determine

(a) the amount of refund, if any, to which the taxpayer may be entitled by virtue of section 129, 131, 132 or 133 for the year, or

(b) the amount of tax, if any, deemed by subsection 119(2), 120(2), 120.1(4), 122.2(1), 127.1(1), 127.2(2), 144(9) or 164(6) to have been paid on account of his tax under this Part for the year.

(2) After examination of a return, the Minister shall send a notice of assessment to the person by whom the return was filed.

(3) Liability for the tax under this Part [I] is not affected °Y an incorrect or incomplete assessment or by the fact that no assessment has been made.

(3.1) For the purposes of subsections (4) and (5), the normal reassessment period for a taxpayer in respect of a taxation year is

(a) where at the end of the year the taxpayer is a mutual fund trust or a corporation other than a Canadian-controlled private corporation, the period that ends four years after the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year or the day of mailing of a notification that no tax is payable for the year; ana

(b) in any other case, the period that ends three years after the day of mailing of a notice of an original assessment under this Part in respect of the taxpayer for the year or the day of mailing of a notification that no tax is payable by the taxpayer for the year. [1]

(4) The Minister may at any time assess tax, interest or penalties under this Part [I] or notify in writing any person by whom a return of income for a taxation year has been filed that no tax is payable for the taxation year, and may

(a) at any time, if the taxpayer or person filing the return

(i) has made . . . this Act, or

(ii) has filed with the Minister a waiver in prescribed form within three years from the day of mailing of a notice of an original assessment or of a notification that no tax is payable for a taxation year,

(b) within six years . . .

(ii) . . . any relevant taxation year, and

(c) within three years from the day referred to in subparagraph (a)(ii), in any other case

(8) An assessment shall, subject to being varied or vacated on an objection or appeal under this Part and subject to a reassessment, be deemed to be valid and binding notwithstanding any error, defect or omission therein or in any proceeding under this Act relating thereto. . . .

PART III

ADDITIONAL TAX ON EXCESSIVE ELECTION

184(1) [repealed]

(2) Where a corporation has elected in accordance with subsection 83(2), 130.1(4) or 131(1) in respect of the full amount of any dividend payable by it on shares of any class of its capital stock and the full amount of the dividend exceeds the portion thereof deemed by that subsection to be a capital dividend or a capital gains dividend, as the case may be, the corporation shall, at the time of the election, pay a tax under this Part equal to

(a) where the corporation has elected in accordance with subsection 83(2), of the excess [three quarters];

(b) where the corporation has elected in accordance with subsection 130.1(4), of the excess [three quarters]; and

(c) where the corporation has elected in accordance with subsection 131(1), of the excess [one third].

(3) Where, in respect of a dividend payable at a particular time after 1971, a corporation would, but for this subsection, be required to pay a tax under this Part equal to all or a portion of an excess referred to in subsection (1) or (2), it may elect in prescribed manner on or before a day which is not later than 90 days after the day that is the later of the day on which this subsection comes into force and the day of mailing of the notice of assessment in respect of the tax that would otherwise be payable under this Part, and on such election being made, subject to subsection (4), the following rules apply:

(a) the amount by which the full amount of the dividend exceeds the amount of the excess shall be deemed for the purposes of the election that the corporation made in respect of the dividend under subsection 83(1) or (2), 130.1(4) or 131(1) and for all other purposes of this Act to be the full amount of a separate dividend that became payable at the particular time;

(b) such portion of the excess as the corporation may claim shall for the purposes of any election in respect thereof under subsection 83(1) or (2), 130.1(4) or 131(1) and, where the corporation has so elected, for all purposes of this Act, be deemed to be the full amount of a separate dividend that became payable immediately after the particular time;

(c) the amount by which the excess exceeds any portion deemed by paragraph (b) to be a separate dividend for all purposes of this Act, shall be deemed to be a separate dividend that is a taxable dividend that became payable at the particular time; and

(d) each person who held any of the issued shares of the class of shares of the capital stock of the corporation in respect of which the full amount of the dividend was paid shall be deemed

(i) not to have received any portion of the dividend, and

(ii) to have received at the time the dividend was paid the proportion of any separate dividend, determined under paragraph (a), (b) or (c), that the number of shares of that class held by him at the time the dividend was paid is of the number of shares of that class outstanding at that time except that, for the purpose of Part XIII, a separate dividend that is a taxable dividend or a capital dividend shall be deemed to have been paid on the day that the election in respect of this subsection is made.

(3.1) Where a corporation has elected in accordance with subsection 83(1) in respect of the full amount of any dividend that became payable by it at a particular time after March 31, 1977 and before 1979 and the corporation made a reasonable attempt to correctly determine its tax-paid undistributed surplus on hand immediately before the particular time and its 1971 capital surplus on hand immediately before the particular time and all or any portion of the dividend

(a) has given rise to a gain from the disposition of a share of the corporation by virtue of subsection 40(3), or

(b) is an excess referred to in subsection (1),

if the corporation so elects under this subsection,

(c) in any case referred to in paragraph (a), not later than December 31, 1982 or such earlier day as is 90 days after the latest of

(i) the day on which this subsection comes into force,

(ii) the day on which a notice of assessment or reassessment is mailed to a shareholder of the corporation in respect of a gain referred to in paragraph (a),

and

(iii) such day as is agreed to by the Minister in writing, or

(d) in any other case, not later than 90 days after the later of

(i) the day on which this subsection comes into force [February 26, 1981], and

(ii) the day on which the Minister notifies the corporation by registered letter that

it has an excess referred to in subsection (1) in respect of the dividend,

and the penalty referred to in subsection (5) in respect of such election is paid by the corporation at the time the election is made, the following rules apply:

(e) all or such portion of the dividend as the corporation may claim shall, for the purposes of this Act, be deemed not to be a dividend but to be a loan made at the particular time by the corporation to the persons who received all or any portion of the dividend if the full amount of such loan is repaid to the corporation before such date as is stipulated by the Minister and the corporation satisfies such terms and conditions as are specified by the Minister, and

(f) sections 15 and 80.4 do not apply to such a loan.

(4) An election under subsection (3) or (3.1) is not valid unless it is made with the concurrence of the corporation and all the shareholders who received or were entitled to receive all or any portion of the dividend in respect of which a tax would, but for subsection (3) or (3.1), be payable under this Part or under Part I and whose addresses were known to the corporation.

(5) The penalty in respect of an election under subsection (3.1) in relation to a particular dividend is an amount equal to the product obtained when $500 is multiplied by the proportion that the number of months or parts of months during the period commencing on the day the dividend became payable and ending on the day on which that election was made is of 12.

185(1) The Minister shall, with all due dispatch, examine each election made by a corporation in accordance with subsection 83(2), 130.1(4) or 131(1), as the case may be, assess the tax payable under this Part [III], if any, in respect of the election, and send a notice of assessment to the corporation.

(2) Where an election has been made by a corporation in accordance with subsection 83(2), 130.1(4) or 131(1), as the case may be, the corporation shall, within 30 days from the day of the mailing of the notice of assessment under this Part in respect of the election, pay to the Receiver General the portion of the assessed tax and penalties then remaining unpaid whether or not an objection to or appeal from the assessment is outstanding and shall, in addition, pay interest on that portion at a prescribed rate per annum from the day of the election until the day of payment whether or not it was paid within the period of 30 days.

(3) Subsections 152(3), (4), (5) and (8), sections 163 or 167, and Division J of Part I are applicable mutatis mutandis to this Part [III].

The parties’ agreements

Apart from the admissions expressed in the pleadings, the parties, by counsel stated certain admissions on the record, at trial. The transcript of November 21 is referred to as T21, and beginning on page 8 thereof counsel for the plaintiff began to state the parties’ agreed admissions, as follows:

BY MAITRE RICHARD POUND:

I believe we have exchanged memos but they are not in form.

So I will describe them, and my friends may wish to describe them, I'm sure we'll agree.

First, we have agreed that in the circumstances such as occurred in this case, a taxpayer, here the plaintiff, is entitled to contest the Part III assessments and at the same time to file a protective election under subsection 184(3.1) of the Income Tax Act — our references throughout here to "the Act" will be under the Income Tax Act unless otherwise indicated. In other words, the taxpayer is not put to a choice of either contesting the assessment and thereby losing its right to elect, or conversely, of electing and thereby losing the right to appear on the substance or the merit of the Part III assessments.

Item 2, the parties agree, notwithstanding the position taken in the pleadings, that there was an understanding that the Minister would proceed with a consideration of the plaintiff's election under subsection 184(3) once the final outcome of the Part III litigation ad been determined. In that sense, therefore, there was an agreement that the election would be examined and given effect to, if valid and if within the statutory power of the Minister of National Revenue to so do.

Now, in making this agreement the parties want to be sure Your Lordship understands that it is understood that the Minister did not by reason of this agreement necessarily accept that all substantive aspects of the election under subsection 184(3.1) had been complied with. It does remain an issue before the Court as to whether or not — and I am quoting here — ‘’a reasonable attempt to correctly determine” within the meaning of that expression in subsection 184(3.1) was or was not made. The issue of the sufficiency of the penalty moneys to cover both the elections and the timeliness of the payment of those penalties is not in issue before Your Lordship today.

The issue of either the — or both the sufficiency of the penalties paid at the time of the elections under subsection 184(3.1) and the timeliness of such payments are not issues that we are referring to your Lordship.

In addition, we are agreed that the elections under subsection 184(3.1) were filed in due time and in proper form; of course, this admission is without prejudice to the question of the “reasonable attempt" to which I just referred.

Next, there is no dispute between the parties as to the computational aspects of the two surplus accounts. In other words, the amounts, or the numbers of the dividends and the surplus calculations are not in dispute for the purpose of this litigation.

Next, as Your Lordship will get into the evidence, you'll see the relevance of this particular admission, but the agreement between counsel is that Bruce Verchere and the Verchere firm are recognized as specialists in income tax matters, for purposes of this litigation. Counsel agree that it will not be necessary, therefore, to introduce evidence to the effect that Verchere and the Verchere firm are known to be specialists in the field.

BY HIS LORDSHIP:

When you say "specialists", are they chartered accounts, or. . . .

BY HIS LORDSHIP: [sic]

They are advocates, My Lord.

BY MAITRE RICHARD POUND:

And we have three more agreements and that will bring us to the end of the agreements between counsel.

The first of these three is that the Part III tax which was assessed in respect of the over elections, and which had been contested in earlier proceedings, has been paid by the plaintiff.

The next, and again the relevance of this will become clearer as Your Lordship hears the evidence, the parties agree that the promissory notes, which were the means by which the dividends in question had been paid, have for the purposes of subsection 184(3.1) been repaid by the cancellation of those notes.

And, finally, we agree that the Minister has not sent the registered letter referred to in subsection 184(3.1). It is the Minister’s view that notification of the access [sic] was effectively communicated by the notices of assessment in respect to Part II! tax, dated — both dated March 19, 1981.

BY MAITRE RICHARD POUND:

Now, I hope my learned friends agree that I’ve presented that correctly.

BY MAITRE ROGER LECLERC:

Those are our admissions.

(T21, pages 8 through 14)

Four volumes of exhibits (some contents withdrawn before trial) are exhibit 1, with their sequentially numbered tabs representing sub exhibits, to which reference may be made as: exhibit 1(1) or 1(22) or 1(123) and so on. As it turned out, exhibit 1 with its many included items, was the only exhibit filed at trial.

General commentaries

Corporate income is subject to tax on two planes. Some relief from this double taxation may be provided by tax credits and other measures with which the case at bar is not concerned. On the first level, the corporation pays tax on its income. Then, the corporation's after-tax income, often called corporate surplus, may be distributed among its shareholders, usually by means of the corporation's declaration of a dividend. “Dividend” is not defined in the I.T.A., but it has been defined in interpretation bulletins as “any distribution by a corporation of its income or capital gains made pro rata among shareholders". On the second plane dividends are taxed as income in the hands of the individual, recipient shareholders, who thus pay the second level of tax on that corporate income.

Before 1972 a corporation and its shareholders paid no tax on capital gains. Only dividends from a corporate surplus involving ordinary income were subject to tax. Under that old system, capital gains could be distributed by tax-free dividends, but there could be no such distribution until all retained ordinary income had been distributed.

In 1972 the Act was substantially revised. Provisions separated the pre-1972 and post-1972 periods and allowed corporations to distribute surpluses which had accumulated before 1972 on the basis of the law then in force. Subsection 83(1) of the I.T.A. permitted a corporation, by formal election, to make (virtually) tax-free, (or tax-deferred), dividend distributions to the shareholders.

To the extent that a pre-1972 surplus was composed of ordinary income, it was still subject to income tax, but that tax could be paid by the corporation and not the individual shareholders, and at the reduced rate of 15 per cent. Dividends

from: this type of surplus were Called dividends out of tax-paid undistributed income or surplus on hand, or T.P.U.S. "Tax-paid" refers to the reduced rate of 15 er cent tax which became due. Other distributions out of pre-1972 surplus could

e tax-free and became 1971 C.S.O.H.

Pursuant to subparagraph 89(5)(a)(ii) of the Act, the 1971 C.S.O.H. was to be deemed nil if the surplus arose when the taxpayer disposed of property which is the shares of a corporation controlled by the taxpayer and that property was disposed of to a person with whom the taxpayer was not dealing at arm's length. The meaning of "controlled" as expressed in subparagraph 89(5)(a)(ii) comes from subsection 186(2) of the I.T.A. which runs:

. . . one corporation is controlled by another corporation if more than 50 per cent of its issued share capital (having full voting rights under all circumstances) belongs to the other corporation, to persons with whom the other corporation does not deal at arm's length, or to the other corporation and persons with whom the other corporation does not deal at arm’s length.

A finding of "control" would be fatal to the crystallization of the 1971 C.S.O.H. account because the amount of the account would be deemed nil. If a taxpayer then made an election to distribute funds from this account, such election would, obviously be excessive.

In 1977 amendments to the I.T.A. terminated, as of the end of 1978, a corporation's right to make distributions of non-taxable dividends out of its T.P.U.S. and 1971 C.S.O.H. accounts. Many corporations found themselves in a situation of having to rush to distribute all of the pre-1972 surplus to their shareholders before that deadline. Because of the rush and the complexity of the Act's relevant provisions, many corporations made excessive elections. The payout of excessive non-taxable dividends attracted under subsection 184(1) a penalty tax of originally 100 per cent of the excess, later reduced to 50 per cent. The subsection under consideration in this case was meant to be a further remedial measure. Subsection 184(3.1) is recited earlier above herein.

Facts

In 1976 Mr. Melling was the plaintiff's sole shareholder and president, which at that time was known as Special Risks Insurance Agencies Ltd. (always abbreviated SR), (T21, page 77). In March of that year Mr. Melling met representatives of a British firm of insurance brokers, Hogg Robinson (HR), who were interested in entering the Canadian market by means of obtaining a minority position in a Canadian firm. Hogg Robinson was interested in buying an interest in Richards, Melling and Co. Ltd. (sometimes hereinafter, RMC or just RM), a Canadian insurance brokerage firm owned and controlled by the plaintiff, Special Risks. (T21, pages 58 to 61). At the risk of rendering these reasons encyclopedic in length, this Court considers that what Mr. Melling testified in this trial and what was written by Madam Justice Reed concerning the same facts (on, apparently, less documentation, then, than was available herein) are both significant passages to be noted.

First, Madam Justice Reed in Special Risks Holdings (F.C.T.D.), supra, at pages 554-55 (D.T.C. 6506-07):

The corporate plaintiff is Special Risks but its controlling mind was Mr. Arthur Frederick Melling, the president and principal shareholder of the company. In the spring of 1976, the plaintiff decided it would be advantageous to seek business links with a United Kingdom corporation — the Hogg Robinson Group. Negotiations ensued for the purpose of enabling the Hogg Robinson Group to purchase an interest in Richards, Melling and Co, Ltd. (RMC) a company owned and controlled by the plaintiff. A decision was made to incorporate in Canada a corporation to be known as Melling, Hogg, Robinson Ltd. It seems clear that from the beginning it was intended that the plaintiff would have the controlling interest in this Canadian corporation.

The actual structuring and implementation of this new business relationship proceeded on the advice of the legal and tax advisers of the respective companies. The steps taken were as follows.

On December 1, 1976, the plaintiff owned 2,500 class "A" and 2,300 class "B" shares of Richards, Melling Company Ltd. (RMC). All shares carried voting rights and the plaintiff's holdings clearly constituted ownership of a majority of the issued shares of that company. On December 17, 1976, Richards, Melling’s authorized capital was increased by 100,000 common shares (of a par value of $1 each). On the same date a new corporation, Melling, Hogg, Robinson Ltd. was incorporated under the laws of Canada. On December 20, 1976, 50,000 common shares of Melling, Hogg, Robinson were purchased by the Hogg Robinson Group Ltd., and 50,000 common shares were purchased by the plaintiff. On the same date Melling, Hogg, Robinson purchased 100,000 common shares (voting) of Richards, Melling (RMC) thereby acquiring control in terms of share ownership of RMC. On December 23, 1976, Richards, Melling’s (RMC's) authorized capital was modified and new classes of preferred and common shares were issued and the plaintiff exchanged its old class "A" and "B" shares in Richards, Melling for new class "A", "B" and "C" shares all of which were non-voting.

On December 31, 1976, the Hogg Robinson Group sold 1,000 of its shares in Melling, Hogg, Robinson to the plaintiff; the plaintiff thereby acquired 51 per cent of the shares of that corporation.

[Emphasis added.]

Next, the testimony of Mr. Melling during the trial of this action, is noteworthy (T2 1, pages 60-62):

. . . I had a couple of visits from some of the senior members from Hogg Robinson who visited me in Montreal and we got far enough along to know that there was a serious interest to see if we could do something and, I believe, that — that at — at the time actually what I was doing with — at the beginning of 1976, I had been spending some time with our tax advisors, specifically Bruce Verchere of Verchere Gauthier, to put together a scheme, or a plan whereby I could reduce the value of the common shares in the firm to something whereby I could attract the key members in, without putting them into bankruptcy, so that they could afford it, through putting the value of the firm into a redeemable preferred share and so on, so we had come up — or I should say “we had”

— Bruce had come up and suggested to me there was a way to do this through preferred shares.

So, when I knew Hogg Robinson were interested in becoming involved with Richards Melling, I set my mind to thinking about what might be attractive to me and the ways to be worthwhile for me to get them involved and what I did is, I came up with some thoughts as to how I could apply what we had done for — or planned to do for the key employees through this estate freeze type of thing and put some figures into it as I thought would be very exciting for me, if we were to let Hogg Robinson became shareholder in the company and, having reviewed some of these documents over the last couple of days, I see that I — I must have called Bruce [Verchere] in the area of May something in 1976. . . .

And I phoned him up and suggested that I was going to be sending a memo and I'd like to sit down with him thereafter and see what he thought of the thoughts, which I did do and — and we ... .

That memo about which counsel interrupted his witness, Mr. Melling, is exhibited.

The document is Exhibit 1(9) a memorandum dated May 19, 1976, with covering letter addressed to Mr. B. Verchere, signed by Mr. Melling, which runs as follows:

Dear Bruce,

I am enclosing the memorandum we discussed today and look forward to your reactions. There are a few other points you might be thinking about before our meeting Tuesday morning.

1. H.R., from their point of view, can pay money in the Bahamas and/or Switzerland or various other tax havens should there be any advantage to me — food for thought.

2. Perhaps Louise [Mr. Melting's spouse] should have two per cent M.H.R. [Melling, Hogg Robinson] thereby disassociating Special Risks from control, thereafter presuming Special Risks should become active on some basis through management contracts, etc.

3. In order to develop the cash to repay the interest-free loan, I have done a cash flow projection based on the deferral of income tax through the unearned commission route.

See you on Tuesday, 8:15 a.m.

Sincerely,

Fred

[Emphasis added.]

The enclosed memo, also part of Exhibit 1(9), headlined RICHARDS, MELLING AND COMPANY Ltd. is too long to recite here, but its significant passages ought to be recited, thus:

1. A.F.M. [Mr. Melling], presently very happy with the almost 100 per cent control of Richards Melling and with future prospects of the present basis. To break this total control, very significant expanded business excitement is necessary to justify it. Although

a decision has been made by A.F.M. to involve key people in the business during the year 1977, the method to be used would be chosen to allow A.F.M. to be literally in 100 per cent control.

2. Hogg Robinson

(b) They believe that control should remain in the country of the activity — especially Canada with its laws and, equally important, attitudes.

(e) Their long-term investment attitude is to maintain a minority interest ad infinitum in a progressive and profitable enterprise. It is not to gain control nor is it for gain through the future sale of the shares.

(f) They accept and agree with A.F.M.'s wish to retain control as long as it is viably possible.

OBJECTIVES

2. To be able to offer shares to key employees and future key employees as well as selling 35 per cent to H.R. and still keep control of R.M. for A.F M.

SOLUTION & SEQUENTS [sic] OF EVENTS

4. Special Risks and H.R. form new federal company Melling Hogg Robinson Company Ltd. — shareholding 51 per cent S.R. — 49 per cent H.R.

SITUATIONS AT THIS POINT

Hogg Robinson

1. H.R. own 49 per cent M.H.R. (i.e., 49 per cent of R.M. at outset)

Special Risks

1. Own 51 per cent M.H.R. (i.e., 51 per cent of R.M. at outset)

ADVANTAGES

H.R.

1. Meaningful role in Canada.

A.F.M.

1. Keep control.

(fifth page plus six more pages)

[Emphasis added.]

The above partially recited memo, Exhibit 1(9), reveals a lively mind and an obsession to keep Bruce Verchere reminded, and perhaps some Court in the future certain of Mr. Melling’s insistence upon keeping control, come what may.

In addition to the above mentioned memo, and about a week later, on May 25, 1976, Mr. Melling again wrote to Bruce Verchere enclosing Mr. Melling’s "schedule of Sequence of Events", Exhibit 1(10). Under the foregoing headline of the memo, item 4 provides: ”. . . new federal company Melling Hogg Robinson Company Ltd. — shareholding 51 per cent S.R. — 49 per cent H.R.”. The same is reiterated again and again in this memo, Mr. Melling testified that “this [memo] was just a little further clarification to the memo that was sent on the 19th”, (T21, page 63). Bruce Verchere advised that Mr. Melling continue his negotiating with Hogg Robinson.

Mr. Melling went to London, U.K., during August 8 through 14, “just getting to know people [at HR] and whatever", (T21, page 65). Immediately following that meeting Mr. A.V. Hopkinson, overseas director of HR wrote to Mr. Melling on August 16, 1976. Pertinent passages of Mr. Hopkinson's letter, Exhibit 1(15) are expressed in this manner:

Dear Fred,

I am writing as promised to set out the basis of the deal that we agreed together on Thursday:

(2) A new holding company to be called Melling Hogs Robinson Ltd. will be formed with a capital of C$100,000 of which 51 per cent will be subscribed by S.R.I.A. Ltd. and/or Mr. Butler and 49 per cent will be subscribed by the H.R. Group. M.H.R. Ltd. will subscribe $100,000 new Common Stock of R.N. & Co. Ltd.

Doubtless you will now be getting your lawyers to draft the necessary documentation and I am today instructing Messrs. Blake, Cassells & Graydon (Mr. W.E. Brown) of Box 25 Commerce Court West, Toronto, Canada, MSL 1A9 to act for us in the matter.

It may therefore be a good thing for the two firms to get into touch.

I think I need hardly say how delighted we all are here that we have been able to find a basis on which we can go forward with you. We all look forward to exciting and profitable years ahead. We all thought your visit to London was extremely helpful and I do hope that you had a pleasant and uneventful trip back home.

My kindest regards.

A.V. Hopkinson

OVERSEAS DIRECTOR

[Emphasis added.]

So it can be clearly seen that, although a myriad of details were still to be crystallized, the main basic lines of the plaintiff's dealings with its own corporation RMC, and with HR, were mutually agreed between the principals. A constant, ever solid sine qua non of the transactions — the plaintiff's control of the new corporation — was permanently embedded therein. Mr. Hopkinson accepted

the plaintiff's control as a given: the principals were ad idem on that score. It was, therefore, an agreed basis of the transaction between the plaintiff's directing mind and those of HR.

In any forum or tribunal in which written depositions or oral testimony are introduced in order to influence the outcome of the litigation, the verbal evidence, written or oral may be tested for credibility. Indeed, it is said that credibility is always in issue. So, it is here.

The defendants' counsel cross-examined Mr. Melling so effectively that at one point in the cross-examination, the plaintiff's counsel interjected seemingly to spare his client's credibility any further demolition. Here is how it happened (T21, pages 135-37):

I certain [sic] will sir. You will agree with me, I think, that whatever exception you may have to his letter, and you set it out here in your letter of the 23rd, whatever exception you may have with his letter of August 16 where he sets out your agreement, that it has nothing to do with the 51/49 stock split in paragraph 2 of his letter.

I haven't mentioned that in this letter.

BY MAITRE RICHARD POUND:

My Lord, I don't want to do anything except help move this along, if my friend is trying to elicit from a review of these documents the intention of the parties, and certain Mr. Melling’s intention from the outset was to go into a 51/49 relationship, and that when the smoke cleared on December 31, 1976, that’s what it was. I have no problem admitting that. I think it’s quite clear and if this is not a sufficient admission for my friend, we can talk about it some more, but up to and including the careful review of this proposal by Verchere, when he suggested a two-step approach to the 51/49, nobody considered anything other than 51/49, neither Mr. Melling nor Hogg Robinson in their discussions. It was only on September 8, and perhaps just before that when it was discussed between Mr. Melling and Mr. Verchere, that the idea of getting at this in two steps, going first to 50/50 for the purpose of the crystallization of the surpluses, and then a short time later to 51/49 came up. And I don’t have any problem admitting that, if that helps my friends.

BY HIS LORDSHIP:

I think this passage of cross-examination began when the witness didn't like the question that you intended ultimately to have 51/49, he said, wait a minute, not ultimately, he said in September we were 50/50 and then we went through some steps. Now your admission is far clearer than the witness's.

BY MAITRE RICHARD POUND:

I think the witness took exception to.

BY HIS LORDSHIP:

“Ultimately.”

BY MAITRE RICHARD POUND:

. . .my friend’s use of the word “insisted” and he said, yes, that's what I want in the best possible world but I was prepared to go to 50/50 for a period of time and take my chances.

BY HIS LORDSHIP:

Let's let the witness testify then.

BY MAITRE RICHARD POUND:

Yes, but I am certainly prepared to admit that, if it helps my friend, because if we are going through the documents at this pace, we will indeed be following you around the country.

BY HIS LORDSHIP:

Carry on.

Exhibit 1(16) is a copy of a letter from Mr. Hopkinson on August 16, 1976, to a chartered accountant in Clarkson Gordon HR's Canadian accountants. In its pertinent parts it runs as follows:

John H. Swinden, Esq., C.A.,

Messrs. Clarkson Gordon & Co.

Royal Trust Tower,

P.O. Box 251,

Toronto-Dominion Centre,

Toronto,

Canada MSK 1J7

Dear Mr. Swinden:

RICHARDS MELLING & CO. LTD.

I much appreciated the opportunity to talk with you and with David Stephen on my recent visit to Toronto. Our discussions were most helpful and have resulted in an outline agreement, details of which I am sending with this letter. i would, however, first like to acknowledge Mr. Stephen's letter of July 21 and the enclosures. We certainly will wish this matter to be discussed with the Foreign Investment Review Agency as soon as the details of the proposals have been finalized. ....

(g) We presently contemplate that the $49,000 new Common Stock would be subscribed by Hogg Robinson & Capel-Cure (Canada) Ltd. and that the H.R. holding of "C" Preference Shares would be taken by our Holding Company in the Bahamas. Subject to the necessary discussion with the Foreign Investment Review Agency, are there any other problems arising from this which should be anticipated?

As intimated in my letter to Mr. Melling, I have also written to Mr. Brown instructing him on this transaction and I have informed him of your involvement. He also has a copy of my letter to Mr. Melling and he may well be in touch with you. At the present time we have not advised our Staff at H.R. & C.-C. (Canada) Ltd. of the proposals although Mr. Seagram and Mr. Austen are aware that we are in discussion with Mr. Melling.

Yours sincerely,

A.V. Hopkinson

OVERSEAS DIRECTOR

Exhibit 1(20) is a copy of a letter addressed to Mr. Brown of Blake Cassells & Graydon, HR’s solicitors on September 8, 1976, by Bruce Verchere the plaintiff's tax lawyer. Mr. Melling identified it, and testified that Bruce Verchere discussed the content with him (T21, page 68, lines 19 and following). In its pertinent passages it proceeds:

Dear Mr. Brown:

RE: Richard Melling, Hogg Robinson et al.

We have reviewed the proposed investment in Richards Melling by Hogg Robinson and the reorganization of A.F. Melling’s interest in Richards Melling (through Special Risks Insurance Agency Ltd.), as set forth in the letter of August 16, 1976 from A.B. Hopkinson of Hogg Robinson Overseas Ltd., from the taxation standpoint and recommend that the transaction proceed with the following modifications:

4. Melling Hogg Robinson Ltd. would be formed in the manner set out in Mr. Hopkinson's letter but the subscription to the common shares would be by Special Risks 50 per cent and by Hogg Melling Robinson 50 per cent — not 51 per cent — 49 per cent.

7. At a short interval following the completion of the foregoing transactions, Hogg Melling Robinson could sell one common share of Melling Hogg Robinson to Special Risks and Hogg Robinson could proceed to acquire the preferred shares in a manner set out in paragraph 3 of Mr. Hopkinson's letter.

The results of the modifications outlined above would be to:

2. permit Special Risks to optimize its taxation position; and

3. place Hogg Robinson in precisely the same position as would obtain pursuant to the arrangements set out in Mr. Hopkinson's letter.

I will call you in a few days to discuss implementation of the transactions.

Yours sincerely. . ..

[Emphasis added.]

This is the first manifestation of games-playing or dissembling "to kill two birds with one stone" so to speak. One would pretend that the agreement was changed to 50-50 for a fleeting short time, as if it were genuine, in order to achieve the tax purpose, and then it would revert to the straightforward first (and ultimately realized) intentions of Messrs. Melting and Hopkinson, that is, SR 51 per cent and HR 49 per cent.

The foregoing assessment is confirmed by Mr. Brown's misgivings in his letter of September 10, 1976, (Exhibit 1(24) a copy) addressed to Clarkson, Gordon, thus:

Re: Hogg, Robinson & Capel-Cure (Canada) Ltd.

I enclose a copy of a letter I have today received from Verchere. I do not follow the letter and will have to talk to Verchere on the telephone in connection with it.

The one point that does occur to me is that the suggestion in paragraph four for a temporary 50/50 ownership of the new holding company will give us problems under the Foreign Investment Review Act and will probably compel us to get FIRA approval before we can proceed.

Yours very truly,

W.E. BROWN

A planning memorandum (Exhibits 1(31) and (32), both copies) drawn by Mr. Verchere as a basis of discussion with HR's solicitors, repeats the temporary 50/50 ruse. Ultimately, despite the initial misgivings of Mr. Brown, HR's Canadian solicitor, HR, upon being advised that the plaintiff's little tax game ofstepping briefly outside the once and future transaction for a breath of hoped-for tax relief would not jeopardize HR in the true transaction, HR good naturedly played along with SR's fictitious diversion.

Now, Mr. Melling testified that the plaintiff took a terrible risk at the end of 1976 that HR would not do the honourable deed and would refuse to sell a one per cent interest to the plaintiff after all. He testified about thunder on the mountain as the lawyers wrangled and fought over HR's honourably conveying that one per cent or not, and he trembled to think that 1977 might dawn with the plaintiff and HR being still in a 50/50 relationship. Only hope remained for Mr. Melling, as he testified What a story!

The story recorded in the transcript, T22, has this aspect to it, on cross- examination (122, pages 15-17):

Q. And, indeed, when Hopkinson came over, as you told us about, in late December 1976, there was nothing that he said on the — I think you said you were together on the 30th and on the 31st — nothing that he said on either of those dates that took away from the hope that you had obtained in September on putting the phone down with them then?

A. Actually, as I said, on the 31st we had—and / don't remember what the issues were, but we really had quite a knock down between the lawyers, and we weren't coming to a conclusion at all. And so, on the 31st there was something that took away from my hope. And, as I said, we left the room and — and — this was after quite a period of time, it wasn't—wasn't quick and we went out and made some business decisions on whatever those issues were and we came back and we instructed the counsel per se so that it got planned. But, yes, at that point, there definitely was a doubt in my mind.

Q. Nothing on December 30?

A. No, not on the 30th.

Q. You had dealings with Hopkinson on the 30th?

A. Yes, that’s right.

Q. Nothing that he said, or did, took away from that hope

A. No.

Q. . . . it would only have confirmed your view that things would happen as they were planned, on December 30?

A. Yes, there was nothing to take away from my hope at that time.

Q. So, we are down to the last day of the year to effect this hope that you had since mid September?

A. That's right.

Q. And it’s probably late September because the Verchere Memorandum is dated September 22 and you told us, Mr. Melling that you had at least read the document before the phone conversation. And you don't remember what the issues were that caused the hang-up on the 31st?

A. No, I am afraid I don't.

[Emphasis added.]

If he correctly described the situation at the end of December 1976, it must have been one of stress, anxiety and high adrenalin production for Mr. Melling. He had evinced almost an obsession for keeping control from the beginning; he had evinced an intelligent understanding of the transaction all along; he had every expectation that HR would honourably carry out the parties’ understanding, and he of all people could not remember what bone (or bones) of contention was impeding his keeping control? He and Hopkinson instructed their fractious solicitors on how to settle the issues, and Mr. Melling could not remember what they were! That is incredible, unless the big story about this last-minute rescue of the original transaction be all sham. This Court, on a compelling inference from virtually the whole cross-examination of Mr. Melling, and his demeanour in testifying, finds that it was a sham.

Here is what Madam Justice Reed wrote in the earlier case of Special Risks Holdings Inc., supra, at page 555 (D.T.C. 6507):

It is clear from the evidence that the structure of the transaction was designed solely in order to avoid taxes which the plaintiff would otherwise be required to pay. On August 16, 1976, the plaintiff, in the person of Mr. Melling wrote to the Hogg Robinson Group stating: "I am writing as promised to set out the basis of the deal that we agreed together on Thursday". The deal so described involved the exchange by the plaintiff of its existing common shares in Richards, Melling (RMC) for preference (non-voting) shares; the issue of 100,000 common (voting) shares of Richards, Melling to the new corporation to be held 51 per cent by the plaintiff and 49 per cent by the Hogg Robinson Group. Subsequent correspondence between Mr. Melling and the Hogg Robinson Group during August and September proceeded on the basis that the 51 per cent/49 per cent split was agreed upon. The plaintiff's evidence was that there was no "agreement" at this time respecting the final disposition of the share ownership. His evidence was that it was unimportant whether he held a 50 per cent share of a 51 per cent share in the new corporation. I do not accept this evidence. At the very least such a difference in a normal business transaction would have been reflected in the purchase price offered. In explaining the reason for the purchase of the one per cent controlling interest on December 31, 1976, Mr. Melting's evidence was:

. . . back at that time it seemed to me that it might be advantageous to be able to wave a Canadian flag while trying to offer the services in Canada, and on this basis, I suggested to Hogg Robinson that it might be advantageous to do that, and I could do that if they were willing to sell me the one thousand shares. That's the reason I bought those shares.

In the context of negotiations which had been going on between the parties since the previous spring, this is not a credible explanation.

Finally, Mr. Melling, under cross-examination, testified thus (T22, pages 21-22):

Q. Then your hope then to have what you wanted to achieve ultimately, the 51/49 was based (a) on your desire for control, you testified to that?

A. Yes, it certainly was a preference, yes.

Q. And was that also related to the Foreign Investment Review?

A. Well, the Foreign Investment was there, I mean certainly at the — I remember that — there was something at the year end, that that’s where it triggered, where your investment was and so on and — and — and it would have created problems in the future. But the Foreign Investment Review was there.

Q. So, if I understand you correctly, what you are saying is that it was contrived so that there would be a period of 10 or 11 days in which there would be a 50/50 relationship to allow you to get your money out tax free, and then on the last day of the year, the 50/50 relationship would yield to a 51/49 relationship. Is that how it was planned?

A. It was planned so that there were the two steps, yes.

Mr. Melling was effectively cross-examined and not rehabilitated on redirect examination.

Findings

The findings of Madam Justice Reed above cited, upheld as they were by the Appeal Division at [1986] 1 C.T.C. 201, 86 D.T.C. 6035, being the same issue litigated by the same parties constitute res judicata, or issue estoppel. Even so, the evidence before Madam Justice Reed was not so complete as is the documentary evidence in the case at bar. So, without purporting in any way to dilute, or to cast doubt upon, the Appeal Division confirmed findings of Reed, J., this Court, upon all of the evidence, finds that the intention of the plaintiff and HR was, from the outset, single-minded determination to have a 51/49 share deal: the 50/50 share deal was a contrivance at best, and a deliberate sham at worst, being a ploy to pretend that control was lost, without possibility of retrieval, except by HR's act of grace.

Indeed, it is not entirely so sure that by invoking equitable principles against HR, in a lawsuit in Ontario or in England, the plaintiff could not have compelled the result of 51/49, upon which it and HR were always ad idem from the outset, in any event. Mr. Hopkinson, upon all the evidence was an honourable person vis- a-vis Melling and the plaintiff, and there is no doubt that the extra one per cent was sure to Pe obtained by the plaintiff with or without the contrived little ploy.

Mr. Melling’s earlier unguarded assertions of control from beginning to end, first, last and always wholly accepted by HR, are the nexus of this case. Accordingly Mr. Melling’s credibility suffers horribly on the question of that temporary, wholly ephemeral 50 per cent/50 per cent position of the plaintiff and HR, which was never intended to be aught but a chimeric falsa demonstatio. The Court is inclined to accept, and does adopt, the defendants' written argument on this issue, following, as it did, the defendants’ counsel's effective cross-examination of Mr. Melling at trial.

So, as he always intended, Mr. Melling through the plaintiff never did lose control of RMC, nor accordingly, of MHR. He is hoist with his own petard. The evidence is clear that although the parties may have purported to agree that on December 20, 1976, they would for a few days seem to be equal partners, it was never their agreement to remain as such into 1977, since it was always understood that their one and only closing date would see them in a 51/49 arrangement before 1976 ended.

The plaintiff's efforts, through Mr. Melling and others, to reveal only part of the true nature of the transactions involved raise a strong — nay, irresistable — inference that Mr. Melling was vividly aware that the undisclosed information, brought to light just before the trial herein, was crucial to a proper assessment of the plaintiff’s tax position.

Conclusions

As noted by the defendants, "correctly", the corresponding adverb, is defined in the Shorter Oxford English Dictionary 3rd ed. as (defendants' book of authorities — tab 25):

1. In accordance with an acknowledged standard, especially style or behaviour 1676. 2. In accordance with fact, truth or reason, right 1705. 3. Of persons: adherence exactly to a standard 1734.

A “reasonable attempt to correctly determine" pre-1972 surpluses must exact an attempt to determine those sums in accord with the facts, or the truth, as the taxpayer knows it to be, not merely as the taxpayer would like it to appear in order to gain a tax advantage which would not otherwise be available. The taxpayer, under the statutory standard is not required to be "right" as the plaintiff has argued; but it is required not to be duplicitous, or deceitful, or knowingly to evade the duty to make a reasonable attempt to meet the standard of correctly determining its tax paid 1971 C.S.O.H. The taxpayer knowingly fell woefully short of that statutory standard. Its 1971 C.S.O.H. is deemed to be nil pursuant to subparagraph 89(5)(a)(ii) of the Act, because the plaintiff was disposing of property which is the shares of a corporation controlled by it, and the property was disposed to a person with whom the taxpayer was not dealing at arm's length, as this Court holds, and as has been held in the earlier trial and appeal.

On the foregoing basis and for the foregoing reasons the plaintiff's action should be dismissed with costs.

Alternative contentions

The plaintiff and the defendants have submitted written notes of argument, the plaintiff submitted written notes of reply, the defendants in turn, filed a rebuttal, and finally the plaintiff submitted a response to the defendants' rebuttal.

The written arguments are intellectually thrilling to read and to savour. Basically the plaintiff argues that subsection 184(3.1) of the I.T.A. confers on a taxpayer who falls within its terms, upon satisfying the conditions expressed in the subsection, a right to have the Part III tax imposed on it (by virtue of tne subsection 83(1) overelection) remitted because subsection 184(3.1) retroactively changes the basis upon which that tax was imposed. In the Court's finding, however, the taxpayer has not satisfied the conditions expressed in subsection 184(3.1).

Jurisprudence

Although the case of Canadian Marconi Co. v. Canada, [1991] 2 C.T.C. 352, 91 D.T.C. 5626, did not concern subsection 184(3.1), it appears to be directly applicable to the case at bar, because the Court of Appeal in Marconi interpreted the effect of the reassessment provisions of subsection 152(4). There, the Minister (hereinafter M.N.R.) and the respondent were disputing the M.N.R.'s reassessments in regard to the 1973 to 1976 taxation years, both inclusive. The respondent was ultimately successful in an appeal to the Supreme Court of Canada, which rendered its decision on November 6, 1986, Canadian Marconi Co. v. The Queen, [1986] 2 S.C.R. 522, [1986] 2 C.T.C. 465, 86 D.T.C. 6526.

Here are pertinent passages from the Appeal Division’s 1992 unanimous Marconi judgment articulated by Mr. Justice Mahoney, commencing at page 354 (D.T.C. 5627):

While the appeal against the 1973 to 1976 assessments was before the courts, by notices of reassessment dated July 4, 1983, the Minister reassessed the respondent's 1977 to 1981 returns, excluding the investment income from the computation of Canadian manufacturing and processing profits. The respondent did not file notices of objection nor did it file waivers within the four-year limitation period. That period expired in respect of all taxation years in issue before the Supreme Court rendered its judgment.

The respondent has asked the Minister to reassess it for 1977 to 1981 in accord with the Supreme Court’s judgment. The Minister says he is powerless to do so. There is no question of compelling him to do so.

The argument is that, notwithstanding the limitation period, the Minister may at any time reassess any taxpayer in respect of any taxation year; the taxpayer may then elect to waive the limitation period by not raising it in defence. That is the way waiver comes into the process and, if the Minister had the power to reassess, there could, in my view, be no reason at all why a taxpayer ought not, by foregoing a private right to object to a reassessment, waive the limitation period.

The seminal decision is that of Cameron, J. in M.N.R. v. Taylor, [1961] C.T.C. 211, 61 D.T.C. 1138 (Ex. Ct.).

Absent a waiver as provided by subparagraph 152(4)(a)(ii), an allegation of misrepresentation or fraud is implicit in an out-of-time reassessment.

Where the Minister alleges, expressly or implicitly, misrepresentation or fraud, there is nothing offensive in putting a taxpayer on notice that he must object to an out-of-time reassessment. It is, with respect, quite otherwise absent an allegation of fraud or misrepresentation. An obvious policy consideration nourishes the distinction in treatment.

This is a hard case from the respondent's point of view but, in my respectful opinion, this appeal is concerned with a rather straightforward question of statutory interpretation. One need go no further into the authorities than Sussex Peerage, [1844] 11 Cl. and Fin. 85 at page 143; (1844), 8 E.R. 1034 (H.L.) at page 1057.

. . . if the words of the statute are in themselves precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense.

In my opinion, there is no ambiguity in subsection 152(4) as it bears on the question here. It seems to me that subsection 152(4) is clear and I have been pointed to nothing in its immediate context or in other provisions of the Act that would suggest it should be interpreted otherwise than in its plain meaning.

I would allow the appeal with costs and, pursuant to subparagraph 52(b)(iii) of the Federal Court Act, R.S.C., 1985, c.F-7, declare that on the facts as agreed the Minister of National Revenue had no power to reassess the respondent's income tax returns for its taxation years 1977 to 1981 inclusive on or after November 6, 1986.

Conclusions

In the case at bar, misrepresentation has surely been found, but it appears that the parties have agreed herein that the Part III tax which was assessed in respect of the over-elections, and which has been contested in earlier proceedings, has been paid by the plaintiff. Can the Minister reassess in the circumstances? It is obvious that he cannot be compelled to reassess, just to give the plaintiff yet another day in Court. After all the plaintiff has been found not to have made a reasonable attempt to correctly determine the very surpluses upon which it has paid up as required by the judgment of this Court. Indeed, on the reasoning of the Marconi case, the Minister is functus and was so at the time of trial. He is not able to open up the matter by means of another reassessment. Given the plaintiff’s misrepresentation and failure to satisfy the conditions of the law, there is no question of any allegedly "just" restitution. Hard as the plaintiff’s principal may think it to be, that conclusion, in these circumstances, seems to be a just conclusion.

Accordingly this alternative contention by the plaintiff should be dismissed.

The plaintiff's action is dismissed with costs. Pursuant to Rule 337(2)(b), the defendants' counsel or solicitors may draft a form of judgment to give effect to these reasons. They should seek the plaintiff’s lawyers’ consent to form at least, if not form and content — a matter which is not compulsory for the plaintiff's lawyers—before submitting the form.

Application dismissed.