Estate of Nathan Gesser v. Minister of National Revenue, [1984] CTC 2751, 84 DTC 1570

Cardin, TCJ:—The appeal of the Estate of Nathan Gesser is from an assessment of tax with respect to the 1972 taxation year. This appeal is one of twenty- four appeals whose taxation years, subject matter, background and legal issues, while not all identical, are sufficiently similar to enable them to be heard to some extent on common evidence.

The parties agreed tht the Estate of Nathan Gesser (“the Estate”) be proceeded with first and disposed of by the Court. The decision in the Estate, of course, will not necessarily be binding in respect of all the issues in the other appeals, but it was felt that some of the facts and law addressed in the Estate could apply to other appeals thereby facilitating and expediting their hearing and their disposition. With that purpose in mind, it was suggested that the presiding judge in the Estate would also preside at the hearing of the other related appeals. I have concurred in this arrangement.

The background of the Estate and the other 23 appeals are in respect of transactions in shares of corporations in which the members of the Bronfman family of Montreal were involved.

Claridge Investment Ltd was a management company for the numerous Bronfman corporations. Among the corporations referred to in these appeals, are Cemp Investments Ltd (“Cemp”), and Cemp Holdings Ltd (“Holdings”), a subsidiary of Cemp. After 1970, Holdings became known as Fairview Corporation of Canada Ltd (“Fairview”) which in turn became Cadillac Fairview Corporation (“Cadillac”).

Summary of Facts

Prior to his death in 1978, Nathan Gesser was employed by Claridge Investments Limited. On November 24, 1970, the Estate allegedly agreed to purchase, and Cemp allegedly agreed to sell, 8,400 common shares of Holdings at $21 a share for a total of $176,400 — $100 of which was paid on account (Exhibit A-l).

On June 1, 1972, the common shares of Holdings whose value then was $21 a share were split on the basis of 5.6 for 1 common share of Fairview [sic] [Corporation of Canada Ltd (“Fairview”)]. On June 1, 1972, the price of Fairview shares was $3.75 per share (Exhibits A-2 and R-l).

On July 14, 1972, the Estate is said to have sold back to Cemp 5,600 shares it had acquired in Fairview (originally Holdings) at a value of $3.75 per share (Exhibit A-2). The fair market value of the shares at the time of sale in 1972 was $15 a share. The profit realized by the Estate in that transaction was $63,000, the amount in issue for the Estate’s 1972 taxation year.

In his notice of appeal, the appellant contends:

1. The notice of confirmation by the Minister indicates that the assessment is in respect of the benefit received by the Appellant in virtue of his office or employment amounting to Sixty Three Thousand Dollars ($63,000.00) in accordance with the provisions of paragraph 7(l)(a) of the Income Tax Act (the “Act”) and subsection 44(1) of the Income Tax Application Rules 1971;

2. In the year 1970 the appellant purchased from Cemp Investments Ltd (“Cemp”) common shares of Cemp Holdings Ltd (“Holdings”);

3. At such time Holdings was a subsidiary of Cemp;

4. It is understood that a taxable benefit is supposed to arise by reason of an agreement between Appellant and Cemp for the purchase of the shares in Holdings;

5. The agreement was not a stock option, and the assessment which proceeded on the basis that it was is unfounded;

6. The Appellant acquired the shares of Holdings and was the legal owner thereof in the year 1970 at a price equal to the fair market value thereof at the date of acquisition;

7. To the extent, if any, if section 7(l)(a) of the Act is applicable which is not admitted but is expressly denied, the value of the shares acquired by Appellant at the time he acquired them did not exceed the amount paid or to be paid by the Appellant to Cemp and, accordingly, the tax now owed is nil;

8. If any benefit was conferred which is not admitted but is expressly denied, it would have been conferred in the taxation year 1970 when Appellant acquired his shares and not the year 1972 when he disposed of them;

9. No benefit was received by the taxpayer in respect of, in the course of, or by virtue of an office or employment;

10. In the event the Appellant has not signed a waiver in respect of the 1972 taxation year the assessment is statute-barred;

In his reply to the notice of appeal, the respondent alleged:

(A) Statement of Facts

1. He admits paragraphs 1, 2, 3 and 4 of the Notice of Appeal;

2. He denies paragraphs 5, 6, 7, 8, 9, 10 and 11 of the Notice of Appeal;

3. In assessing the Appellant for his 1972 taxation year the Respondent relied, inter alia, on the following assumptions of fact;

(a) In November 1970, Cemp Investments Ltd agreed to sell to the Appellant

shares of Cemp Holdings Ltd (“Holdings”) at a price of $21,00 per share;

(b) Subsequent to November 1970, “Holdings” name was changed to Fairview Corporation of Canada Ltd (“Fairview”) and later on to Cadillac Fairview Corporation (“Cadillac”) and on June 1st, 1972, the shares were split on 5.6 for one basis and therefore the price of $21.00 per share mentioned above became $3.75 per share;

(c) In 1972, the Appellant exercised its option and acquired 5,600 shares of “Fairview” at a price of $3.75 per share;

(d) At the time of acquisition in 1972 the fair market value of the shares was $15.00 per share and therefore the Appellant realized a $63,000.00 benefit;

(e) At the relevant time “Fairview” or (“Holdings” or “Cadillac Fairview Corporation”

as it is now called) and “Cemp” were not dealing at arm’s length;

(f) At the relevant time, the Appellant was an employee of Claridge Investments

Limited, a corporation which does not deal at arm’s length with “Cemp”;

(g) The benefit received by the Appellant was received by virtue of his office or employment;

(h) The Appellant has signed a waiver for the taxation year 1972 in respect of “shares” of The Cadillac Fairview Corporation Limited (formerly Cemp Holdings Ltd);

(B) Statutory Dispositions and Reasons

4. He relies inter alia, on section 6(l)(a), 7(l)(a) and 152(4) of the Income Tax Act SC 1970-71-72 ch. 63 and section 44(1) of the Income Tax Application Rules 1971;

5. He submits that in 1972, the Appellant has acquired shares under the agreement he signed with “Cemp” in 1970 and he is deemed by the provisions of section 7(1 )(a) of the Act to have received the benefit of $63,000.00 duly assessed;

6. He submits, in the alternative, that if the provisions of section 7(l)(a) do not apply then the benefit is taxable under the provisions of section 6(1 )(a) of the Act;

7. The appeal is ill-founded in facts and in law;

The facts in this appeal are not in issue and in order to narrow the scope of the legal issue, counsel for the appellant admitted that the transaction between Cemp and Nathan Gesser was not at arm’s length.

Both counsel agreed that paragraph 7(l)(a) of the Income Tax Act, RSC 1952, c 148 (the “Act”) applies to the facts of this appeal.

Counsel for the respondent in turn, desisted from his pleadings in the alternative and abandoned his position on the applicability of paragraph 6(1 )(a) of the Act with respect to the issue for the 1972 taxation year. The respondent also produced a waiver signed by the the Estate’s administrator in accordance with subsection 152(4) of the Act, and counsel for the appellant recognized that the respondent’s a. sessment for the 1972 taxation year was not statute-barred.

Counsel for the appellant referred the Court to paragraph 2 of the notice of appeal which reads as follows:

2. In the year 1970 Appellant purchased from Cemp Investments Ltd (“Cemp”) common shares of Cemp Holdings Ltd (“Holdings”);

Counsel for the appellant noted that in paragraph 1 of the Minister’s reply, the Minister admits paragraph 2 of the notice of appeal and suggested that the appeal should be allowed on that admission alone, since the only issue in this appeal is whether the appellant acquired the shares in “Holdings” in 1970 or in 1972.

The respondent answered that, that admission in his reply was an obvious error arising from the complexity of drafting a variety of pleadings in so many related appeals. He stated that the respondent does not admit that the appellant acquired the shares in the 1970 taxation year and that the reply to the notice of appeal should be amended accordingly. The Court accepted the respondent’s amendment.

The appellant’s principal submission as set out by Me Philip Vineberg is that the Estate, by virtue of a purchase and sale agreement dated November 24, 1970 (Exhibit A-l), had acquired and was the legal owner of 8,400 common shares of Cemp as of November 24, 1970. He further contends that the Estate acquired the shares at a price equal to the fair market value of the shares at the time of acquisition and that no benefit was therefore conferred on the appellant in the transaction. Alternatively, counsel argues that if a benefit was conferred on the appellant it would have been conferred on it in the 1970 taxation year and not in 1972, the year of the Minister’s assessment.

The Minister based his assessment on the assumption that the agreement of November 24, 1970 (Exhibit A-l) is not an offer of purchase and sale but a stock option offered to the appellant by Cemp in 1970 which the appellant exercised in 1972.

The sole issue here is in what taxation year did the appellant acquire and become the legal owner of 8,400 common shares of Cemp within the meaning of paragraph 7(l)(a) of the Act?

At the hearing, both counsel admitted paragraph 7(l)(a) of the Act to be applicable in the determination of the issue. Paragraph 7(l)(a) of the Act reads as follows:

Sec. 7

(1) Where a corporation has agreed to sell or issue shares of the capital stock of the corporation or of a corporation with which it does not deal at arm’s length to an employee of the corporation or of a corporation with which it does not deal at arm’s length,

(a) if the employee has acquired shares under the agreement, a benefit equal to the amount by which the value of the shares at the time he acquired them exceeds the amount paid or to be paid to the corporation therefor by him shall be deemed to have been received by the employee by virtue of his employment in the taxation year in which he acquired the shares

For purposes of this appeal the important word of paragraph 7(l)(a) of the Act is “acquired”. However, the transactions having taken place in the province of Québec, references to the pertinent articles of the Québec Civil Code were also made by both counsel in their respective submissions and must be considered in determining the nature of the 1970 agreement.

The Québec Civil Code at Article 1472 defines a sale contract as follows:

1472. Sale is a contract by which one party gives a thing to the other for a price in money which the latter obliges himself to pay for it.

It is preferred by the consent alone of the parties, although the thing sold be not then delivered; subject nevertheless to the provisions contained in article 1027 and to the special rules concerning the transfer of registered vessels.

Related articles of the Civil Code are Articles 1025, 1026 and 1027 which read as follows:

1025. A contract for the alienation of a thing certain and determinate makes the purchaser owner of the thing by the consent alone of the parties, although no delivery be made.

The foregoing rule is subject to the special provisions contained in this code concerning the transfer and registry of vessels.

The safe-keeping and risk of the thing before delivery are subject to the general rules contained in the chapters Of the effect of Obligations and Of the extinction of Obligations in this title.

1026. If the thing to be delivered be uncertain or indeterminate the creditor does not become the owner of it until it is made certain and determinate and he has been legally notified that it is so.

1026. The rules contained in the two last preceding articles apply as well to third persons as to the contracting parties, subject, in contracts for the transfer of immoveable property, to the special provisions contained in this code for the registration of titles to and claims upon such property. But if a party oblige himself successively to two persons to deliver to each of them a thing which is purely moveable property, that one of the two who has been put in actual possession is preferred and remains owner of the thing although his title be posterior in date; provided, however, that his possession be in good faith.

In summary, the Québec Civil Code states that the consent of the parties alone can make the purchaser owner of the alienated thing. The sections of the Québec Civil Code do not require that the purchase price be paid at the time the purchase and sale agreement is entered into nor do they specify any time limit in which the purchase price may become payable and the purchaser required to fulfil his obligation to pay. Neither does paragraph (a) of subsection 7(1) of the Act with reference to the acquisition of shares of an employee of a company in a non-arm’s length transaction require that the shares be paid for at the time the agreement of purchase and sale is made. The non-payment of the shares by the Estate in 1970 is therefore not the issue here.

However, Article 1472 of the Québec Civil Code explicitly states and paragraph 7(l)(a) of the Act implies that the purchaser must obligate himself to pay the purchase price at the time of the agreement of purchase and sale for the contract to be considered valid.

A valid agreement of purchase and sale cannot, in my opinion, be left open ended. The question now is whether the Estate had intended to assume and did in fact assume in 1970 an enforceable legal obligation to pay the purchase price of the shares by virtue of the agreement of November 24, 1970 as the appellant contends. If he did not, the agreement is not a valid contract; and the appellant did not acquire the shares in 1970.

Although the alleged acquisition of shares by the appellant, as described in paragraph 1 of Exhibit A-l, may appear to meet the requirements of a purchase and sale contract as defined in the pertinent section of the Québec Civil Code and may seem to conform with the wording of paragraph 7(1 )(a) of the Act; paragraph 1 of Exhibit A-l, often cited by counsel for the appellant, does not reflect the real nature and the true principle of the agreement when all the clauses of the contract are considered together.

The November 24, 1970 agreement is the document on the basis of which the issue of this appeal must be determined. Paragraph 1 of Exhibit A-l reads as follows:

This will confirm my purchase from you and your sale to me of 8,400 common shares of Cemp Holdings Ltd (hereinafter called “the Company”) without nominal or par value for and in consideration of a purchase price of $21.00 per share aggregating $176,400 whereof $100 has been paid on account as herewith acknowledged by you, and the balance shall be payable ten (10) years from date hereof.

The Estate, in the first paragraph of its letter dated November 24, 1970 to Cemp, appears to confirm a purchase and sale agreement for the acquisition of shares of Cemp Holdings Ltd and it does state that the balance of the alleged purchase price shall become payable in ten years from the date of this agreement. However, when the agreement is read as a whole it becomes clear that it provided the appellant with several options which completely freed it from any obligation to pay the full purchase price of the shares at any time.

In paragraphs 3, 4 and 5 of the November 24, 1970 agreement (Exhibit A-1) the appellant states:

Until full payment of the purchase price, the share certificates for the the shares hereby sold shall be pledged to you as continuing collateral security for the fulfillment of my obligations to pay the purchase price and to comply with all of the provisions of the present agreement.

Upon payment in full for the shares, the certificates for such shares will be released to me but, in any event, they will contain an endorsation thereon relative to the restrictions on transfer embodied in the present agreement.

You shall have an irrevocable option to purchase my shares in the Company in the event of:

(a) you or the Company making a public issue of any of your or the Company’s shares; or

(b) my retirement from the services of your Company or any of its subsidiaries, for any reason or cause whatsoever; or

(c) the efflux of ten years from date herof; or

(d) my death.

The last paragraph of the said agreement dated November 24, 1970 (Exhibit A-l) at page 3, reads as follows:

In the event of my failure to meet the obligations for the balance of price when it becomes due, and my failure to correct such default within 60 days or written notice thereof, all my right, interest and title in and to the shares shall thereupon become forfeited to you by way of a “dation en paiement” and any payments made on account of the purchase price shall thereupon be forfeited as liquidated damages without any further recourse by either party towards the other.

In a letter to “Cemp” dated July 17, 1972 (Exhibit R-l) the appellant referred to an agreement of July 14, 1972 (Exhibit A-2) by which it had agreed to sell to Cemp 5,600 common shares of Fairview. Paragraph 1 of the letter of July 17, 1972 (Exhibit R-l) reads as follows:

Reference is made to that certain letter agreement (the “Purchase Agreement”) between us dated November 24, 1970, pursuant to which I purchased from you 8,400 common shares of Cemp Holdings Ltd which have been subdivided into 47, 040 common shares of the Fairview Corporation of Canada Limited (the “Fairview Shares”), the supplementary letters patent of Cemp Holdings Ltd dated June 1, 1972 changing inter alia its name to The Fairview Corporation of Canada Limited (the “Company”) and subdividing each issued common share into 5.6 common shares, the prospectus of the Company dated July 5, 1972 and our agreement dated July 14, 1972 pursuant to which I agreed to sell to you 5,600 common shares of the company. The balance of 41,440 common shares of the Company owned by me are hereinafter referred to as the “Remaining Fairview Shares”. In view of the proposed public issue of the shares of the Company, this will confirm our agreement to supplant the Purchase Agreement save and except for the second paragraph thereof by the present letter agreement.

It is only after it had agreed in 1972 to sell back to Cemp 5,600 shares of Fairview that the Estate exercised its 1970 option to acquire the 8,400 shares of Holdings which by that time had been converted and represented for the Estate 47,000 shares of Fairview.

The third complete paragraph of page 2 of the letter (Exhibit R-l) reads as follows:

I acknowledge my debt of $176,300.00, payable on November 24, 1980 with respect to the shares which I acquired pursuant to the Purchase Agreement. Until full payment of the said balance of price and save and except for a sale to a bona fide third party pursuant to the terms and conditions of the following paragraph hereof, the share certificates for the Remaining Fairview Shares shall be pledged to you as continuing collateral security for the fulfillment of my obligations to pay the said balance of price and to comply with all of the provisions of the present agreement, and all voting rights in respect of the said Remaining Fairview Shares shall remain with you and my right to said shares and under this Agreement shall not be assignable.

The appellant’s letter to Cemp of July 17, 1972 (Exhibit R-1) also repeats verbatim the same “dation en paiement” clause that appears in the November 24, 1972 [sic] agreement. Paragraph 3 at page 3 of the July 17, 1972 agreement reads as follows:

In the event of my failure to meet the obligations for the balance of price on November 24, 1980 and my failure to correct such default within sixty (60) days of written notice thereof, all my right, interest and title in and to the Remaining Fairview Shares other than those sold pursuant to the terms and conditions of the present agreement shall thereupon be forfeited to you by way of a “dation en paiement’’ and any payments made on account of the purchase price shall thereupon be forfeited as liquidated damages without any further recourse by either party towards the other.

Counsel for the appellant in his submission that the appellant had acquired and was the legal owner of the shares counted heavily on the issuance to and the recording in the Company minutes of the transfer of Cemp shares to the Estate. He filed the following Exhibits:

1) Exhibit A-5: Documents certifying a true copy of letter patent of Cemp Hold

ings as at December 9, 1959 and signed by the Assistant Secretary at Cadillac Fairview Company Limited (acquitting Cemp Holdings).

2) Exhibit A-6: A document certifying as true and correct copies of minutes of

meeting of Board of Directors at Cemp Holdings Ltd dated December 4, 1970 indicating that 8,400 common shares had been transferred to Nathan Gesser.

3) Exhibit A-7: Register of Transfer of Cemp Holdings covering the period of

December 4, 1970 to July 25, 1972.

4) Exhibit A-8: A certificate dated March 14, 1984 signed by J. Mark Lederman,

Assistant Secretary of Cadillac Fairview Corporation Limited (Holdings) certifying as true and correct a copy of page of shareholders ledger of Holdings from December 4, 1970 to July 25, 1972.

5) Exhibit A-9: Certification as true and correct copy of pages 7, 7(a) and 7(h) of

shareholder ledger of Cemp Holdings for period of December 17, 1959 to July 25, 1972 in which Nathan Gesser’s name appears.

6) Exhibit A-10: Certification of true and correct copy of shareholders register of

Cemp Holdings from December 9, 1959 to June 1, 1972 in which Gesser’s name appears.

7) Exhibit A-11: Certification by J. Mark Lederman of copies of minutes of an-

nual meeting of shareholders of Cemp Holdings — on December 15, 1971 showing Nathan Gesser as being present in person at the meeting.

8) Exhibit A-12: Certification by J. Mark Lederman of certified copies of minutes

of annual meeting of shareholders of “Holdings’’ held on June 1, 1972 which Nathan Gesser attended.

9) Exhibit A-13: Certification by J. Mark Lederman of minutes of general meet

ing of shareholders of “Holdings’’ held on June 1, 1972 which Nathan Gesser attended.

Exhibits A-5 to A-13 inclusive were identified by Miss Wendy Agnew, secretary in Cemp Holdings who testified she recognized Mr Lederman’s signature. With respect to Exhibit A-10, Miss Agnew stated that all the shareholders in Exhibit A-10 were employees of Cemp Holdings.

On cross-examination, counsel for the respondent drew Miss Agnew’s attention to the shareholder’s ledger (Exhibit A-9) in which no share certificate number is indicated for Nathan Gesser and for some other employeeshareholders. Miss Agnew declared she had never seen any of the share certificates.

Counsel for the appellant argued that not only did the November 24, 1970 agreement establish that the Estate acquired 8,400 shares of Cemp by means of a purchase and sale contract but that the shares had been issued to the Estate and had been registered in the company records acknowledging the appellant as the legal owner of the shares with right to attend shareholders’ meetings and to enjoy privileges accorded to other shareholders of the company.

There are, in my opinion, serious discrepancies between the company’s records with respect to the Estate’s alleged ownership of the shares and the numerous provisions, conditions and options of the November 24, 1970 agreement and subsequent documents affecting the appellant’s legal right to the shares. There is no evidence that the Estate ever had in its possession the share certificates, yet the 1970 agreement contains clauses such as . . the share certificates for the shares hereby sold shall be pledged to you as continuing collateral security . . .” and “. . . upon payment in full for the shares, the certificates for such shares will be released to me . . .” (pages 3 and 4 of Exhibit A-l). Indeed there is no evidence that the share certificates ever existed.

Counsel for the appellant placed on record subsection 39(1) of the Canada Corporations Act, 1964-65, c 52, which reads as follows:

39. (1) Invalid without entry.—No transfer of shares, unless made by sale under execution or under the decree, order or judgment of a court of competent jurisdiction, is, until entry thereof has been duly made in the register of transfers or in a branch register of transfers of the company, valid for any purpose whatsoever, save only as exhibiting the rights of the parties thereto toward each other, and if absolute of rendering any transferee jointly and severally liable with the transferor to the company and to its creditors.

Counsel submitted that the name of Nathan Gesser appearing as it does in the company’s share register is further proof that he had acquired the Cemp shares in 1970.

In the Company Law of Canada by J L Stewart and M Lairo Palmer — (1962) — fifth edition, at page 227, it is stated:

A share certificate is not the title but the evidence of title to shares and statutory provisions such as s-s (3) of s 33, which provides that the certificate is prima facie evidence of the title of the shareholder to the shares mentioned therein, are merely declaratory of the law as established in the cases, for example, Shropshire Union Rys & Canal Co v The Queen (1975) LR 7 HL 496 at page 513;

Further on that page it is stated:

The presumption of title in favour of the person in whose name the certificate stands may be rebutted: Philipps v Cameron Copper Mines Ltd (1959) Que SC 433 . . .

In my opinion, the appellant’s letter of November 24, 1970 (Exhibit A-l) confirming what it chose to call a purchase and sale agreement between Cemp and itself for the acquisition of shares and the company share register showing the Estate as holding 8,400 shares of Cemp do not establish that the shares were acquired in 1970.

Counsel for the appellant failed to convince the Court that the agreement of November 24, 1970 with all its conditional and optional clauses had the legal effect of obligating the appellant to pay for the shares making it in 1970 the legal owner thereof within the meaning of Articles 1025 and 1472 of the Québec Civil Code, nor did counsel prove notwithstanding the company share register that the Estate had acquired the shares in the 1970 taxation year within the meaning of paragraph 7(l)(a) of the Act.

In the decision of the Exchequer Court of Canada in Front & Simcoe Limited v MNR, [1960] CTC 123; 60 DTC 1082, Cameron, J referred to the text: Simon's Income Tax from which he quoted at 132 [1085]:

It may be well to repeat two propositions which are well established in the application of the law relating to income tax. First, the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer, any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it. Secondly, a transaction which, on its true construction, is of a kind that would escape tax is not taxable on the ground that the same result could be brought about by a transaction in another form which would attract tax.

Commenting first on Viscount Simon’s second proposition in the present context the true construction of the appellant’s share transaction as I see it, (shares acquired in 1972) would attract tax: the appellant’s version (shares acquired in 1970) of the contract would not. The choice, however, cannot and is not made arbitrarily but is based, as I will explain in commenting [on] Viscount Simon’s second proposition, on the true nature of the November 24, 1970 agreement.

The actual offer made by Cemp to the appellant was not produced. The details of the offer are found in the letter from the appellant to Cemp (Exhibit A-l) in which the numerous conditions and the 10-year term with respect to the payment of the purchase price are set out by the appellant and agreed to by a member of the Bronfman family.

It appears clear to me that the splitting of Cemp shares and the purchase by Wood Gundy Limited of 1,800,000 shares of Fairview in 1972 (Exhibit A-4) including the sale of 5,600 by the appellant to Cemp (Exhibit A-2 and R-l) had been foreseen prior to 1972.

The rather unusual conditions, options and pledges between the appellant and Cemp which formed part of what the appellant referred to as a simple purchase and sale agreement of November 24, 1970 (Exhibit A-l) were included in that agreement to provide the basis for subsequent transactions of Fairview shares from the appellant to Cemp (Exhibit A-2 and R-1). These subsequent transactions were to take place well within the 10-year term allowed for the acquisition of the Cemp shares by the appellant and it was expected that the Fairview shares would by then have been transferred back to Cemp.

The Estate therefore did not feel it necessary to obligate itself in the November 24, 1970 contract to pay the $176,300 purchase price of the CEMP shares in 1970 or in any other taxation year and Cemp under the 1970 agreement had no legal recourse against the appellant for the payment of the purchase price of the said shares.

Mr Justice Urie in Atinco Paper Products Limited v The Queen, [1978] CTC 566; 78 DTC 6395 made comments which, I believe, are particularly pertinent in the context of this appeal:

. . . It is trite law to say that every taxpayer is entitled to so arrange his affairs as to minimize his tax liability. No one has ever suggested that this is contrary to public policy. It is equally true that this Court is not the watch-dog of the Minister of National Revenue. Nonetheless, it is the duty of the Court to carefully scrutinize everything that a taxpayer has done to ensure that everything which appears to have been done, in fact, has been done in accordance with applicable law. It is not sufficient to employ devices to achieve a desired result without ensuring that those devices are not simply cosmetically correct, that is correct in form, but, in fact, are in all respects legally correct, real transactions.

and further the learned Justice stated:

. . . It is for this reason that I cannot accede to the suggestion, sometimes expressed, that there can be strict or liberal view taken of a transaction or series of transactions which it is hoped by the taxpayer will result in a minimization of tax. The only course for the Court to take is to apply the law as the Court sees it to the facts as found in the particular transaction. If the transaction can withstand that scrutiny, then it will, of course, be supported. If it cannot, it will fall.

In the case at bar, although the form of the agreement may appear to be a purchase and sale agreement and is referred to as such by the appellant, the substance of the transactions and the rights and obligations of the parties to the agreement are in fact a stock option which Cemp offered in 1970 and which the Estate exercised in 1978 in order to be able to transfer back to Cemp 5,600 shares of Fairview.

The true purpose of the 1970 agreement was not to sell Cemp shares to the appellant and to other Bronfman employees. What the Bronfman family, who controlled Cemp, intended, was to recompense a number of their outstanding employees by permitting them, if they so wished, to be able to participate in and to benefit from what was felt would be a most successful enterprise. As Me Vineberg suggested such generosity is commendable and the transactions are certainly not illegal but in my opinion the November 24, 1970 agreement does not constitute a legally binding purchase and sale contract, but is an option offered by the Bronfman family to its key employees permitting them to acquire valuable Fairview shares at little or no cost.

The “dation en paiement” clause referred to in both the November 24, 1970 agreement (Exhibit A-l) and the July 17, 1972 agreement (Exhibit R-l) with respect to the transaction of 8,400 shares of Cemp to the Estate and 5,600 shares of Fairview by the Estate to Cemp also have, in my opinion, an important bearing on the nature and the substance of both agreements.

The “dation en paiement” clause is defined in Article 1592 of the Québec Civil Code, which reads as follows:

1592. The giving of a thing in payment is equivalent to a sale of it, and makes the party giving liable to the same warranty.

The giving in payment nevertheless, is perfected only by the actual delivery of the thing. It is subject to the provisions relating to the avoidance of contracts and payments contained in the title Of Obligations.

Me Samuel Minzberg, acting with Mr Vineberg on behalf of the appellant, submitted that the 1970 agreement was clearly a purchase and sale contract and that the effect of the “dation en paiement” clause described above was a penal clause which provided the vendor, Cemp, with an additional recourse over and above its recourse of suing the appellant for failure to meet its obligations of paying the purchase price of the shares.

The obligation arising from a penal clause in a contract is described in Articles 1131 and 1133 of the Québec Civil Code and they read as follows:

1131. A penal clause is a secondary obligation by which a person, to assure the performance of the primary obligation, binds himself to a penalty in case of its inexecution.”

1133. The creditor may enforce the performance of the primary obligation, if he elect so to do, instead of demanding the stipulated penalty.

But he cannot demand both, unless the penalty has been stipulated for a simple delay in the performance of the primary obligation.

The stipulation in the 1970 and 1972 agreements that “all my right (the Estate’s) interest and title in and to the shares shall thereupon become forfeited to you by way of a “dation en paiment” and any payments made on account of the purchase price shall therefore be forfeited as liquidated damages without further recourse by either party towards the other’’, [emphasis added] precludes the “dation en paiment’’ clause from being considered a penalty clause within the meaning of Articles 1131 and 1133 of the Québec Civil Code.

The above clause is not a secondary obligation by which the Estate further binds itself to the payment of a penalty for failure to meet its primary obligation. It is because the Estate was not under any obligation to pay for the shares under the agreement that the “dation en paiement’’ clause was considered necessary to protect the vendor, had the Estate failed to pay the balance of the purchase price of the Cemp shares.

Me Minzberg, on this point, cited the case of Raginsky v Dame Pilon et vir, and Brassard, ès-qualité, mis-en-cause, (1964) Rapports Judiciaires de Québec, Cour Supérieure, Volume 64 à la page 155; Halcro v Gray (1916), Rapports Judiciaires de Québec, Cour Supérieure, Volume 50 à la page 350; and Gagnon v Lemay, Cour du Banc du Roi (1918), Rapports Judiciaires de Québec, Volume 27 à la page 59.

These three decisions found at Tab 17, 18 and 19 of the appellant’s book of authorities deal with “dation en paiement” clauses, “‘penal clauses” and “pactes commissoires” and they all stand for the proposition that only the creditor be he vendor or lender and not purchaser or the borrower can invoke and exercise such clauses in a contract. There is no dispute on that point. However, if I understand Me Minzberg’s argument correctly his point is that Cemp alone could exercise the “dation en paiement” clause and the Estate having accepted the clause had, somehow, in signing the agreement, obligated itself to the extent that the November 24, 1970 agreement was indeed a valid purchase and sale agreement. I cannot agree.

The cases cited can be easily distinguished from the facts of the appeal under review in that in each case cited, the contract created a primary obligation for the debtor whether as a purchaser or borrower. The “dation en paiement” clause, the “penal clause” and the “pacte commissoire” were secondary obligations providing the creditor with an alternative compensation which also bound the debtor and which the creditor could choose to exercise if the debtor failed to comply with his primary obligations.

In the case at bar, the agreements did not create a primary obligation for the Estate to pay for the shares. The only effect the “dation en paiement” would have had would have been for the Estate to give the shares back to Cemp if, in fact, it had them in its possession and it would have forfeited its rights and titles to the shares, if indeed it had any, and payments made on behalf of the shares would also have been forfeited as liquidated damages. In this instance, Cemp had no other recourse against the Estate and the estate having signed the agreement was subject only to the forfeiture of the “dation en paiement” clause and neither it nor Cemp had any further recourse towards the other.

In summary, the 1970 agreement gave to the Estate the option of acquiring the Cemp shares at any time during the 10-year period if it so chose. The Estate did not choose to exercise its option to acquire and become the legal owner of the shares in the 1970 taxation year. The Estate acquired the Cemp shares only after they had been split 5.6 to 1 Fairview share; after the purchase by Wood Gundy of 1,800,000 shares of Fairview, and at the time Cemp exercised its option to buy back from the Estate 5,600 shares of Fairview — all of which took place in the 1972 taxation year.

I hold therefore that the respondent did not err in adding to the appellant’s 1972 income, an amount of $63,000 as a benefit received by it in 1972 in accordance with paragraph 7(1 )(a) of the Act.

Judgment will go dismissing the appeal.

Appeal dismissed.