North Star Holdings Incorporated v. Her Majesty the Queen, [1993] 2 CTC 2672, 93 DTC 973

Beaubier, T.C.C.J.:—This matter was heard in Thunder Bay, Ontario on June 14, 1993. It is an appeal pursuant to the general procedure of this Court.

The issue in question is whether the appellant was associated with Sibru Holdings Inc. ("Sibru") or Bruno’s Contracting (Thunder Bay) Ltd. ("B.C.") during its 1986, 1987 and 1988 taxation years. In particular, the parties stated that the question for the Court is:

Who owned the shares of Sibru during the years under appeal?

The parties’ evidence was limited to that question. The appellant says Wilfred Lingman ("Wilf") owned one common share and B.C. owned the other two common shares. The Crown assumed that Silvio DiGregorio ("Silvio") owned one common share and his brother Bruno DiGregorio ("Bruno") owned the only other common share.

All of the witnesses were called by the appellant. They were Silvio, Wilf and Peter Buset, CA (” Peter").

Sibru was incorporated by the DiGregorios' solicitor July 17, 1984 pursuant to the Ontario Business Corporations Act, S.O. 1982, c. 4, on Silvio's instructions in order to purchase property from Vulcan Machinery & Equipment Ltd. (the "Vulcan deal”). Silvio instructed the solicitor that the shares were to be owned by Silvio and Bruno equally. Silvio signed minutes of a telephone meeting of July 30, 1984 whereby each of Silvio and Bruno received one common share of Sibru (Exhibit A-1). Silvio testified that Bruno was out of town at the time of the Vulcan deal.

The subscriptions for shares by Silvio and Bruno contained in Exhibit A-1 read as follows:

5. Resolved that subject to receipt of a subscription for shares of the capital stock of the corporation, the corporation issue the shares to the person named at the price indicated, and that the certificate for the said share be issued to him forthwith upon payment for the said share.

I, Silvio DiGregorio hereby subscribe for one common share of the capital stock of the corporation at the price of one dollar per share and hereby undertake and agree to pay for the same forthwith upon the authorization of the issue of the said shares to me.

Name	No. and class of share	Price per share
Silvio DiGregorio	1 common share	$1

Silvio DiGregorio

Share issuance

The chairman informed the meeting that Bruno DiGregorio wished to subscribe for shares of the capital stock of the corporation.

Upon motion duly made, seconded and unanimously carried, it was:

RESOLVED that subject to receipt of a subscription for shares of the capital stock of the corporation, the corporation issue the shares to the person named at the price indicated, and that the certificate for the said shares be issued to him forthwith upon payment for the said shares.

Name	No. and class of shares	Price per share
Bruno DiGregorio	1 Common Share	$1

I, Bruno DiGregorio, hereby subscribe for one common share of the capital stock of the corporation at the price of one dollar per share and hereby undertakes and agrees to pay for the same forthwith upon the authorization of the issue of the said share to me.

Bruno DiGregorio

A few days later Wilf and Silvio agreed that Wilf would acquire shares to give him a one-third interest in Sibru for an investment of $30,000. Wilf's interest would be held secretly. Silvio’s evidence is not clear as to who would be trustee for Wilf. Wilf thought that Bruno was to hold Wilf's one-third interest in trust for Wilf.

Silvio and Peter both testified that within two or three weeks of July 30, 1984 Silvio met with Peter and told Peter about the incorporation of Sibru whereupon Peter said that Silvio and Bruno should not hold the shares of Sibru because they would cause an unwanted association of corporations with the appellant pursuant to the Income Tax Act, R.S.C. 1952, c. 148 (am. S.C. 1970-71-72, c. 63) (the "Act"). Silvio told Peter to straighten it out with the corporate solicitor. They both stated that they agreed the shareholder in place of Silvio and Bruno would be B.C. Peter said it had to be straightened out before the Vulcan deal closed. Silvio left it to Peter to contact the solicitor.

Peter stated that he followed it up with the solicitor almost immediately and told him that B.C. would now hold the DiGregorios' interest. Peter was also Wilf's accountant. A week later Peter again phoned the solicitor to confirm how Wilf's interest was to be held. These calls occurred in August of 1984. Peter and Silvio agreed that the matter was left to Peter and the solicitor and neither checked any further with the solicitor. The DiGregorios had 10 or 12 corporations and active businesses in Thunder Bay. Peter states that he didn't see or check any documents of the solicitor.

On August 14, 1984 Wilf delivered his cheque for $30,000 to the solicitor and got a receipt for it which was filed as Exhibit A-9. “Sibru Holdings” is the file name for this receipt.

On August 21, 1984 the solicitor wrote to Silvio personally respecting Sibru, enclosing the minute books, share certificate books, bank forms, corporate seal, original articles of incorporation and his statement of account (Exhibit A-2). The letter specifically states that Silvio and Bruno each had one common share and told Silvio to have the bank forms completed and delivered to the bank. It contains three" P.S.” paragraphs which read as follows:

P.S.: Because of Bruno’s absence when the minute book was being completed, his signature is still required at those places marked with yellow paper markers. Please assure that this is attended to immediately. If you wish to have the minute book stored in our vault please have it returned to us after all signatures are completed.

The resolution and notice of change were necessitated when the absence of Bruno made it necessary that Silvio hold all offices in order to execute financing documents relative to the company's acquisition of property.

You will also find enclosed a notice of change as required by the Ontario Ministry of Consumer and Commercial Relations and this should be signed and forwarded to them in the enclosed envelope.

All of the corporate documents including share certificates numbers 1 and 2 for a common share to each of Silvio and Bruno were signed and dated July 30, 1984.

On August 22, 1984 B.C. delivered a cheque for $134,000 to the solicitor which cleared the bank that day. Silvio testified that $60,000 was for the two thirds interest in Sibru and the remainder was for gravel B.C. was taking from the Vulcan property.

On September 26, 1984 another lawyer in the solicitor's firm reported on the Vulcan deal to Sibru “Attention: Mr. DiGregorio" (Exhibit A-4). The total purchase price was $602,430.15. This was not a simple purchase of bare land. The purchase included a number of parcels of land, a Howe Richardson scale, a mobile office trailer, a Magnatech electronic scale and a De Mag overhead crane. After listing these, the reporting letter reads:

As per your instructions, the bill of sale was not registered. We do not certify title to these chattels.

It goes on to say that pursuant to Mr. DiGregorio's instructions, bulk sales compliance did not occur and that Mr. Lingman had attested to the value of the stock. The statement on page 4 reads as follows:

The following is a cash statement of this transaction:

Received from you		134,000
Received mortgage proceeds from the Bank of
Montreal		450,000
Received from Mr. Lingman		30,000
Paid balance due on closing per enclosed
statement of adjustments	602,430.15
Our account for professional services	5,250.00
To disbursements necessarily incurred on your
behalf	6,166.87
Balance enclosed by cheque herein	152.98
	$614,000.00	$614,000

The following documents were enclosed:

1. Copy of statement of adjustments;

2. Our receipted statement of account;

3. Copy of the above-mentioned Mortgage and Charge;

4. Duplicate registered deed number 257565 dated July 18, 1984 and registered August 22, 1984;

5. Duplicate registered transfer number 195902-S dated July 18, 1984 and registered August 22, 1984;

6. Our cheque in the amount of $152.98;

7. Declaration of Angus Harnden deposited on title as instrument number 257645;

8. Original bill of sale;

9. Agreement between Bruno’s Contracting (Thunder Bay) Ltd. and Sibru Holdings Inc. dated August 22, 1984 and registered August 22, 1984 as instrument number 195904;

10. Copy of the agreement of purchase and sale.

By a working statement marked “14/1/86” a member of Peter’s firm listed Sibru's" Other Liabilities” as of July 15,1985 as follows:

Exhibit A-6 is the financial statement of B.C. for March 31, 1986 which shows a demand note from Sibru for $60,000 as an asset.

Exhibit R-2 is the appellant's June 30, 1986 income tax return signed by Silvio and dated December 30, 1986 which contains a form T2013 “Allocation Among Associated Corporations” which shows B.C. and Sibru associated with the appellant. It shows the appellant's taxation year end as June 30. This was received by the Minister of National Revenue on December 31, 1986.

On January 15,1987 minutes of a meeting of shareholders of Sibru show Bruno and Silvio as the sole shareholders (Exhibit R-1). The minutes are disjointed. They are signed by Bruno and Silvio and a representative of Buset & Buset. They approve the July 15,1986 financial statements, they elect Bruno and Silvio as directors, they appoint Buset & Buset as corporate accountants and they approve all corporate business transacted to that date.

On March 31,1987 the financial statement of B.C. (Exhibit A-7) shows at that date two common shares in Sibru for $2 and a loan of $59,998 to Sibru, whereas at March 31, 1986, the loan to Sibru was $60,000. The auditors" report attached to Exhibit A-7 is dated July 8, 1987 and is signed by Buset & Buset. B.C.’s March 31, 1986 statement (Exhibit A-6) shows the loan of $60,000 to Sibru. B.C.’s March 31, 1988 statement (Exhibit A-8), confirms Exhibit A-7. All of these exhibits are signed by Buset & Buset, none are signed by a director of B.C.

Silvio states that neither Silvio nor Bruno paid $1 in cash for their shares. Therefore, pursuant to subsection 23(3) of the Ontario Business Corporations Act, Sibru could not legally issue shares to them. Section 23 reads as follows:

23.(1) Subject to the articles, the by-laws, any unanimous shareholder agreement and section 26, shares may be issued at such time and to such persons and for such consideration as the directors may determine.

(2) Shares issued by a corporation are non-assessable and the holders are not liable to the corporation or to its creditors in respect thereof.

(3) A share shall not be issued until the consideration for the share is fully paid in money or in property or past service that is not less in value than the fair equivalent of the money that the corporation would have received if the share had been issued for money.

(4) The directors shall, in connection with the issue of any share not issued for money, determine,

(a) the amount of money the corporation would have received if the share had been issued for money; and

(b) either;

(i) the fair value of the property or past service in consideration of which the share is issued, or

(ii) that such property or past service has a fair value that is not less than the amount of money referred to in clause (a).

(5) In determining the value of property or past service, the directors may take into account reasonable charges and expenses of organization and reorganization and payments for property and past service reasonably expected to benefit the corporation.

(6) For the purposes of subsection (3) and of subsection 24(3), a document evidencing indebtedness of a person to whom shares are to be issued, or of any other person not dealing at arm’s length with such person within the meaning of that term in the Income Tax Act (Canada), does not constitute property.

The Crown takes the position that issue of the share certificates is prima facie evidence that consideration was paid and that in any event Silvio's work in putting together the Vulcan deal constitutes services rendered for the shares. It has pleaded assumptions 6(c), (d) and (e) which read:

6. In so reassessing the appellant, the Minister made the following assumptions of fact:

(c) at all material times, the shareholders of Sibru Holdings Inc. ("Sibru") were as follows:

Silvio DiGregorio	1 common share
Bruno DiGregorio	1 common share

(d) at all material times, the Shareholders' registry and the corporate minute books of Sibru showed Silvio and Bruno DiGregorio as being its only shareholders in respect of one common share each; Sibru share certificates were also issued to Silvio and Bruno DiGregorio;

(e) Bruno DiGregorio is the brother of Silvio DiGregorio;

Exhibit A-5 is not a document signed by Bruno or Silvio or Sibru or Buset & Buset. It is, at best, a working paper of Buset & Buset. Exhibit A-5 could be disowned by all of them at any time as not binding on anyone.

Exhibit R-1, the minutes of Sibru’s shareholders' meeting of January 15, 1987, approves a financial statement which will be submitted to a bank or another financial institution and to the Minister of National Revenue. The minutes approve corporate business transacted to that date, which would include share certificates and anything else Sibru might have done in the intervening years. They authorize a holding out by Sibru that Bruno and Silvio are shareholders whether that holding out is made to the Ontario Ministry of Consumer and Commercial Relations, to the Minister of National Revenue, to the bank or to anyone else. These minutes confirm the meaning conveyed by Exhibit R-2, the appellant's income tax return for its taxation year ending June 30, 1986, which was signed by Silvio on December 30, 1986.

Thus, on January 15, 1987 Bruno, Silvio and Buset & Buset signed Sibru documents which indicate that Silvio and Bruno were the sole shareholders of two issued common shares in Sibru (Exhibit R-1) and confirm the minutes and share certificates of July 30, 1984. Wilf was also content to hold this out to the public; what the situation was between Wilf and Bruno is their own affair. Exhibit A-7, confirmed by Buset & Buset's signature dated July 8,1987 is B.C.'s document which states that on March 31, 1987 B.C. owned the two shares in Sibru; it is not Sibru’s document.

The evidence the parties placed before the Court was in respect to the ownership of the common shares in Sibru. The appellant’s June 30, 1986 income tax return (Exhibit R-2) conflicts with the testimony of Silvio and Peter. The share certificates and minutes of Sibru which are in evidence and which were signed at the times described conflict with the testimony of Silvio and Peter. That testimony is not accepted in the light of these documents and the assumptions of the respondent. The Court finds that at all times in question in this appeal Sibru had issued only two common shares, one owned by Silvio and the other owned by Bruno.

Therefore the Court finds that the appellant was associated with Sibru during the years in question and is deemed to be associated with B.C. within the meaning of subsection 256(2) during the years in question.

The appeals are dismissed.

The respondent is awarded its party and party costs.

Appeals dismissed