Hugh a McMaster v. Minister of National Revenue, [1985] 1 CTC 2279, 85 DTC 278

Rip, TCJ:—The appellant appeals against his 1978 income tax assessment on the basis that he did not receive a benefit when the corporation of which he was the sole shareholder satisfied a debt incurred by the appellant on his acquisition of shares of the corporation from a third party.

The facts in the pleadings, admitted and confirmed at trial, are as follows:

(a) on February 1, 1978 the appellant acquired from Donald Williams certain shares in McMaster Insurance Agencies Ltd (“corporation”);

(b) the purchase price for the said shares was $40,000. Of the purchase price, $15,000 was payable February 1, 1978. $10,000 was payable February 1, 1979, $10,000 was payable on February 1, 1980 and the final $5,000 was payable on February 1, 1981;

(c) on February 1, 1978 the corporation paid $15,000 to Mr Williams and issued a note to the vendor promising to pay a further $25,000 by paying $10,000 on February 1, 1979, $10,000 on February 1, 1980 and $5,000 on February 1, 1981;

(d) by notice of assessment, dated August 4, 1981, the respondent, the Minister of National Revenue, reassessed the appellant and included, pursuant to subsection 15(1) of the Income Tax Act (“Act”), $40,000 in the appellant’s income for the 1978 taxation year;

(e) the fiscal year end of the corporation is, and was at the relevant time, October 31.

The corporation was incorporated prior to 1978 for the purpose of acquiring an insurance agency. The appellant did not have sufficient assets to himself finance the acquisition of the insurance business and sought assistance from Mr Williams. Both the appellant and Mr Williams had loaned funds to the corporation by way of a loan. The corporation then acquired the business. About a year after the acquisition of the insurance business relations between Mr Williams and the appellant became strained and the appellant sought to buy the shares of Mr Williams. Mr Williams agreed to sell the shares on condition the corporation pay him back the loan he had advanced to the company. The appellant arranged for financing with the corporation’s banker who required all the corporation’s shares to be lodged as security for the bank’s loans. The purchase and sale of the shares then took place on February 1, 1978.

In his opening statement counsel for the appellant advised the Court that the corporate records of the corporation for the period prior to February 1, 1978 and for a time thereafter are not complete. He stated that on incorporation two common shares had been issued, one to each of the appellant and Mr Williams. However in order to satisfy the bank’s request, certificates representing 40,000 common shares in the capital stock of the corporation were issued for delivery to the bank as security; the registered owner of the 40,000 shares was (and is) the bank’s nominee.

The appellant’s position, as I understand it, is that the appellant ought not to be taxed pursuant to subsection 15(1) of the Act since no benefit or advantage has been conferred on him by the corporation. Appellant’s counsel argues that this transaction is no different from a transaction where a corporate entity, having say, only two shareholders, buys back its shares only from one of the shareholders. As a result of the purchase the remaining shareholder becomes the owner of all the issued and outstanding shares in the corporate entity. In the example given by appellant’s counsel the corporate entity is liable to the vendor for the purchase price of the shares and on payment the assets of the corporate entity are reduced to the extent of the price paid for the shares. In the appeal at bar as well, argues counsel, as a result of a sale the appellant is the beneficial owner of 100 per cent of the shares and the corporation is liable to the vendor for the payment of the shares; since the corporation paid for the shares its assets

— or the book value of its assets — is reduced to the extent of the amount it paid for the shares. The appellant should be in the same position as the remaining shareholder of the corporate entity which has brought back its shares from another shareholder. The appellant has received no economic benefit; the value of the corporation has been reduced to the extent of the moneys it has paid for the shares acquired by the appellant. If the appellant has received any benefit as a result of the sale of the shares, the benefit was not equal to the purchase price paid by the corporation. The benefit should be valued and the value only ought to be included in income.

The appellant’s counsel referred me to Goldin & Company Limited v MNR, 35 Tax ABC 261; 64 DTC 333, a decision of the Tax Appeal Board, and Farries Engineering Ltd et al v MNR, [1982] CTC 2118; 82 DTC 1120, a decision of Mr Tremblay of the Tax Review Board, as he then was, in support of his position. These cases are of no assistance to the appellant.

The question of whether a taxable benefit is incurred under certain circumstances where a taxpayer receives no economic advantage was raised before the Federal Court of Appeal in Charles Perrault v The Queen, [1978] CTC 395; 78 DTC 6272. In that case, of the 490 issued common shares of a company, Montreal Terra Cotta Limited (“Montreal”), the taxpayer held 273, and Mr Oscar Nomn held 24 and the remaining 193 were held by Central Motor Sales Ltd (“Central”) which was controlled by the executor of the estate of A H Rocheleau (“Estate”). Montreal, which was engaged in the manufacture of building construction products, experienced financial difficulties in the early 1960’s and in 1964 closed down one of its two main plants. The company intended to wind-up its operations and sold the plant which was closed down for $465,000. The Estate required funds and in 1965, the taxpayer entered into an agreement to purchase the 193 shares of Montreal held by Central for $350,000. In November 1965, Montreal declared a dividend of $1,813 per share which the taxpayer, who had earlier purchased Nomn’s shares, renounced. Central obtained a total dividend of $350,005 and then transferred its shares of Montreal to the taxpayer. On December 1, 1966 Montreal was wound up. Contending that the taxpayer received a benefit of $350,000 because his liability to the Estate to pay that amount for the shares of Montreal was extinguished by the payment of the $350,000 dividend, the Minister reassessed the taxpayer for that amount.

Mr Justice Le Dain stated at 400-1 (DTC-77):

In my opinion there is much force in the appellant’s contention that in the circumstances he did not gain much, if anything, in value by the acquisition of the shares of Central Motor when, as a result of the payment of the dividend, the shareholders’ equity was reduced by $350,000. But this does not exhaust the question of whether the appellant received a benefit from the payment that was made by the Company to Central Motor. By the offer to purchase, which was accepted by the Estate Rocheleau, the appellant became legally obliged to cause the sum of $350,000 to be paid to Central Motor. The payment of this sum by the Company to Central Motor in the form of a dividend extinguished the appellant’s obligation and to this extent conferred a benefit upon him of the value of $350,000.

As I see it, if a shareholder chooses to take payment in the form of a dividend for a sale of his shares to another shareholder under an agreement such as the one in this case then this must be the result, however excessive from the fiscal point of view it may appear. There is no basis on which the selling shareholder can be said not to have received a dividend within the meaning of s 6, and there is no basis on which the purchasing shareholder can be said not to have received a benefit. The selling shareholder has received a dividend; the purchasing shareholder has received a benefit in that the payment of the dividend has satisfied his obligation to pay the price of the

shares. It is not the payment of the dividend but its effect that constitutes the benefit. It is undeniable that a payment by a corporation, whatever its form, which has the effect of extinguishing a debt or obligation of a shareholder must be considered to be a benefit conferred on him. See, for example, MNR v Bisson, [1972] FC 719 at 726-7 and 728-9; [1972] CTC 446; 72 DTC 6374. The value of what he acquired in consideration of the debt or obligation is really irrelevant. (Emphasis mine.)

In this appeal the evidence is clear that a payment was made by the corporation which had the effect of extinguishing a debt of a shareholder, the appellant. On the basis of the reasoning in Perrault, the corporation conferred a benefit on the appellant to the extent of the purchase price.

The appeal will therefore be dismissed.

Appeal dismissed.