Albert J. Alexander v. Minister of National Revenue, [1986] 1 CTC 2365, 86 DTC 1306

Taylor, T.C.J.:—This is an appeal heard in London, Ontario, on January 21, 1986, against an income tax assessment in which the Minister of National Revenue increased the taxable income of Mr. Alexander by an amount of $50,000 as a “benefit” on an “appropriation” received under section 15 of the Income Tax Act, S.C. 1970-71-72, c. 63, as amended. A succinct summary of the matter was contained in the reply to notice of appeal, and there was little which followed at the hearing which conflicted with it:

In assessing tax as aforeaid, the respondent relied, inter alia, upon the following findings or assumptions of fact:

— the Appellant, at the commencement of the 1978 taxation year owned 50% of the shares of Suncoast; the other 50% of the shares of Suncoast were owned by Ken Hutchins;

— during the 1978 taxation year, differences of opinion arose between the Appellant and Ken Hutchins and it was agreed that either Ken Hutchins would purchase the shares of the Appellant or the Appellant would purchase the shares of Ken Hutchins;

— on or about June 1, 1978, the Appellant agreed to purchase the shares of Ken Hutchins for a price of $1,200,000.00, the transaction was to close on July 1, 1978;

— the transaction did not close on July 1, 1978 due to the Appellant’s inability to obtain financing;

— on or about August 11, 1978, the Appellant and Ken Hutchins reached a new agreement for the purchase by the Appellant of Ken Hutchins’ Suncoast shares, whereby in consideration for the transfer of the shares, the Appellant agreed to pay Ken Hutchins $1,200,000.00 as well as having Suncoast pay Ken Hutchins $50,000.00;

— in this regard, the Appellant made an arrangement with the Rosny Corporation Limited ('Rosny’) in or about August of 1978 whereby Rosny agreed to lend the Appellant $1,2000,000.00 [sic] for the acquisition of Ken Hutchins’ shares in Suncoast and Rosny further agreed that if certain conditions were met it would purchase these shares from the Appellant on or before December 31, 1978;

— the Appellant in or about September of 1978 paid Ken Hutchins $1,200,000.00 and caused Suncoast to pay Ken Hutchins $50,000.00. In consideration thereof the Appellant received the outstanding shares of Suncoast previously owned by Ken Hutchins;

— Rosny did not purchase any shares of Suncoast from the Appellant in 1978 or subsequently, and the loan from Rosny to the Appellant is currently the subject of a law suit between Rosny and the Appellant.

In support of the assessment the respondent asserted:

The respondent submits, that by causing Suncoast to pay Ken Hutchins the sum of $50,000.00 as part consideration for the transfer of shares from Hutchins to himself, the Appellant appropriated property from Suncoast in the amount of $50,000.00 to his own benefit and therefore that amount was properly included in the Appellant’s income for the 1978 taxation year pursuant to paragraph 15(1)(b) of the Act.

The Respondent further submits that the payment of $50,000.00 by Suncoast to Ken Hutchins as part consideration for the transfer of shares from Hutchins to the Appellant constituted a benefit of $50,000.00 conferred on the Appellant by Suncoast and therefore that amount was properly included in the Appellant’s income for the 1978 taxation year pursuant to paragraph 15(1)(c) of the Act.

I would note at this juncture that in both of the assertions above the Minister relied upon the expression “as part consideration for the transfer of shares”.

At the hearing, both the appellant and the solicitor directly involved in much of the complicated and prolonged decisions, negotiations, and agreements leading up to the transaction gave testimony. Mr. Daniel Joseph Murphy, the lawyer noted above filed several documents, and provided his explanations and understanding of the reason for the $50,000 payment at issue. In essence, he recalled that Mr. Hutchins had claimed (over a period of about a year preceding the transaction which transferred the shares of Suncoast from Hutchins to Alexander) that he (Hutchins) was owed amounts — several amounts, and for various reasons — by Suncoast. Mr. Murphy acknowledged that the record during this time dealing with the $50,000 itself did not provide much in the way of precision on that point (the exact reason) but as the person most directly involved — with Suncoast, Hutchins and Alexander, he was satisfied that the $50,000 had nothing to do with the $1.2 million sale of shares. He had been in meetings between Hutchins and Alexander at which such obligation from Suncoast had been strongly asserted by Hutchins. The major documents presented, as I see it, were Exhibits A-2, A-5, A-6 and A-7, reproduced in total:

(Exhibit A-2)

DONNELLY & MURPHY BARRISTERS-SOLICITORS 18 The Square GODERICH, ONTARIO N/A 3Y7

M. Donnelly Q.C.

D. J. Murphy, Q.C.

N. B. Pickell, LL.B.

519-524-2154

P.O. Box 38

May 6th, 1978.

PRIVATE AND CONFIDENTIAL

Mr. Bert Alexander,

8 The Square,

GODERICH, Ontario.

Dear Bert:

RE: Suncoast Estates Limited

As you are now aware, Ken Hutchins has offered to buy your interest in Suncoast Estates for 1.2 million dollars and you advised Mr. Hutchins that you wished the matter put in writing and he requested me to write you accordingly. I advised Mr. Hutchins that I would not do so without speaking to you first and this is to confirm that even though I act for Suncoast Estates Limited, you had no objection to me putting Ken's offer in writing.

In the event that you wish to accept the offer, I believe Ken's accountant has advised him that from a tax point of view it is preferable for Suncoast Estates Limited to buy the shares rather than either one of you selling to the other.

Ken advised me that he would like some indication from you within the next thirty days as to how you wish to proceed, but that he wanted to make it clear that he certainly wasn't suggesting this sort of time limit as far as arranging financing is concerned. He simply wants an indication as to whether you accept his offer or, in the alternative, whether you would, in fact, buy his interest for 1.2 million dollars so he can make long term plans in connection with his relationship with Colpo.

Yours very truly,

DONNELLY & MURPHY

Per (Signature)

(Exhibit A-5)

THE ROSNY CORPORATION LIMITED GODERICH, CANADA

August 2, 1978

Mr. Daniel J. Murphy, Esq., Q.C.,

Donnelly and Murphy,

18 The Square,

Goderich, Ontario.

Dear Dan:

This letter is written following our meeting this morning with yourself, Ken Hutchins and Bert Alexander that we are more than sincerely interested in and have taken definite steps to acquire the half interest in Suncoast Estates Limited, presently owned by Ken Hutchins for 1.2 million dollars, by our paying 1.2 million dollars to be held ‘In Trust' while the Company is restructured, to cover our investment in the Company so that the Company could purchase the shares owned by Hutchins.

Within an hour of 6:30 p.m. on Monday, July 31, 1978, when we were advised by A. J. Alexander that he was told by Ken Hutchins that Ken wanted 1.2 million dollars for his interest in Suncoast Estates Limited, we advised Bert Alexander that providing we could make satisfactory arrangements with our Bank, the Bank of Montreal, we would purchase a half interest in Suncoast Estates Limited. Yesterday morning, August 1, 1978, for the first time, we were given copies of audited statements of Suncoast Estates Limited and immediately approached the Bank of Montreal for a loan to acquire the half interest in Suncoast Estates Limited. As I told the three of you this morning, the Bank was receptive to our request and immediately went into action to review the situation, and stated they would advise us within ten days of their answer. As I further advised the three of you this morning, we offered to arrange for an airplane to pick up the Bank’s real estate people and fly them to Goderich to see the properties owned by Suncoast Estates Limited to expedite their decision.

I also told you this morning that your Bank was looking at loaning us monies in two different ways for the acquisition of Ken Hutchins’ interest in Suncoast Estates Limited. The one way that was suggested by the Bank was that the Bank would loan us the money because of The Rosny Corporation Limited’s substantial interest (95 per cent) in Champion Road Machinery Limited, which has in excess of 13.5 million in retained earnings, or a second way by loaning The Rosny Corporation Limited 1.2 million dollars on the strength of the real estate investments of Suncoast Estates Limited. As I stated this morning, I was more than optimistic that our Bank would loan us the monies for this venture.

To expedite matters and to make it easier for our Bank to give us a fast answer, I asked Ken Hutchins to provide us with a copy of the appraisal, which I understand he had done at his own expense. Of course, whether Ken wishes to give us this copy is certainly his decision.

I think it only fitting that we set out for you and the principals of Suncoast Estates Limited the sequence of events which led up to our decision on Monday, July 31, 1978, at approximately 7:30 p.m. to acquire a half interest in Suncoast Estates Limited.

Bert Alexander of Alexander & Chapman Limited has been our insurance broker from the time Alexander & Chapman was formed. Mr. Alexander, in May of this year, approached both the President of this Company and myself, at different times, seeking advice as to whether, in our opinion, he should sell his interest in Suncoast Estates Limited. Each of us told him, without knowledge that the other had also advised him, that we felt he would be foolish to sell his interest and that it would be better for him, his Real Estate business, the community in general, to acquire his partner’s interest in Suncoast Estates Limited.

A short time later, Alexander approached me and asked if I thought our President, B. A. Sully, might be interested in purchasing a portion of Suncoast Estates Limited’s developed and partially developed land. My answer to Alexander was that I felt Sully could be interested but that Alexander himself would have to arrange to speak to Sully and that I would also speak with Sully to advise him to expect a call from Alexander. The meeting between Alexander and Sully took place and within ten days Sully and Alexander agreed to form a new company named Sunlake Holdings Inc. (if name available), to purchase, free and clear of all encumbrances, the following properties — Plan 48, Plan 49, the property zoned commercial on the corner of Highway #21 and Suncoast Drive, and the 26 acres zoned for single and multiple dwellings, immediately south of Plan 48, presently owned by Suncoast Estates Limited. On Thursday, July 20, 1978, accompanied by Alexander, I met with the Bank of Montreal in Toronto on behalf of Sunlake Holdings Inc., and requested a loan to purchase the aforementioned properties. Because of Sully's interest in The Rosny Corporation Limited (100 per cent ownership), the Bank was receptive and stated they would give me an answer in four or five days. It was on the strength of this and a further talk I had with the Bank of Montreal on Monday, July 31, 1978, that Alexander met with you and Mr. Hutchins to inform you of the proposed plan.

We enclose herewith two extra copies of this letter for you to pass a copy to both Mr. Hutchins and to Mr. Alexander.

We look forward to advising you on or before August 11, 1978, that our Bank is receptive to our request for a loan so that you can proceed to finalize the transaction. We will keep you informed of our progress during the next few days.

Should you require anything further from us, please contact me.

Sincerely yours,

(Signature)

J. C. Freeman

Secretary-Treasurer

(Exhibit A-6)

THE ROSNY CORPORATION LIMITED GODERICH, CANADA

August 8, 1978

Mr. Daniel J. Murphy, Esq., Q.C.,

Donnelly & Murphy,

18 The Square,

Goderich, Ontario

Dear Dan:

Further to our letter of August 2, 1978, this is to advise you that we will give you our cheque in the amount of 1.2 Million Dollars to be held ‘In Trust’ in your account until Suncoast Estates Limited can restructure its Capital Stock position to allow for this investment and for the Company to purchase for cancellation, the shares owned by Kenneth G. Hutchins.

Yours very truly,

(Signature)

J. C. Freeman

Secretary-Treasurer

(Exhibit A-7)

THIS AGREEMENT made the 11th day of August, 1978.

BETWEEN:

KENNETH GEORGE HUTCHINS, of the Town of Goderich, in the

County of Huron, Executive,

Hereinafter called the VENDOR OF THE FIRST PART,

and

ALBERT JOHN ALEXANDER, of the Town of Goderich, in the County of Huron, Executive,

Hereinafter called the PURCHASER OF THE SECOND PART,

THIS AGREEMENT WITNESSETH that, in consideration of the covenants, agreements, warranties and payments herein set forth and provided for, the parties hereto hereby respectively covenant and agree as follows:

1. The vendor covenants and agrees that he will sell to the purchaser 2,000 common shares being Fifty (50%) per cent of the issued and outstanding shares in the capital of Suncoast Estates Limited, a Company incorporated under the laws of the Province of Ontario, for the price of One million, two hundred thousand ($1,200,000) dollars payable in the manner hereinafter set out.

2. The vendor represents and warrants, and it shall be a condition of the purchaser’s obligation under this agreement that:

(a) The authorized capital of Suncoast Estates Limited consists now of 3,600 preference shares with a par value of Ten ($10.00) dollars, and 4,000 common shares without par value, issuable for an aggregate consideration not exceeding $4,000.00.

(b) No preference shares have been issued as of the date hereof.

(c) 4,000 common shares have been issued as of the date hereof.

(d) The shares are owned by the vendor, free of liens, charges or encumbrances whatsoever.

(e) No person, firm or corporation now has, or at the time of closing will have,

any agreement or option for the purchase from the vendor of the said shares.

3. The warranties contained in paragraph 2 hereof shall survive the closing and, notwithstanding the closing and the sale and purchase of shares herein provided for, shall continue in full force and effect.

4. The sale and purchase of the shares in the capital of Suncoast Estates Limited are subject to the following terms and conditions to be fulfilled on or before September 1, 1978;

(a) Albert John Alexander shall cause Suncoast Estates Limited to pay Ken Hutchins Construction Limited the sum of Seventy-nine thousand, one hundred and fifty-four dollars and forty-seven cents ($79,154.47), together with interest at Twelve (12%) per cent from January 1, 1978 to September 1, 1978.

(b) Albert John Alexander shall cause Suncoast Estates Limited to pay to Glen- mark Lumber the sum of Four thousand, eight hundred and seventy-one dollars and ninety cents ($4,871.90), together with interest at Twelve (12%) per cent from January 1, 1978 to September 1, 1978.

(c) Albert John Alexander shall pay the vendor interest on One Million, two hundred thousand — ($1,200,000) — dollars at the rate of Twelve (12%) per cent from June 30, 1978 to August 11, 1978, or such later date as agreed on between the parties.

(d) Albert John Alexander will cause Suncoast Estates Limited to pay Kenneth George Hutchins the sum of Fifty Thousand ($50,000) dollars for damages for breach of contract in connection with his dismissal as an officer of Suncoast Estates Limited, and in connection with an alleged agreement between Suncoast Estates Limited, and in connection with an alleged agreement between Suncoast Estates Limited, Kenneth George Hutchins and Albert John Alexander, which agreement was never consummated, and this payment is being made solely for the purpose of obtaining a complete and final release from the said Kenneth George Hutchins.

(e) That, at the time of closing, the vendor will resign as a director and officer

of Suncoast Estates Limited in favour of the nominee of the purchaser.

(f) That, at the time of closing, the vendor will execute a complete release of all claims against Suncoast Estates Limited, as an officer, director, shareholder, employee or otherwise.

4. At the time of closing the vendor shall deliver to Suncoast Estates Limited, for cancellation, certificates representing 2,000 issued and outstanding shares in the capital of Suncoast Estates Limited and shall cause Suncoast Estates Limited to issue to the purchaser a share certificate as follows:

Albert John Alexander — 2,000 common shares.

5. The closing date of this transaction shall be August 11, 1978, at which time the purchaser, upon receiving the shares from the vendor, duly endorsed, shall pay to the vendor’s Solicitors, Donnelly & Murphy, One million, two hundred thousand ($1,200,000) dollars made by certified cheque.

IN WITNESS WHEREOF this agreement has been executed by the parties hereto.

SIGNED, SEALED AND DELIVERED

in the presence of

(Signature) (Signature)

Kenneth George Hutchins

(Signature)

Albert John Alexander

The $50,000 at issue in this appeal had been paid to Mr. Hutchins about September 8, 1978, and the following “Final Release” was obtained from — filed as Exhibit A-8:

FINAL RELEASE

IN CONSIDERATION of the payment of the sum of Fifty Thousand ($50,000.00) Dollars, which is directed by the undersigned to be paid as follows:

Kenneth Hutchins — $50,000.00

THE UNDERSIGNED hereby for himself, his heirs, executors, administrators successors and assigns, releases and forever discharges Albert John Alexander, The Rosny Corporation Limited and Suncoast Estates Limited, from any and all action, causes of action, claims and demands by reason of my termination as an officer of the said Suncoast Estates Limited on or about August 11th, 1978, and in connection with an alleged breach of contract by Suncoast Estates Limited and Albert John Alexander which verbal contract was entered into between the parties hereto on or about June 1st, 1978.

THE SAID UNDERSIGNED further releases Suncoast Estates Limited from any and all action, causes of action, claims and damages by reason of the purchase of shares in Suncoast Estates Limited from the undersigned by Albert John Alexander.

AND FOR THE SAID CONSIDERATION the undersigned agrees not to make claim or take proceedings against any other person or corporation who might claim contribution or indemnity under the provisions of any statute or otherwise.

THE UNDERSIGNED agrees that the said payment is not deemed to be an admission of liability on the part of Albert John Alexander, The Rosny Corporation Limited or Suncoast Estates Limited.

AND IT IS HEREBY DECLARED that the terms of this settlement are fully understood, that the amount stated herein is the sole consideration of this release and that the said sum is accepted voluntarily for the purpose of making a full and final compromise, adjustment and settlement of all claims for damages resulting from the above referred to breach of contract.

WITNESS my hand and seal this 6th day of September, 1978.

SIGNED, SEALED & DELIVERED

in the presence of

(Signature) Signature

Kenneth Hutchins

The testimony of Mr. Alexander was not of great help in further detailing the purpose of the $50,000 payment — indeed his own comments and statement made to Revenue Canada commencing with an early notice of objection, and also referred to in correspondence gave various versions of its nature, “withdrawal of threatened legal action by Hutchins”, “interest and discounts lost by Hutchins through slow payment of accounts to him by Suncoast”, “breach of contracts”, “termination of responsibilities at Suncoast” etc. When faced with the chronology of events and documents, Mr. Alexander could not support any charge that Mr. Hutchins had been “dismissed”, nor in what way Suncoast would be liable for damages arising out of any breach of contract dealing specifically with the sale of the shares.

The point at issue in this appeal comes down to whether the $50,000 payment arising out of paragraph 4(c) of Exhibit A-7 above, was an obligation of Alexander or of Suncoast. I have already said that the genesis of the amount is unclear, and to add that the testimony and evidence related to it was at best conflicting or confusing would be an understatement. But the basic fact is that Alexander (at least in Exhibit A-7 — and probably before that) admitted its existence and the liability related to it. He further agreed (Exhibit A-7) that he would “cause” it to be paid by Suncoast. That however does not necessarily make it an obligation of Suncoast. As I see it, this decision can be made based on the evidence to be found in paragraph 4(c) of Exhibit A-7, and the final release (Exhibit A-8) which flowed from its payment. Both these documents deal with two reasons why the payment should be made — (a) termination as an officer, and (b) breach of contract. There is no evidence to support the conclusion that Hutchins was ever dismissed as an officer by Suncoast, or that his employment was terminated by that company. This also holds true for any such action by Alexander on behalf of Suncoast. It may well have been that Alexander had effectively “squeezed out” Hutchins from the operation of Suncoast, and Hutchins may have threatened some action, but I am not prepared in the circumstances of this appeal, to conclude that Alexander agreed that either Suncoast or himself, had any $50,000 obligation because of that. So Suncoast had no obligation to Hutchins on that score.

Turning to the “breach of contract” point, it is equally untenable. There is no evidence that Suncoast as such had any agreement at all with Hutchins in connection with the sale of his shares — although it is quite possible that Alexander and Hutchins might have considered using this as a mechanism to accomplish the purpose of Alexander buying out Hutchins. The simple fact is that not even Alexander had “on or about June 1, 1978” a contract to buy Hutchins’ shares — although a verbal agreement might have been reached. It is not necessary for the Court to consider whether Hutchins, on these grounds, might have had any cause for action against Alexander, (I accept for purposes of this decision Mr. Murphy's evident concern that there might have been such cause). But any action, as I see it, even at its highest level would have been against Alexander, if he did indeed breach such a contract. Mr. Murphy may have understandably concluded from his exposure to Hutchins and Alexander during the period of their disagreement leading up to the settlement and the sale of the shares, that Hutchins had some claim for the $50,000, since apparently many items subjects and circumstances were tossed into the attempts at reaching some agreement between the parties. However the evidence does not support a conclusion that such a liability related to Suncoast, and even the acceptance of that by Alexander does not make it so.

Therefore, while I fail to see as clearly as the Minister seems to, the direct link between the “sale and transfer of the shares” from Hutchins to Alexander for $1.2 million, the $50,000 at issue, I do agree that Alexander could not have obtained Hutchins' agreement to the sale for the $1.2 million without accepting that condition in paragraph 4(c) of Exhibit A-7 for the $50,000. If the $50,000 was not — as it is portrayed by the Minister, an additional payment on account of the sale of the shares, then if an obligation of any kind it is, it is surely an obligation of Alexander and not of Suncoast. In either event, it is not that which is portrayed by counsel for the appellant — a pre-existing simple obligation for which Suncoast was responsible to Hutchins. In failing to establish that point, the appellant has failed in his attempt to cast serious doubt on the assessment in question.

The appeal is dismissed.

Appeal dismissed.