Pedro Cabezuelo v. Minister of National Revenue, [1983] CTC 2775, 83 DTC 679

Christie, CJ:—The first issue which arises is the application dated May 13, 1983, made pursuant to section 7 of the Tax Review Board Rules, which remain in force by operation of section 29 of the Tax Court of Canada Act, for leave of the Court to file a reply to the notice of appeal. A reply should have been filed within 60 days of June 8, 1982, which is the date on which the notice of appeal was transmitted to the Deputy Minister of National Revenue as required by subsection 170(1) of the Income Tax Act (“the Act”). In support of the application, counsel for the Minister of National Revenue has filed a consent dated May 3, 1983, to the filing of a reply which is signed by counsel for the appellant. In the circumstances the application is granted.

This is an appeal from an assessment of income tax payable by the appellant for his 1978 taxation year. On May 14, 1975, Triomphe Inc (“Triomphe”) was incorporated pursuant to the Business Corporations Act of Ontario, RSO 1970, c 53 (“the BCA”). The original shareholders were the appellant and Mr Gerard Gontier. They were joined soon thereafter by Mr Kevin Eccleston and Mr Howard Glossop. Murmar Financial Services Limited and Mr Martin Lilley were issued shares later. The holdings then were:

On December 8, 1975, Cabezeulo Enterprises Inc (“Enterprises”) was incorporated under the BCA. At the time of incorporation, only one common share valued at $1 was issued and that was to Mr Ian Angus as incorporator. He testified that this share was later transferred to the appellant “effective as of the date of incorporation”. Angus is a Toronto solicitor who acted for the appellant with respect to the incorporation of Enterprises.

The respondent did not call any witnesses and all exhibits entered in evidence were those of the appellant. All documents referred to in these reasons are exhibits in the proceedings with the exception of the Revenue Canada T-5 form. That form was received by the Court pursuant to subsection 170(2) of the Act. It was the subject of cross-examination.

Angus further testified in chief that the reasons for incorporating Enterprises were: “Basically to provide a holding company which would hold his (the appellant’s) investments. He did not wish to have his investments held personally”. The witness added that a subsidiary reason for the incorporation was that Enterprises would also act as a management service company for services which it was expected the appellant would render to restaurant operations. He was described as having expertise in that field. In answer to a subsequent leading question suggesting that one of the purposes for which Enterprises was incorporated was to hold the shares in Triomphe which had been issued to the appellant, Angus replied: “That was the most immediate purpose”.

On December 8, 1975, which, as mentioned, is the date of the incorporation of Enterprises the appellant signed a “Resolution of the Director” which reads:

WHEREAS the Corporation (Enterprises) was formed for the purpose of holding assets and investments of a commercial nature.

AND WHEREAS certain investments of the Shareholder have been held by him pending organization of the Corporation.

THEREFORE IT IS RESOLVED:

That the shares of TRIOMPHE INC, issued to PEDRO CABEQUELO (sic) at the time of formation of that Company be confirmed as belonging beneficially to the Corporation (Enterprises), and the Corporation is hereby directed to instruct Triomphe Inc to pay all dividends and fees which it may owe from time to time to the holder of the shares, to be paid to the Corporation in the place and stead of Pedro Cabezuelo. The corporation confirms that it has reimbursed Pedro Cabezuelo for the monies paid by him to obtain the issuance of the aforesaid shares.

The undersigned being the sole Director of CABEZUELO ENTERPRISES INC, hereby signs pursuant to the provisions of The Business Corporations Act, the foregoing Resolution.

The nature and purpose of this document was not explained. It is not signed by the appellant in his personal capacity. It amounts to a declaration by Enterprises that the 25 shares in Triomphe issued to the appellant (“the 25 shares”) are “confirmed as belonging beneficially" to Enterprises. The use of the word “confirmed” and the phrase “belonging beneficially” connotates that prior to December 8, 1975, there was a transfer of an interest of a kind less than an unqualified and absolute title in the 25 shares from the appellant to Enterprises. That, as I see it, was an impossibility because Enterprises did not come into existence until December 8, 1975. Perhaps the resolution was a manifestation of the pre-December 8, 1975 intention of incorporating Enterprises “to provide a holding company which would hold his (the appellant’s) investments”. There can be no valid suggestion that the resolution constituted the adoption of a pre-incorporation contract within the meaning of section 20 of the BCA. On December 8, 1975, the appellant was not in fact “the Director” of Enterprises. When Angus was asked if the common share in Enterprises issued to him on incorporation was transferred to the appellant on “that very day, on the 8th of December?”, he replied: “I am sure it was not done on that very day; there was no urgency”. Neither Angus nor the appellant could say whether what is said in the resolution concerning the appellant being reimbursed actually transpired.

My determination on this aspect of the appeal is that the resolution of December 8, 1975, is meaningless in law and of no effect.

A week later the appellant and Enterprises entered into an agreement respecting the 25 shares in which the former is described as “the Trustee” and the latter “the Beneficiary”. The agreement is dated December 15,1975, and is the keystone of the appellant’s appeal. It reads:

The Trustee acknowledges and declares that the twenty five (25) shares in the capital stock of Triomphe Inc held by him, including all dividends, profits, and advantages accrued or accruing thereon or arising therefrom from time to time are held by him upon trust for the Beneficiary, its successors and assigns, and hereby agrees to transfer, pay all (sic) deal with the aforesaid shares in such manner as the Beneficiary shall from time to time direct.

The Trustee will at the request of the Beneficiary, attend all meetings of shareholders of Triomphe Inc and will vote at such meetings in such manner as the Beneficiary shall direct.

The Beneficiary will at all times hereafter keep indemnified the Trustee, his executors and administrators, against all liabilities which he or they may incur by reason of the said shares having been issued in the name of the Trustee, and particularly that it will punctually pay all calls and demands which the Trustee may be liable to pay in respect of any of the said shares not paid up and all costs and expenses incurred by the Trustee in the execution of the said trust.

Angus said that the shareholders of Triomphe had entered into an agreement (“the shareholder’s agreement”). He added that he had conducted a fruitless search for that agreement and it was not produced in evidence. The witness could not be certain of the date of its execution, but the substance of it was related to be that, if any of the shareholders wished to sell his or its shares to Triomphe, he or it must first offer them to the other shareholders of the corporation. If a third party offered to buy the shares of the shareholder the other shareholders had the right to match the offer.

The appellant decided to sell the 25 shares. The reason given for this was disagreements he had with one or more of the other shareholders which related, in particular, to what the appellant regarded as too rapid expansion having regard to the availability of suitable cooks and managerial personnel. Three documents pertaining to this sale were produced. They are a letter dated December 20, 1978, from Mr J Barry Rotenberg, a Toronto solicitor, to Angus; a reply dated December 29, 1978. The salient points in the Rotenberg letter are:

1. Glossop, Eccleston, Gontier, Lilley and Murmar Financial Services Limited (“the remaining shareholders”) were prepared to comply with the shareholder’s agreement and purchase the 25 shares “currently owned by Pedro Cabezuelo”.

2. The 25 shares were to be purchased by Triomphe under these terms:

(a) the “purchase price” to be $300,000 plus the return of advances owing to the appellant with interest, the advances and interest to be deemed to be $50,000 for a total of $350,000;

(b) the $350,000 to be payable,

(i) $25,000 on closing by way of cash or certified cheque,

(ii) the balance to be paid over 3 years, based on a 25-year amortization, from the date of closing with a principal payment of $25,000 due 6 months from closing.

3. By way of ensuring payment of the balance of $325,000:

(a) Triomphe was to execute a promissory note to be guaranteed by the remaining shareholders with interest at 10 /2 per cent per annum repayable in blended monthly payments based on a 25-year amortization and requiring a principal repayment of $25,000 6 months after closing;

(b) the “escrowing of the said 25 shares being purchased with a third party trustee” pursuant to an agreement under which the shares were to revert to the appellant in the event of default under the promissory note for a period exceeding 60 days;

(c) no dividends to be paid by Triomphe to the remaining shareholders while the obligation was outstanding without the consent of the appellant;

(d) no further shares of Triomphe to be issued while the obligation was outstanding without the consent of the appellant, but Triomphe was permitted to rearrange the shareholdings internally amongst the remaining shareholders and to convert Martin Lilley’s class “C” shares to common shares.

4. A closing date of January 12, 1979, was recommended instead of January 5, 1979, which had been suggested by Angus in a telephone conversation with Rotenberg on December 19, 1978.

In his reply of December 22, 1978, Angus said he had reviewed Rotenberg’s letter with the appellant and that it was acceptable subject to these conditions:

(i) the effective date of the transaction to be December 29, 1978, and the closing date and interest adjustment date to be “as early in January as possible, if not, December 29th”;

(ii) the auditors of Triomphe to confirm every six months that dividends have not been paid or additional shares of Triomphe issued;

(iii) the promissory note to contain “an acceleration clause, such that the balance of principal and interest shall fall due sixty (60) days after default has occurred pursuant to the terms of the promissory note, or with regard to the undertakings of Triomphe Inc”; and

(iv) the guarantees of the remaining shareholders to be “exigible effective at the same time as the promissory note due date accelerates as set out above”. In addition the remaining shareholders to be subject to being called upon immediately in case of default.

On December 29, 1978, an agreement (“the escrow agreement”) was entered into between the remaining shareholders as party of the first part, the appellant as party of the second part, Rotenberg as “Trustee” and party of the third part, and Triomphe as party of the fourth part. The first paragraph recites that:

WHEREAS pursuant to an Agreement (the “Agreement”) Triomphe purchased all of the shares owned by Pedro in the capital of Triomphe (the “Corporation”) for an aggregate purchase price of THREE HUNDRED AND FIFTY (sic) ($350,000.00) DOLLARS, including advances and all loans and shareholders’ notes with accrued interest thereon owing to Pedro (the appellant) by the Corporation.

The agreement referred to in paragraph one is that described in the Rotenberg-Angus exchange of correspondence of December 20 and 22, 1978. The escrow agreement contains clauses stating that the “aggregate purchase price” for the 25 shares is $350,000 and that $50,000 of this amount represents advances, loans and amounts owing to the appellant by Triomphe including interest. The remaining shareholders agree “to enter into this Agreement to provide security for the balance of the said purchase price payable”, that is, $325,000. The escrow agreement also states that Triomphe has paid the appellant $25,000 “this date”. It goes on to appoint Rotenberg “as escrow agent”. Clause 2 reads:

2. Contemporaneously with the execution of this Agreement, Triomphe shall deliver to the Trustee, certificates duly endorsed in blank for transfer, representing Twenty-Five (25) common shares (the “Shares”) in the capital of Triomphe owned by Triomphe. Such shares shall be held by the Trustee, in escrow, as collateral security for the payment by Triomphe of the amounts due and owing under the Agreement.

There was some confusion at the hearing regarding what certificates were being referred to, but it was eventually agreed that they were the certificates which represented the 25 shares which were the subject of the sale by the appellant to Triomphe. This conclusion makes legal and commercial sense. It is representative of a normal and understandable business transaction.

The opening words of clause 3 of the escrow agreement are: “The shares shall be held in escrow subject to the following terms and conditions”. There follows the narrative that Triomphe covenants to pay the appellant $325,000 in instalments at specified times and that, in the event of default, the balance due and owing is, at the option of the appellant, accelerated and becomes due and payable in full. Clause 3(b) provides that upon receiving prescribed evidence by way of statutory declaration made by the appellant establishing default, Rotenberg is to deliver the share certificates being held in escrow to the appellant. Clause 7 provides that upon Rotenberg declaring by way of statutory declaration that he has been advised and has made inquiries and it appears to him that the amount owing under the promissory note, which will be referred to again in a moment, has been repaid in full and, additionally, upon this being confirmed by Triomphe, the share certificates are to be delivered to Triomphe. Attached to the agreement as Schedule A is a promissory note for $325,000 dated December 29, 1978, with a due date of January 5, 1982. It is signed by Triomphe as maker and the remaining shareholders as guarantors. Its principal provisions are that interest is at the rate of 10 /2 per cent per annum computed from January 5, 1979. The monthly instalments are $3,017.08 payable from February 5, 1979. Those instalments are to continue until December 5, 1981, and to be applied first in payment of interest, but a supplementary $25,000 was payable on July 5, 1979, to reduce principal. This is followed by a statement that the remaining shareholders “severally guarantee the payments due pursuant to this note as required to be made by Triomphe Inc”.

There is not the slightest suggestion in the Rotenberg-Angus correspondence, the escrow agreement, or the promissory note and guarantees therein that the 25 shares were beneficially owned by Enterprises under a trust in respect of which the appellant was the trustee. Indeed, if anything, the whole tenor of the documents suggests absolute and complete ownership in the appellant. Having regard to the amount involved and the rather elaborate nature of this documentation, I can only conclude that the appellant conducted himself, in relation to the sale of the 25 shares to Triomphe, as the outright and absolute owner of them. I consider it as almost a certainty that if Triomphe, the remaining shareholders or the legal advisors of any of them had any reason to believe that the appellant was not the outright owner of the 25 shares, this would have been reflected in the documentation respecting the sale and purchase. It is also noted that in the respondent’s reply to the notice of appeal it was alleged that the balance sheets of Enterprises for its fiscal years 1976, 1977 and 1978 did not reflect its interest in the 25 shares. This was pursued further by counsel for the respondent in his cross-examination of appellant’s witnesses, but no testimony was forthcoming which could be reasonably construed as refuting the allegation.

On February 20,1981, the respondent received copy of a Revenue Canada T-5 form issued by Triomphe stating that the appellant was the recipient in 1978 from Triomphe of a dividend of $299,975. In his income tax return for 1978 which is dated April 29, 1979, the appellant reported the sale of the 25 shares as being the disposition of a capital asset and he claimed a reserve for the portion that had not been received. The return showed the total proceeds on the sale of the shares to be $300,000. From this $25 was deducted as being the paid-up capital in respect of the 25 shares resulting in a declared capital gain of $299,975. Applying the $25,000 paid on the execution of the escrow agreement on December 29, 1978, he claimed a reserve of $274,977. This return was prepared by Mr George Farkas, a chartered accountant.

About a year later, on April 27, 1980, Farkas sent Revenue Canada a note in his own handwriting which reads:

Please amend the 1978 T Return to reflect the facts as described in attached schedule. The 12,499 in taxable gains reported in 1978 is an error and should not have been treated as such. Instead, interest income of $8,849 from Triomphe Inc should be added to the return. Said interest is eligible for the interest deduction.

Farkas had decided that the better path to follow in respect of his client’s 1978 return of income was to construe the agreements involving the 25 shares as consisting of three components, namely, the advances made to Triomphe by the appellant and the interest thereon which totalled $50,000 plus the $300,000 for the shares. He testified that he had made inquiries from various sources including the books of Triomphe and had concluded that the $50,000 was made up of “$40,000 and some change” and interest in the amount of $8,849. He simply allocated the $25,000 paid to the appellant on December 29, 1978, first to interest and the balance to repayment of advances. I have no quarrel with the construction that Farkas placed on the agreement even though the escrow agreement speaks of the “aggregate purchase price” of the 25 shares being $350,000. When the relevant documentation is regarded as a whole the transaction, in substance, breaks down into the three components mentioned. It must be observed, however, that it was clear from the testimony given by Farkas that his note of April 27,1980, was not precipitated by any knowledge or belief on his part that the beneficial owner of the 25 shares was Enterprises. He testified that his first awareness of Enterprises’ interest in the 25 shares came about when, at some unspecified date after March 1981, a Revenue Canada assessor showed him a copy of the T-5. The result of this was that he consulted with the appellant and his legal adviser and discovered the existence of the alleged trust involving the 25 shares in favour of Enterprises.

The appellant, Angus and Farkas gave testimony of varying detail pertaining to the circumstances surrounding the preparation of the 1978 return of income. Prior to employing Farkas the appellant had been the client of another accounting firm which he came to regard as unsatisfactory. That firm was dismissed in favour of Farkas in March or April of 1979. Farkas said that he acted under severe pressure of time constraints and that he encountered difficulties in securing required information. All he obtained from the previous firm of accountants was said to be some spread sheets, a pencilled copy of the company’s return and a financial statement. He even had problems in communicating with the appellant. Farkas said that, in the last analysis, he relied in very large measure on information secured from one Maria Amstutz, a bookkeeper who worked for Triomphe and also did part-time work for the appellant. In particular it was information received from Amstutz that led Farkas to believe that entitlement to the 25 shares was exclusively with the appellant.

The evidence indicates that some, but quite possibly not all, of the payments made by Triomphe went to Enterprises. For example it was not clear where the first $25,000 went. The appellant did not know whether it was paid by cheque or cash. He thought the money was paid to a lawyer who disbursed it. He said it probably went to Enterprises, but he was not at all certain about this. On the other hand two pages from a cash receipts journal said to have been prepared by Amstutz (who did not testify) from Royal Bank records show receipt by Enterprises of payments of sums of $3,017.08 by Triomphe during the period February 2, 1979 to September 9, 1979. It will be recalled that $3,017.08 were the monthly instalments due on the promissory note. Whatever percentage of the payments made by Triomphe may have found its way into the hands of Enterprises, I do not find this very useful in determining whether the beneficial interest in the 25 shares was vested in Enterprises at the relevant time. These payments going to Enterprises could be just as consistent with the first preincorporation purpose given by Angus for bringing Enterprises into existence which purpose was, possibly, evinced by the “Resolution of the Director” dated December 8, 1975, which I have already said I regard as a nullity.

Finally before turning to the law, I mention that on February 6, 1981, Enterprises offered to purchase a restaurant in Toronto called the Monks Cellar from CKS Holdings Inc. The offer was accepted and, as part of the transaction, the appellant was required to assign and deliver Triomphe’s promissory note in his favour to C K S Holdings Inc. Although the sale of the Monks Cellar was to Enterprises, the offer to purchase was signed by the appellant in his personal capacity as well as in his capacity as an officer of Enterprises. The appellant warranted that the promissory note was in good standing. The statement of adjustments in relation to the sale of the Monks Cellar is as of March 25, 1981, and showed the principal due under Triomphe’s promissory note as at March 5, 1981 to be $288,579.74. There was no suggestion at the hearing that the note was regarded or treated as being in default at any time.

By notice of reassessment dated October 19, 1981, the appellant was informed that the amount of $7,422, assessed on his 1978 income was increased to $101,539.40. In reassessing, the position of the respondent is that the acquisition of the 25 shares by Triomphe .was an acquisition of shares which must be treated as a deemed dividend in the hands of the appellant in accordance with subsection 84(3) of the Act. Selecting from this subsection what is appropriate to this appeal, it provides that where a corporation resident in Canada acquires shares of its capital stock it is deemed to have paid, at that time, a dividend on the shares so acquired which is equal to the difference between the amount paid by the corporation on the acquisition and the paid-up capital in respect of those shares and a dividend is deemed to have been received at that time by the holder of the shares in the amount just described. There is no dispute that the paid-up capital in respect of the 25 shares was $25. The deemed dividend was accordingly calculated to be the difference between the purchase price of the shares ($300,000) and $25, which is $299.975. To this amount the respondent has added $149,987 in computing the appellant’s income. This was done pursuant to subsection 82(1) of the Act. This subsection provides that, in computing the income of a taxpayer for a taxation year, there shall be included all amounts received by him in the year from corporations resident in Canada as taxable dividends plus, where the taxpayer is an individual, one-half of the amount just mentioned.

The primary argument relied upon by counsel for the appellant is summed up in this passage taken from the notice of appeal:

The shares of Triomphe Inc were at all times beneficially owned by Cabezuelo Enterprises Limited and not the Appellant. Consequently, any dividend deemed to have been received under the provisions of subsection 84(3) of the Act would be received by Cabezuelo Enterprises Limited.

On the basis of what I have already said, the earliest date on which Enterprises could have become beneficial owner was on December 15, 1975, by operation of the alleged trust instrument of that date.

A surfeit of language has been employed over the years to describe trust, but one distinguishing quality which attaches to all personal trust is “a relationship based on property control and property enjoyment between two persons, the trustee who controls and the beneficiary who enjoys”. Waters, Law of Trusts in Canada, at page 4 (italics supplied). The word control is important in respect of the appellant’s contention. In Underhill's Law of Trusts and Trustees, 12th (1970) edition, it is said at page 6 that a trust may be regarded as an equitable obligation relating exclusively to property. The learned author then goes on:

It is, further, an obligation, the due performance of which necessarily implies that the trustee has some control over the property which is the subject of the trust, for otherwise he would be unable to deal with it for the benefit of the beneficiaries; and although, as will be seen hereafter in the case of simple trusts the control is merely nominal (consisting solely in the trustee being the custodian of the legal title), yet some scintilla of control is absolutely necessary to the existence of a trust (italics supplied).

There is no modicum of effective control in the appellant over the 25 shares under the terms of the document dated December 15, 1975. He is nothing but a mere cipher. There is no meaningful fiduciary relationship created between him and Enterprises, the purported beneficiary. This, in my opinion, negates the existence of a trust.

Additionally, to create a trust, a settlor must intend to settle property by way of a trust and that intention must not be spurious. While unquestionably where there is a declaration in writing placing identifiable property “in trust”, this creates a strong prima facie presumption of the existence of a trust. It is not, however, an irrefutable presumption and in determining the issue there is no reason why, in principle, regard should not be had to the relationships existing among the settlor, the trustee and the beneficiary at the time of the creation of the alleged trust. It follows that the fact that the instrument dated December 15, 1975, specifically declares that the 25 shares are held by the appellant “upon trust” for Enterprises is not necessarily of controlling importance. The whole of what transpired may properly be considered. In this regard reference is made to Re Rispin (1912), 25 OLR 633 per Garrow, JA at 642.

I do not believe that the appellant had the requisite bona fide intention of creating a trust. Certainly the preponderance of the evidence does not reveal that intention. As previously observed, there is not a word in the Angus- Rotenberg correspondent or the escrow agreement to suggest that the appellant dealt with Triomphe, the remaining shareholders and Rotenberg in the role of a trustee in relation to Enterprises as a cestui que trust. This is also reflected in the T-5 which was issued by Triomphe to the appellant in his personal capacity only, not as trustee. The balance sheets of Enterprises and the fact that originally the appellant reported the $299,975 as a capital gain accruing to him in his 1978 income tax return have also been mentioned. Finally on this point reference is made to the evidence that the appellant and the other shareholders had a falling-out which led to the sale of the shares to Triomphe. Assuming there was a falling-out, how would that place the appellant in a legal position to dispose of the 25 shares? If there was a valid trust, the appellant could not deal with the 25 shares as his exclusive property. Under the terms of the alleged trust instrument the appellant, as trustee, had no independent authority to sell the shares and there is no evidence that Enterprises made a corporate decision in that regard. This further substantiates that the appellant never regarded the 25 shares as being anything other than his personal property and dealt with them as such when he had the falling-out.

Apart altogether from what has been said concerning the existence of a trust, if superior judicial authority did not cling so tenaciously to the doctrine of the absolute distinction of identity between a corporation and its shareholders as propounded over 85 years ago by the House of Lords in Salomon v Salomon & Co Ltd, [1897] AC 22, one might regard a single shareholder corporation like Enterprises in the light of its relationship to the appellant and conclude that in truth and substance what was attempted was to establish a trust under which the settlor, the trustee and the sole beneficiary are the same person, which is not permissible under the law of trusts. The current condition of corporate law, as I comprehend it, bars access to this apparently reasonable avenue.

Appellant’s counsel also contends that Triomphe did not have the corporate power to acquire its own shares and consequently, the acquisition in relation to the 25 shares was ultra vires Triomphe and a nullity. Certain provisions of the BCA must be considered with respect to this submission, namely, section 16 (now section 15); subsections 39(2), (3), (4) and (5) as amended by Statutes of Ontario 1972, c 138, s 13 (now section 37); paragraph 42(a) as amended by Statutes of Ontario 1972, c 138, s 14 (now section 40) and section 135 (now section 133).

16. (1) No act of a corporation and no transfer of real or personal property to or by a corporation, otherwise lawful, that is heretofore or hereafter done or made, is invalid by reason of the fact that the corporation was without capacity or power to do such act or make or receive such transfer, but such lack of capacity or power may be asserted,

(a) in a proceeding against the corporation by a shareholder under subsection 2;

(b) in a proceeding by the corporation, whether acting directly or through a receiver, liquidator, trustee or other legal representative or through shareholders in a representative capacity, against a director or officer or former director or officer of the corporation; or

(c) as cause for the cancellation of the certificate of incorporation of the corporation under section 250.

(2) A shareholder of a corporation may apply to a court of competent jurisdiction for an order to restrain the corporation from doing any act or transferring or receiving the transfer of real or personal property on the ground that the corporation lacks capacity or power for the purpose, and the court may, if it considers it to be just and equitable, grant an order prohibiting the corporation from doing the act or transferring or receiving the transfer of the real or personal property, but, where the act or transfer sought to be restrained or prohibited is being or to be done or made under a contract to which the corporation is a party,

(a) all the parties to the contract shall be parties to the proceeding;

(b) the court in granting the order may set aside the contract and allow the corporation or other parties to the contract, as the case may be, such compensation as may be equitable for the loss or damage sustained by any of them from the granting of the order and setting aside of the contract, other than anticipated profits from the contract.

39. (2) Where authorized in its articles and subject to any restrictions contained therein, a corporation may purchase any of its issued common shares.

(3) A corporation shall not purchase shares under this section if the corporation is insolvent or if the purchase would render the corporation insolvent.

(4) No purchase of shares shall be made under this section by a corporation unless the purchase is authorized by a resolution of the board of directors.

(5) Where a corporation purchases shares under subsection (2), the purchase shall be made at the lowest price at which, in the opinion of the directors, such shares are obtainable, and,

(a) pursuant to tenders received by the corporation upon request for tenders addressed to all the holders of the shares of the class and the corporation shall accept only the lowest tenders; or

(b) from bona fide full-time employees and former employees of the corporation; or

(c) where the shares to be purchased are of a body corporate that is offering its shares to the public, by purchase on the open market.

42. An agreement for the purchase by a corporation of its shares under section 39 is not invalid or unenforceable because of the possibility that the corporation may not be able to comply with section 39, but such agreement is,

(a) subject to subsection (2) of section 135, valid if performed;

135. (1) Where any shares of a corporation are acquired by it by redemption, purchase or acceptance for surrender in contravention of this Act or the articles, the directors who voted in favour of or consented to the resolution authorizing the redemption, purchase or acceptance for surrender are jointly and severally liable to the corporation to the extent of the amount paid for the acquisition of the shares.

(2) Where any shares of a corporation are acquired by it by redemption, purchase or surrender in contravention of this Act or the articles,

(a) any shareholder of the corporation; or

(b) where the acquisition is in contravention of subsection (1) of section 38, subsection (3) of section 39 or section 100 any creditor of the corporation who was a creditor at the time of the acquisition,

may apply to the court within two years of the acquisition, and the court may, if it considers it to be just and equitable under the circumstances, make an order making any shareholder whose shares were acquired liable to the corporation, jointly and severally with the directors, to the extent of the amount paid to him for his shares.

Mr Katchen said that the sale of the shares was in violation of subsections 39(2) and (3). The articles of incorporation placed in evidence do restrict Triomphe to purchasing its common shares out of surplus. On the other hand there was not one iota of evidence tendered to bring the transaction within the ambit of subsection 39(3). There was an absence of evidence on the question whether there was strict compliance with subsections 39(4) and (5), but in this regard it must be borne in mind that all of the shareholders of Triomphe were parties to the escrow agreement of December 29, 1978.

In any event the various provisions cited from the BCA speak for themselves and the message contained therein is certainly that a corporation may purchase its common shares, subject to prescribed conditions. It is equally certain that if those conditions are not met, the result is not to render the transaction a nullity, but rather it is to open the door to the conceivability of the kind of liability or litigation described in section 135 or, possibly, in section 16. The necessary implication to be taken from the legislation is that it contemplates the purchase by a corporation of its common shares in contravention of the Act and notwithstanding what the result will be the transaction shall stand unimpaired.

Counsel for the appellant also argued that there was no sale of the 25 shares, only an agreement to sell. In support of this proposition, he invoked subsections 2(3) and (4) of the Ontario Sale of Goods Act, RSO 1970, c 421 which was succeeded by RSO 1980, c 462. The provisions that have been referred to by counsel and the provision which will be referred to by me in a moment are the same in both statutes. The subsections referred to read:

2. (3) Where under a contract of sale the property in goods is transferred from the seller to the buyer, the contract is called a sale, but, where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred.

The unfulfilled condition relied upon was payment in full of the amount owing for the 25 shares and the sequential delivery of the share certificates to Triomphe by Rotenberg. Paragraph 1(1 )(g) which defines “goods” for the purposes of the Sale of Goods Act expressly excises “things in action”. This excludes the application of that Act with respect to the transaction pertaining to the 25 shares. A thing in action is synonymous with a chose in action. A share in a corporation is a bundle or package of rights and obligations. It is quite separate from a share certificate. The latter is simply evidence of ownership of the share and this is so even if the language of transfer on its reverse side has been endorsed in blank by the registered owner. The essential nature of a share must ultimately be determined by reference to the law under which the corporation to which it relates was brought into being and any other applicable laws which taken together determine the rights and obligations which arise out of the existence of and entitlement to the share. These rights and obligations can and do vary between and among different jurisdictions. The sort of rights and obligations referred to can be exemplified by reference to federal and Ontario legislation. Mention has already been made to the BCA. To this reference is added its successor, the Business Corporations Act, RSO 1980, c 54, the Canada Business Corporations Act, Statutes of Canada 1974-75-76, c 33 and the Securities Act, RSO 1980, c 466. Illustrative only of rights which are constituent elements of a share is the right of the holder to vote at meetings of shareholders; the right to dividends which are declared; the right to examine the records of the corporation; the right to require the attendance of the auditor of the corporation at a shareholders’ meeting and the right to receive rateably the remaining property of the corporation upon dissolution. Types of obligations that are components of a share are, the liability of a shareholder to the creditors of the corporation up to the amount of the repayment to him where the issued capital has decreased by an amendment to the articles; the obligation of n insiders to submit reports to officials of government; the obligation of an insider not to sell short; the obligation of an insider not to buy or sell a call or a put in respect of a share of the corporation, and the obligation of a dissenting offeree to transfer his shares when a takeover bid is accepted by the holders of at least 90 per cent of the shares to which it relates.

In Braun v The Custodian, [1944] Ex CR, Thorson, P, after emphasizing the fundamental difference between a share certificate and the share to which it relates said at 40:

A share is intangible property, a chose in action, a relationship between the shareholder and the company involving rights and duties.

The package of rights and duties which are a share and go with the purchase of a share establish legal commitments between and among the shareholder and the corporation, other shareholders, officers and directors of the corporation, officials of government charged with administrative responsibilities respecting shares, and others, including potential purchasers of shares. These rights and duties are an interrelated creation designed for the benefit, assistance and protection of those just mentioned. In Special Lectures of the Law Society of Upper Canada, 1972, Corporate and Securities Law, 16, John L Howard said at 27:

Two centuries ago Blackstone, with his typical incisiveness, aptly characterized corporations as “little republics” a policy that has been unqualifiedly accepted in the Proposals. More concretely, a corporation law is essentially a constitutional law that determines the respective constituencies within the “republic”, particularly of shareholders, directors, officers and creditors.

Reference is also made to Palmer on Company Law, 21st (1968) edition at page 280; Principles of Modern Company Law, 2nd (1957) edition by Professor Gower at page 322 and David v Dow, [1916] 10 WWR 674. This last citation is a decision of the Supreme Court of Alberta, Appellate Division, and is of direct precedential value in support of my conclusion regarding the application of the Sale of Goods Act to the transaction between the appellant and Triomphe concerning the 25 shares.

I am satisfied that the 25 shares were sold by the appellant to Triomphe and that the former transmitted his title, both legal and equitable, to the latter. While it may be arguable on the evidence concerning the precise moment in time when this transfer occurred, it was sometime between the Rotenberg-Angus correspondence of December 20 and 22, 1978 and the signing of the escrow agreement and the promissory note attached thereto on December 29, 1978. That is all the precision necessary for the purposes of this appeal. It was an absolute and unconditional agreement subject only to the taking of certain steps to secure payment in full in due course. Clause 2 of the escrow agreement acknowledges by necessary implication that Triomphe was in receipt of the 25 shares endorsed in blank and it undertook to place them in escrow with Rotenberg “contemporaneously with the execution of this Agreement” as security for the payment of the amount owing on the sale and purchase. The fact that Triomphe placed the 25 shares in escrow pending payment did not derogate from its title. On receipt of the promissory note the appellant had in his hands a valuable and negotiable commercial instrument which he could have sought immediately to discount for cash although if he had done so it would likely have been at some fractional discount. The fact that the 25 shares were regarded by those in an excellent position to place a value on them, ie the remaining shareholders, to be worth $300,000 gives one some insight into the financial worth of the remaining shareholder whose holdings in Triomphe at the $300,000 rate totalled $3,000,000 plus whatever value attached to the 11 class “C” shares. Furthermore in offering $300,000, Triomphe was matching an offer made for the 25 shares by a Mr Patrick Chan, another restaurateur. When, in March of 1981, the Monks Cellar was purchased for $400,000, the balance then due on the note was used as the largest asset in the purchase. There was therefore an acquisition of the 25 shares by Triomphe within the meaning of subsection 84(3) of the Act.

It was then contended on behalf of the appellant that, notwithstanding that by operation of subsection 84(3) Triomphe was deemed to have paid a dividend when it acquired the 25 shares, the dividend must be calculated from time to time in accordance with the amounts “actually paid” by Triomphe to the appellant. This, it was submitted, would be the monthly instalments of $3,017.08 payable under the promissory note commencing February 5, 1979, and which were to continue until December 5, 1981, whereupon on January 5, 1982, the entire balance of the principal sum and interest became due and payable. Counsel regarded the $50,000, consisting of advances made to Triomphe by the appellant and interest thereon, in the same light as did Farkas when he sent the handwritten note to Revenue Canada on April 27, 1980. In support of this view counsel focused on the words ‘paid by the corporation on . . . acquisition . . in subsection 84(3). I disagree that the deemed dividend in the subsection is to be determined by reference to what was actually paid and when. While, as said by Chief Justice Jackett in J F Kennedy v MNR, [1973] CTC 437; 73 DTC 5359 at 5361, it is assumed with respect to “income” (as opposed to a “benefit”) that Parliament intends income tax to attach when the amount is paid and not when the liability is created he expressly included the qualification that this was so ‘in the absence of special provision”. As I construe subsection 84(3), a corporation is deemed to have paid a dividend at the time of the acquisition of its shares and, even if the consideration for the shares acquired is payable over a considerable period of time, it must, for the purposes of income tax law, be regarded as being payable at the time of the acquisition. Subsection 84(7) of the Act provides that a dividend that is deemed by subsection 84(3) to have been paid at a particular time shall be deemed to have become payable at that time. In the light of the deeming provision in subsections 84(3) and (7) it is of no consequence that a dividend was not in fact declared and that the sum which constitutes the deemed dividend was not in fact payable at the particular time. In The Queen v The County Council of Norfolk, [1891] LJQB 379, Cave, J had under consideration section 14 of the Highway Act of 1878 which provided: “The following areas shall be deemed to be highway areas for the purposes of this Act”. His Lordship said at 380-1:

Generally speaking, when you talk of a thing being deemed to be something, you do not mean to say that it is that which it is to be deemed to be. It is rather an admission that it is not what it is to be deemed to be, and that, notwithstanding it is not that particular thing, nevertheless, for the purposes of the Act, it is to be deemed to be that thing.

Finally, as I understand him, Mr Katchen contended that when the promissory note was assigned to CKS by the appellant in part payment of the Monks Cellar, at which time the amount owing on account of principal was $288,579.74, the effect of the assignment was to deflect entitlement to payment from the appellant to CKS with the consequence that payment of deemed dividends by Triomphe to the appellant within the meaning of subsection 84(3) ceased. I must reject that. It fails, having regard to what has already been said in these reasons for judgment and for other reasons that are self-evident.

I appreciate that the result is to inflict a very acute burden of taxation on the appellant for his 1978 taxation year. Nevertheless, I must apply the law, as I understand it, to the facts as I find them on the basis of the evidence placed before me.

The appeal is dismissed.

Appeal dismissed.