Guy
Tremblay:—These
cases
were
heard
in
Calgary,
Alberta
on
January
15,
1981.
They
were
taken
under
advisement
on
reception
of
the
stenographic
notes
on
February
26,
1981.
Since
the
various
assessments
of
tax
issued
against
the
above
appellants
relate
to
the
same
transaction,
it
was
agreed
that
these
appeals
be
heard
on
common
evidence.
1.
The
Point
at
Issue
The
point
at
issue
is
whether
the
appellants
are
correct
in
considering
the
payments
of
$22,164
made
in
1974
($17,388)
and
in
1975
($14,776)
by
the
appellant
company
(a
firm
of
professional
engineers)
to
a
Mr
Paul
Greenwood
(a
former
shareholder
and
former
employee
of
the
said
company)
as
severance
pay,
hence
as
income
for
the
recipient
and
as
an
expense
made
and
incurred
for
business
purposes.
The
respondent
contends
that
the
payments
were
not
made
for
severance
pay,
but
for
the
purchase
of
the
shares
of
the
recipient.
Moreover,
the
respondent
contends
that
the
other
shareholders
(the
three
individual
appellants)
officially
bought
the
said
shares
for
$1.
The
payments
made
by
the
appellant
company
resulted
in
a
benefit
being
conferred
on
the
individual
appellants
by
the
company
and
those
payments
must
be
included
in
the
income
of
the
individual
appellants.
2.
The
Burden
of
Proof
2.01
The
burden
is
on
the
appellants
to
show
that
the
respondent’s
assessments
are
incorrect.
This
burden
of
proof
results
especially
from
several
judicial
decisions,
including
the
judgment
delivered
by
the
Supreme
Court
of
Canada
in
Johnston
v
MNR,
[1948]
CTC
195;
3
DTC
1182.
2.02
In
the
same
judgment,
the
court
decided
that
the
assumed
facts
on
which
the
respondent
based
the
assessments
or
reassessment
are
also
deemed
to
be
correct.
In
the
present
case,
the
assumed
facts
are
described
in
the
Reply
to
Notice
of
Appeal,
paragraph
8,
subparagraphs
(a)
to
(d)
for
the
individual
appellants:
8.
In
so
assessing
the
Appellant,
the
Respondent,
assumed
inter
alia,
that:
(a)
Notwithstanding
the
form
of
the
agreement
dated
December
1st,
1971,
the
payment
to
the
retiring
shareholder
by
the
company
resulted
in
a
benefit
being
conferred
on
the
Appellant
by
the
company;
(b)
The
payment
made
by
Farries
Engineering
Ltd
to
the
retiring
shareholder
was
for
the
purchase
of
shares
of
the
company;
(c)
the
“severance”
payment
to
the
retiring
shareholder
was
not
calculated
with
respect
to
either
his
years
of
service
with
the
company,
salary
level
or
job
function;
(d)
Only
after
payment
had
been
made
in
full
by
the
company
to
the
retiring
shareholder
were
his
shares
transferred
to
the
Appellant
and
the
remaining
shareholders.
The
assumed
facts
are
described
in
the
Reply
to
Notice
of
Appeal,
paragraph
9,
subparagraphs
(a)
to
(d)
for
the
appellant
company:
9.
Upon
reassessment,
the
Appellant
disallowed
the
said
expense
claim
and
in
so
assessing
the
Appellant,
assumed,
inter
alia,
that:
(a)
Notwithstanding
the
form
of
the
agreement
dated
December
1,
1971,
the
payment
to
the
retiring
shareholder
constituted
a
payment
on
account
of
capital
and
was
not
an
outlay
or
expense
incurred
by
the
Appellant
for
the
purpose
of
gaining
or
producing
income;
(b)
The
payment
made
by
the
Appellant
to
the
retiring
shareholder
was
for
the
purchase
of
shares
of
the
Appellant;
(c)
The
“severance”
payment
to
the
retiring
shareholder
was
not
calculated
with
respect
to
either
his
years
of
service
with
the
Appellant,
salary
level
or
job
function;
(d)
Only
after
payment
in
full
had
been
made
by
the
Appellant
to
the
retiring
shareholder
were
his
shares
transferred
to
three
of
the
remaining
shareholders.
3.
The
Facts
3.01
The
appellant
company
is
a
private
company
incorporated
on
November
19,
1970,
under
the
laws
of
the
Province
of
Alberta.
The
head
office
is
located
in
the
City
of
Calgary,
Province
of
Alberta.
3.02
The
shareholders
of
the
appellant
company
as
of
December
1st,
1971,
were
as
follows:
|
Shares
|
%
|
|
John
K
Farries
|
300
|
30.0
|
|
Frank
Fedor
|
225
|
22.5
|
|
Robert
B
Macpherson
|
250
|
25.0
|
|
Paul
M
Greenwood
|
225
|
22.5
|
3.03
On
December
1st,
1971,
the
appellant
company
and
its
shareholders
entered
into
an
agreement
(Exhibit
A-1,
SN
p
12)
governing
the
ownership
of
shares
and
also
providing
for
various
eventualities
involving
the
shareholders
leaving
the
appellant
company
under
such
circumstances
as
death,
disability
or
resignation.
The
provisions
of
paragraphs
2,
3(b)
and
6(a),
(b)
and
(c)
of
Exhibit
A-1
read
as
follows:
2.
Unless
the
shareholders
otherwise
unanimously
agree
in
writing,
the
value
of
the
Company’s
common
stock
held
by
each
of
the
Shareholders
shall
comprise
the
following
amounts
in
the
circumstances
indicated,
namely:
(i)
In
case
of
death,
the
value
of
the
insurance
on
the
life
of
the
deceased
owned
by
the
remainder
of
the
Shareholders
(ii)
In
the
case
of
permanent
disability,
or
in
the
absence
of
any
insurance
owned
on
the
life
of
a
deceased
party
as
referred
to
in
clause
(i)
hereof,
the
book
value
of
the
shares
owned
by
the
disabled
party
as
of
the
last
day
of
the
month
when
he
first
became
disabled,
or
died,
as
the
case
may
be,
and
(iii)
In
the
case
of
any
party
when
he
leaves
the
employ
of
the
Company
for
any
reason
whatsoever
(except
those
set
forth
in
clauses
(i)
&
(ii)
hereof),
the
sum
of
$1
per
share.
3.
In
the
event
any
of
the
Shareholders
shall
die,
or
become
permanently
disabled
(for
the
purpose
of
this
Agreement
a
person
shall
be
permanently
disabled
if
he
shall
be
unable
to
carry
out
his
normal
duties
for
a
period
of
six
(6)
consecutive
months),
then
such
party
shall
sell
to
the
remainder
of
the
Shareholders
and
they
shall
purchase
from
such
party,
all
shares
of
the
Company
then
owned
by
him
on
the
following
terms:
(b)
Notwithstanding
the
foregoing
provisions
of
this
paragraph,
if
the
purchase
price
of
said
shares
is
not
paid
from
insurance
proceeds,
then
purchasers
thereof
shall
have
the
right
to
either
pay
the
purchase
price
(including
any
indebtedness
from
the
Company)
against
delivery
of
the
share
certificates
pursuant
to
sub-paragraph
(a),
or,
pay
such
purchase
price
in
three
equal
consecutive
annual
instalments,
with
the
unpaid
balance
to
bear
interest
at
six
(6%)
percent
per
annum
from
date
of
delivery
of
the
said
share
certificates
and
to
be
paid
at
the
time
of
payment
of
each
such
instalment,
the
first
instalment
to
become
due
and
payable
thirty
(30)
days
from
date
of
delivery
of
said
share
certificates
to
the
Company’s
solicitor.
Any
indebtedness
owing
under
this
subparagraph
(b)
shall
be
secured
by
a
promissory
note
from
the
purchasers
of
such
shares
to
the
vendor
thereof
and
containing
a
provision
that
if
any
payment
of
principal
or
interest
shall
be
unpaid
on
the
due
date,
the
entire
balance
owing
under
such
note
shall
forthwith
become
due
and
payable.
The
share
certificate
or
certificates
of
any
shares
sold
under
this
paragraph
3
shall
be
held
by
the
Company’s
solicitor
as
Trustee
for
the
vendor
of
such
shares
and
collateral
security
to
the
aforesaid
promissory
note
until
the
entire
sale
price
thereof
and
interest
thereon,
if
any,
is
paid
in
full
when
the
same
shall
be
delivered
to
the
purchaser
or
purchasers
of
such
shares.
During
the
term
the
said
share
certificate
or
certificates
are
pledged
as
aforesaid,
the
purchaser
or
purchasers
thereof
shall
be
entitled
to
vote
such
shares
so
long
as
there
shall
be
no
default
in
payment
of
the
purchase
price
hereunder.
However,
in
the
event
of
default
in
payment
of
the
purchase
price
under
this
paragraph
3,
the
vendor
of
such
shares
shall
be
entitled
to
obtain
delivery
thereof,
properly
registered
in
the
name
of
such
vendor
and
the
vendor
shall
be
entitled
to
realize
on
the
aforesaid
promissory
note
or
the
said
shares
in
such
priority
and
at
such
times
as
he
may
determine
in
keeping
with
his
or
their
discretion.
Provided,
however,
on
the
resale
of
such
shares,
in
the
event
of
default,
then
any
surplus
over
the
sum
then
due
from
the
purchaser
or
purchasers
of
such
shares
under
subparagraph
(a)
hereof,
after
deducting
all
costs
and
expenses
incurred
in
connection
with
obtaining
delivery
of
such
shares
and
the
resale
of
same,
shall
be
paid
to
the
said
purchaser
or
purchasers
of
such
shares.
6.
In
connection
with
the
Company’s
operations
it
is
agreed
by
and
between
the
Shareholders
as
follows:
(a)
Any
party
resigning
from
or
being
dismissed
from
the
Company
(other
than
dismissal
for
cause)
shall
receive,
by
way
of
severance
pay
in
complete
settlement
of
all
claims
he
may
have
against
the
Company,
the
amount
of
the
book
value
of
his
shares
as
of
date
of
resignation
or
dismissal
and
such
amount
shall
be
paid
without
interest
in
the
manner
set
forth
in
sub-paragraph
3(b)
hereof;
any
party
dismissed
for
cause
shall
have
no
claim
or
cause
of
action
against
the
Company
or
the
remaining
Shareholders
save
and
except
the
payment
provided
for
in
paragraph
2(iii)
hereof.
(b)
No
party
shall
transfer,
assign,
pledge,
or
otherwise
dispose
of
or
incur
any
Obligation
which
might
result
in
disposal
of
his
shares
to
any
party
not
being
a
Shareholder
in
the
Company
and
any
disposal
of
shares
to
existing
Shareholders
shall
be
on
a
pro
rata
basis
pursuant
to
existing
shareholdings.
(c)
In
the
event
of
disability
preventing
normal
duties,
a
Shareholder
shall
be
entitled
to
the
difference
between
any
disability
insurance
income
provided
by
the
Company
and
his
normal
salary
for
a
maximum
period
of
six
(6)
months.
The
insurance
provided
in
the
cited
provision
2(i)
above
was
$50,000
for
each
shareholder.
This
amount
was
“in
excess
of
book
value”
(testimony
of
Mr
J
K
Farries,
pages
15,
16,
and
63),
and
concerning
provision
2(iii),
Mr
Farries
explained
the
reason
for
paying
$1
for
the
shares:
In
the
case
of
death
or
disability
we
felt
that
was
beyond
any
individual’s
control,
whereas
it
was
within
the
individual’s
control
if
he
resigned
voluntarily
or
could
not
get
along
with
the
others
or
was
forced
out
for
some
reason,
and
we
wanted
to
make
it
much
tougher
for
one
of
the
shareholder
employees
to
leave
because
of,
oh,
other
job
opportunities,
or
this
problem
in
getting
along
with
the
other
people.
(SN
pp
17,
18)
The
witness
admitted
that
nobody
would
have
sold
his
shares
for
$1
“without
having
received
the
amount
or
book
value”
set
out
in
clause
6(a)
(SN
p
64).
Mr
Farries
admitted
that
the
prime
motivation
for
the
existence
of
the
Said
clause
(6(a))
was
the
saving
of
taxes
(SN
pp
47,
48).
3.04
On
April
30,
1974,
it
was
agreed
(Exhibit
A-4,
SN
p
26)
to
amend
Exhibit
A-1
to
permit
the
issuance
and
sale
of
60
shares
to
the
three
following
persons:
Messrs
Robert
G
Reay,
Dennis
H
Carter
and
Ryan
W
Adams.
The
agreement
A-1
was
confirmed
“in
all
other
respects”.
3.05
In
a
letter
signed
by
Mr
J
K
Farries
as
President
of
the
appellant
company
and
dated
May
6,
1974,
three
persons
(Messrs
Reay,
Carter
and
Adams)
were
offered
the
opportunity
to
purchase
20
shares
each
in
the
appellant
company
(Exhibit
A-2,
SN
p
24).
Some
provisions
of
this
letter
read
as
follows:
The
directors
have
authorized
that
you
may
purchase
20
shares
of
Farries
Engineering
Ltd.
the
purchase
price
is
$84
per
share
based
on
the
unaudited
November
30,
1973,
book
value.
The
Company
will
lend
you
the
money
to
purchase
the
shares
on
a
Suitable
plan
with
repayment
of
principal
to
be
made
within
two
years
less
a
day
from
the
date
of
the
transfer
of
the
shares
to
you.
You
will
be
charged
no
interest.
2.
In
the
event
of
termination
of
employment
for
any
reason
including
disability
for
six
months
or
death,
the
shares
must
be
sold
to
a
party
or
parties
designated
by
the
Board
of
Directors.
3.
Upon
such
sale
of
shares,
the
sale
price
will
be
based
on
the
book
value
of
the
Company
at
the
end
of
the
month
at
which
employment
is
terminated.
3.06
On
May
15,
1974,
Messrs
Reay,
Carter
and
Adams
signed
an
agreement
(Exhibit
A-3,
SN
p
25),
in
virtue
of
which
they
purchased
the
60
shares.
The
provision
2(iv)(a),
(b),
(c)
and
(e)
of
the
said
agreement
reads
as
follows:
2.
(iv)
In
the
event
the
employment
of
any
one
or
more
of
the
shareholders
is
terminated
for
any
reason,
the
sale
of
such
parties’
shares
shall
take
place
as
follows:
(a)
The
shareholder
or
his
legal
personal
representative
as
the
case
may
be
shall
sell
the
shares
owned
by
such
shareholder
for
a
price
equal
to
the
book
value
of
such
shares
as
of
the
last
day
of
the
month
in
which
termination
of
employment
occurred.
Such
sale
shall
be
effected
as
soon
as
the
said
personal
representative
of
the
deceased
shareholder
or
the
shareholder
personally
is
in
a
position
to
deliver
to
the
Company’s
solicitor
all
share
certificates
owned
by
such
shareholder,
properly
signed
off,
free
of
adverse
claims
and
encumbrances
and
the
Company
shall
be
able
to
provide
the
personal
representative
of
the
said
shareholder
or
the
shareholder
personally
wth
a
valid
release
of
all
guarantees
or
other
liability,
contingent
or
otherwise,
entered
into
or
incurred
by
the
shareholder
for
the
benefit
of
the
company;
it
being
understood
and
agreed
that
the
said
personal
representative
or
shareholder
personally
shall
be
entitled
to
waive
this
requirement.
(b)
The
said
shareholder
whose
employment
has
been
terminated
shall
transfer
the
shares
to
whomsoever
the
Board
of
Directors
of
the
Company
by
effective
resolution
determine.
(c)
The
selling
party
agrees
to
grant
a
period
of
three
years
from
the
date
of
transfer
of
the
shares
aforesaid
in
which
payment
for
the
shares
may
be
effected.
The
selling
party
shall
be
entitled
to
interest
at
the
rate
of
eight
percent
per
annum
on
any
unpaid
balance
existing
from
time
to
time.
(e)
The
parties
hereto
covenant
and
agree
to
cause
the
purchase
and
sale
of
shares
under
this
paragraph
to
be
completed
at
the
earliest
feasible
date
after
the
termination
of
employment
of
any
party
hereto
and
in
any
event
not
later
than
180
days
after
the
termination
of
employment
of
the
selling
shareholder.
On
June
17,
1974,
the
directors
of
the
appellant
company
approved
the
agreement
A-3.
The
minutes
of
the
meeting
of
directors
were
filed
as
Exhibit
R-3
(SN
p
103).
3.07
In
September,
1974,
Mr
Paul
Greenwood
terminated
his
employment
with
the
company
as
it
appears
from
a
letter
sent
to
the
company
by
Mr
Greenwood
giving
his
resignation,
effective
September
16,
1974,
to
accept
a
position
with
Acroll
Oil
&
Gas
Ltd.
the
resignation
was
approved
by
the
directors
pursuant
to
the
minutes
of
a
meeting,
dated
September
16,
1974
(Exhibit
R-5).
3.08
Pursuant
to
the
agreement
A-1,
Mr
Greenwood
was
paid
by
the
company
on
an
instalment
basis.
The
sum
of
$22,164,
($7,388
in
1974
and
$14,776
in
1975)
by
way
of
severance
pay,
was
complete
settlement
of
all
manner
of
claims
against,
or
relating
to
his
working
for
the
company.
In
computing
income
the
appellant
company
deducted
the
said
payments
as
an
expense
made
for
business
purposes.
3.09
Also,
pursuant
to
the
agreement
A-1,
Mr
Greenwood
sold
his
225
common
shares
of
the
company
to
the
remaining
shareholders
for
a
consideration
of
$1
per
share.
However,
according
to
Mr
Greenwood
the
clause
of
the
severance
pay
(para
6(a))
of
the
agreement
A-1
meant
“that
I
would
sell
my
shares
to
the
remaining
shareholders
for
the
book
value”
(SN
p
100).
3.10
On
February
28,
1975,
Mr
Paul
Greenwood
signed
an
agreement
(Exhibit
A-5,
SN
p
32)
to
transfer
the
said
shares.
He
also
gave
a
general
release
to
the
appellants
and
discharged
any
claims
up
to
the
date
upon
which
the
final
payment
was
made.
Inter
alia,
it
is
affirmed:
I
hereby
assign
my
Two
Hundred
Twenty
Five
(225)
shares
of
Farries
Engineering
Ltd,
to
Douglas
W
Hilland,
solicitor
for
Farries
Engineering
Ltd
in
trust
until
such
time
as
the
sum
of
Twenty
Two
Thousand
One
Hundred
Sixty
Four
($22,164.00)
Dollars
as
aforesaid
has
been
paid.
Mr
Greenwood
testified
in
the
same
way
(SN
p
104).
3.11
The
quantum
of
$22,164,
as
the
book
value
of
Mr
Greenwood’s
shares,
is
calculated
in
a
letter
(Exhibit
R-1,
SN
p
60)
dated
January
15,
1975
sent
by
the
appellant
company
to
the
law
firm
McLaws
&
Company,
for
the
attention
of
D
W
Hilland.
It
reads
as
follows
in
part:
Enclosed
please
find
a
copy
of
our
balance
sheet
as
of
September
30,
1974.
This
has
been
reviewed
with
Mr
Greenwood
and
the
agreed
book
value
of
the
Company
is
$104,417.00.
In
accordance
with
out
shareholder
agreement
we
are
required
to
pay
Mr
Greenwood
the
following:
225/1060
x
$104,417.00
=
$22,164.00
3.12
The
final
settlement
in
the
matter
of
Mr
Greenwood
occurred
at
the
end
of
October
1975
when
the
appellant
company
sent
a
letter
(Exhibit
R-2,
SN
p
61)
to
the
trustee,
Mr
D
W
Hilland,
company’s
solicitor,
with
a
cheque
Of
$11,319.41
payable
to
Mr
Greenwood.
the
last
paragraph
of
this
letter
reads
as
follows:
Would
you
please
forward
the
cheque
to
Paul
together
with
an
appropriate
release.
3.13
The
testimonies
of
Messrs
Farries,
Macpherson
and
Greenwood
confirmed
that
the
facts
were
in
conformity
with
the
documents
filed
above.
More
particularly
the
shares
were
“held
by
the
Company’s
solicitor
as
Trustee
for
the
vendor
of
such
shares”
until
the
payment
was
completed,
as
Stipulated
in
para
3(b)
of
A-1,
quoted
above.
The
shares
were
transferred
to
the
buyers
after
the
payment.
3.14
Mr
Farries’
approximate
figures
of
the
retained
earnings
in
the
company
at
different
times
were
as
follows:
|
November
1970
—
Incorporation
|
$
15,000
|
|
December
1971
—
Buy-Sell
Agreement
|
20,000
|
September
1974
—
Departure
of
Mr
Greenwood
100,000
3.15
During
the
years
1974
and
1975,
the
individual
appellants
received
from
the
appellant
company
the
following
amounts,
as
the
T-4
slips
issued
by
the
company
show:
|
1974
|
1975
|
|
J
K
Farries
|
$27,668.96
|
$93,192.11
|
|
R
B
Macpherson
|
26,570.47
|
81,989.09
|
|
F
Fedor
|
24,284.43
|
$76,461.16
|
4.
Law
—
Cases
at
Law
—
Analysis
4.01
Law
The
main
provisions
of
the
Income
Tax
Act
involved
in
the
present
case
are
3,
5,
6
and
15.
They
shall
be
cited
if
necessary
during
the
analysis.
4.02
Cases
at
law
The
counsel
for
both
parties
referred
the
Board
to
the
following
cases:
1.
Ralph
Pickard
Bell
v
MNR,
[1962]
CTC
253;
62
DTC
1155;
2.
HMQ
v
William
G
Phillips,
[1975]
CTC
250;
75
DTC
5188;
[1976]
CTC
126;
76
DTC
5093;
3.
MNR
v
Gordon
W
Pannell,
[1973]
CTC
81;
73
DTC
5038;
4.
West
Hill
Redevelopment
Co
Ltd
v
MNR,
[1969]
CTC
581;
69
DTC
5385;
5.
Bruce
R
McDade
v
MNR,
[1971]
Tax
ABC
1007;
71
DTC
684;
6.
MNR
v
Robert
P
Ouellette
and
John
E
Brett,
[1971]
CTC
121;
71
DTC
5094;
7.
William
Spira
et
al
v
MNR,
[1975]
CTC
2158;
75
DTC
83;
8.
Jacob
G
Schellenberg
v
MNR,
37
Tax
ABC
237;
65
DTC
80;
9.
Les
Meubles
de
Maskinongé
Inc
et
al
v
MNR,
[1978]
CTC
2285;
78
DTC
1235;
10.
Charles
Perrault
v
HMQ,
[1976]
CTC
65;
76
DTC
6021;
[1978]
CTC
395;
78
DTC
6273;
11.
Salter
v
MNR,
[1947]
CTC
29;
2
DTC
918;
12.
Guilder
News
Company
(1963)
Limited
et
al
v
MNR,
[1973]
CTC
1;
73
DTC
5048;
13.
MNR
v
A
T
Leon
et
al,
[1976]
CTC
532;
76
DTC
6299;
14.
Massey-Ferguson
Ltd
v
HMQ,
[1977]
CTC
6;
77
DTC
5013;
15.
Front
&
Simcoe
Ltd
v
MNR,
[1960]
CTC
123;
60
DTC
1081;
16.
IRC
v
Duke
of
Westminster,
[1936]
AC
1.
4.03
Analysis
4.03.1
Crux
of
the
Matter
The
crux
of
the
matter
was
well
described
by
the
counsel
for
the
appellants
at
the
beginning
of
his
arguments:
Mr
Chairman,
I
submit
that
the
sole
question
to
be
determined
today
is
the
nature
of
the
payments
made
by
the
appellant
company
to
Mr
Greenwood
upon
his
resignation
and
in
particular
the
question
arises
can
the
payments
made
by
the
company
to
Mr
Greenwood
be
characterized
as
severance
payments?
If
the
answer
to
that
is
yes
I
believe
that
there
is
no
argument
from
the
Minister
as
to
the
proposition
that
such
expenses
or
such
severance
payments
would
be
fully
deductible
against
income
as
an
ordinary
expense.
Also,
if
the
payments
are
severance
payments,
and
I
also
believe
that
there
is
no
argument
on
the
Minister’s
part
as
to
the
proposition
that
the
individual
appellants
did
not
receive
a
benefit
by
virtue
of
their
having
acquired
the
shares
for
$1.
First,
it
is
important
to
study
the
buy-sell
agreement.
4.03.2
The
appellants’
view
The
purpose
of
the
buy-sell
agreement
according
to
the
evidence
of
the
counsel
for
the
appellants
was
to
regulate
the
purchase
and
the
sale
of
shares
in
three
distinct
sets
of
circumstances:
death,
permanent
disability
and
departure
of
an
associate
from
the
company.
The
company
itself
was
one
of
a
special
nature.
It
was
indeed
a
partnership
of
four
professional
individuals
who
decided
to
carry
on
a
partnership
in
the
incorporated
form.
The
parties
were
hoping
to
build
up
retained
earnings
so
that
they
would
have
sufficient
retained
earnings
to
both
finance
their
ongoing
working
capital
requirements
and
still
have
sufficient
retained
earnings
for
investment
into
assets.
The
earning
potential
of
the
company
was
strictly
and
solely
dependent
upon
the
billing
potential
of
each
individual
person.
It
was
decided
that
the
shareholders
would
leave
the
money
in,
to
finance
working
capital.
The
partners
structured
the
agreement
in
certain
circumstances
to
shift
the
burden
of
tax.
Accounting
and
legal
advice
was
received
so
that
no
one
escaped
taxes
in
this
situation.
When
one
dies,
the
life
insurance
indemnity
is
used
to
pay
the
shares
to
the
heirs,
whatever
the
market
value
of
the
shares.
As
the
indemnity
insurance
was
$50,000,
it
was
always
higher
than
the
fair
market
value
(para
2(i)
of
the
Agreement
A-1).
In
case
of
permanent
disability,
“the
philosophy
was
that
the
people
who
were
working
could
stand
the
burden
easier
than
the
disabled
shareholder”.
The
partners
agreed
to
pay
the
book
value
for
his
shares.
The
remaining
shareholders
themselves
would
be
thus
obliged
to
buy
the
shares
(para
2(ii)
of
the
Agreement
A-1).
In
the
case
of
a
partner
who
left
the
company
“for
any
reason
whatsoever”,
the
amount
to
be
paid
by
the
remaining
shareholders
was
$1
for
the
shares
of
the
leaving
shareholder
(para
2(iii)
of
the
Agreement
A-1).
However,
if
a
partner
left
without
cause,
he
was
entitled
to
receive
from
the
company
a
payment
equal
to
the
book
value
of
his
shares
(para
6(a)
of
the
Agreement
A-1).
This
amount
paid
by
the
company
and
received
by
the
leaving
partner
was
called
“severance
pay”
in
the
agreement.
For
Mr
Greenwood,
this
clause
meant
that
“I
would
sell
my
shares
to
the
remaining
shareholders
for
the
book
value”
(SN
p
100,
para
3.09).
The
counsel
for
the
appellants
agrees
that
“by
calling
the
payments
severance
pay
does
not
by
itself
make
it
severance
pay”
(SN
p
148).
4.03.3
This
“piece
of
pie”
is
not
provided
however
if
the
partner
must
leave
for
cause
(see
provision
6(a)
in
fine
A-1).
At
that
time
he
would
be
entitled
only
to
receive
the
$1
(para
2(iii)
of
the
Agreement
A-1)
for
his
shares.
4.03.4
The
counsel
for
the
appellants
contended
that
in
receiving
Mr
Greenwood’s
shares
for
$1
per
share,
the
three
remaining
shareholders
in
fact
were
not
entitled
to
receive
more
of
the
remaining
retained
earnings
(Mr
Greenwood
has
received
his
own
part
as
“severance
pay”)
than
if
they
had
not
received
Mr
Greenwood’s
shares.
The
part
of
each
of
the
three
remaining
shareholders
indeed
is
approximately
one-third
(300/775
Farries;
225/775
Fedor
and
250/775
Macpherson)
of
the
remaining
retained
earnings.
The
fact
that
each
one
would
own
75
shares
(225
of
Greenwood
+
3)
or
more
would
not
change
the
right
to
the
approximate
one
third
(375/1,000;
300/1,000
and
325/1,000)
of
the
remaining
retained
earnings.
Once
again
the
retained
earnings
related
to
the
shares
of
Mr
Greenwood
were
paid
to
him.
Therefore
Mr
Greenwood’s
shares
transferred
to
his
associates
were
of
no
more
value
than
a
piece
of
paper.
Despite
this
fact,
they
had
to
be
transferred
because
this
would
give
Mr
Greenwood
another
right
not
only
to
the
remaining
retained
earnings
but
to
the
future
retained
earnings
acquired
by
the
three
remaining
active
associate
shareholders.
4.03.5
It
would
have
been
possible
for
the
remaining
partners
to
pay
from
their
own
pocket
for
the
shares
of
the
departing
partner
($22,500
-i-
3
=
$7,500
each).
Then,
the
“piece
of
pie’
would
have
been
larger
because
the
25%
of
the
retained
earnings
of
Mr
Greenwood
would
still
be
in
the
company.
It
would
then
be
possible
for
the
company
to
pay
to
the
three
remaining
shareholder
employees
$7,500
each
as
salary.
After
the
personal
tax
paid
there
would
remain
approximately
$4,000.
Who
is
ready
to
pay
$7,500
to
receive
$4,000?
If
the
retained
earnings
are
distributed
in
the
form
of
dividends,
they
are
in
fact
still
taxable.
4.03.6
Mr
Pyrcz,
counsel
for
the
appellants,
explained
that
in
1971
as
well
as
in
1974,
by
virtue
of
the
Companies
Act
of
Alberta,
a
company
was
prohibited
from
buying
its
own
shares.
It
was
not
until
the
end
of
1975
or
1976
that
the
legislation
changed
in
Alberta.
Therefore,
in
1974
it
was
impossible
for
the
appellant
company
to
buy
Mr
Greenwood’s
shares
just
as
it
was
also
impossible
to
annul
the
same
shares.
The
associates
tried
to
settle
the
problem
in
case
one
were
to
leave
without
cause
in
another
way,
the
one
which
is
stipulated
in
Agreement
A-1.
In
case
of
leaving
for
cause,
two
witnesses,
Messrs
Farries
and
Macpherson
said
they
would
never
have
been
paid
the
book
value
for
the
shares
of
the
leaving
partner.
If
the
appellant
company
had
had
such
legal
authority,
probably
the
present
case
would
not
be
before
the
Board.
4.03.7
Respondent’s
arguments
The
main
reasons
on
which
the
respondent
can
base
his
thesis
are
that
the
payment
made
by
the
appellant
company
was
not
made
for
the
purpose
of
producing
or
earning
income.
Moreover,
it
conferred
a
benefit
on
the
shareholders.
4.03.8
The
counsel
for
the
respondent,
Mr
Heinrich
said:
Firstly,
that
there
was
really
no
contract
of
employment
between
Greenwood
and
the
company
such
that
it
would
give
rise
to
a
payment
in
the
nature
of
severance
on
the
scale
which
occurred
and
secondly,
that
the
shareholder
agreement
of
December
1st,
when
you
examine
it
in
all
of
the
circumstances
and
in
light
of
all
the
agreements
and
transactions
that
occurred
it
was
for
the
sole
purpose
of
transferring
shares
alone
and
the
description
which
is
found
in
6(a)
of
that
agreement,
that
a
portion
of
the
transfer
of
funds
was
by
way
of
Severance
agreement
was
a
sham.
(SN
pp
158,
159)
4.03.9
There
was
no
written
contract
of
employment.
Agreement
A-1
is
not
a
contract
of
employment.
The
counsel
quoted
and
referred
to
the
cases
of:
Bell,
McDade.
Ouellette
and
Brett,
Slater,
West
Hill
Redevelopment
Co
Ltd,
Phillips,
Schellenberg,
Les
Meubles
de
Maskinongé
Inc,
Spira
et
al,
Perrault
and
Guilder
News
Company
(1963)
Ltd.
Both
Mr
Heinrich
and
Mr
Pyrcz
referred
to
the
doctrine
of
substance
and
form
in
those
cases.
4.03.10
The
substance
The
substance
of
the
payment
of
$22,000
to
Mr
Greenwood
is
provided
in
clauses
2(iii)
and
6(a)
of
the
buy-sell
agreement.
The
intention
of
the
partners
was
that
the
company
pays
the
partner
leaving
without
cause
an
amount
equal
to
the
book
value
of
the
leaving
partner’s
shares.
The
fact
that
the
shares
were
retained
in
trust
by
a
third
party
until
the
payment
of
the
complete
amount
confirms
that
the
shares
are
related
to
the
$22,000
payment
(Schellenberg,
Les
Meubles
de
Maskinongé
Inc,
Phillips
and
Guilder
News
Company
(1963)
Ltd
cases).
Although
the
said
shares
had
been
fully
paid
for
($1
per
share),
therefore
the
shares
were
not
bought
for
a
dollar,
but
for
$22,000.
4.03.11
Board’s
Opinion
The
Board
agrees
with
the
reasons
given
by
the
counsel
for
the
respondent
that
the
substance
of
the
payment
was
in
fact
to
pay
for
Mr
Greenwood’s
shares.
Moreover,
when
Mr
Greenwood
referred
to
the
clause
about
the
severance
pay
(para
6(a))
he
said
that
this
clause
meant
that:
“I
would
sell
my
shares
to
the
remaining
shareholders
for
the
book
value’.
The
substance
of
the
Agreement
A-3
quoted
in
para
3.06
also
confirms
this
conclusion.
The
Board
does
not
share
the
opinion
of
the
respondent
to
the
effect
that
Mr
Greenwood
never
received
a
salary.
It
is
true
that
there
is
no
written
contract
of
employment;
however,
clause
6(c)
of
the
buy-sell
agreement
refers
to
“normal
salary”.
This
clause
reads
as
follows:
6.
In
connection
with
the
Company’s
operations
it
is
agreed
by
and
between
the
Shareholders
as
follows:
(c)
In
the
event
of
disability
preventing
normal
duties,
a
Shareholder
shall
be
entitled
to
the
difference
between
any
disability
insurance
income
provided
by
the
Company
and
his
normal
salary
for
a
maximum
period
of
six
(6)
months.
Furthermore,
the
evidence
is
to
the
effect
that
there
was
a
verbal
contract;
the
T-4
slips
(para
3.15)
show
a
salary
for
the
individual
appellants
for
the
years
1974
and
1975.
It
would
be
surprising
if
Mr
Greenwood
had
not
received
a
salary
from
1972
to
September
1974.
Despite
the
fact,
however,
that
Mr
Greenwood
was
an
employee
the
board
maintains
its
conclusion
that
the
amount
paid
cannot
be
severance
pay.
It
is
Mr
Greenwood’s
part
of
the
retained
earnings
of
the
company,
ie
the
book
value
of
his
shares
which
was
paid
by
the
company.
The
said
amount
cannot
be
deducted
from
the
computation
of
the
net
income
of
the
appellant
company.
However,
the
Board
understands
the
partners
who
in
drafting
the
buy-sell
agreement
tried
to
find
the
right
expression
to
describe
the
reality
because
in
that
situation
it
was
legally
impossible
for
the
company
to
buy
and
annul
the
shares
of
the
leaving
partner
without
cause.
4.03.12
Concerning
the
second
point
as
to
whether
amounts
paid
to
Mr
Greenwood
should
be
included
in
the
income
of
the
individual
appellants
as
advantages
received
by
them
by
the
transfer
of
the
shares,
the
Board
does
not
share
the
respondent’s
thesis.
If
one
applies
this
thesis,
the
shareholder
must
indeed
have
received
an
advantage.
Paragraph
15(1)(c)
of
the
Act
reads
as
follows:
15.
(1)
Where
in
a
taxation
year
(c)
a
benefit
or
advantage
has
been
conferred
on
a
shareholder
by
a
corporation,
the
amount
or
value
thereof
shall
be
included
in
computing
the
income
of
the
shareholder
for
the
year.
It
is
also
obvious
that
this
advantage
must
be
a
financial
advantage.
Subsection
15(1)
indeed
says:
“the
amount
or
value
thereof”.
What
is
the
financial
advantage
that
the
three
shareholders
and
individual
appellants
have
received
from
the
transfer
of
Mr
Greenwood’s
shares?
None,
the
Board
shares
the
opinion
of
the
appellants
on
that
point
(paras
4.03.4,
4.03.5
and
4.03.6).
In
sum,
Mr
Greenwood’s
shares,
after
the
company
paid
for
them
were
without
value
for
the
remaining
shareholders.
Mr
Greenwood
indeed
had
received
their
value
from
the
company,
from
the
assets
of
the
company
or
more
particularly
from
the
retained
earnings.
The
shareholders
equity
was
diminished
by
$22,000
(approximately
25%).
After
the
payment
made
to
Mr
Greenwood,
the
balance
was
the
equity
of
the
shares
of
the
three
individual
appellants.
It
is
different
when
a
partner
dies.
His
shares
are
paid
with
the
insurance
indemnity
and
the
shareholders
equity
is
not
diminished.
It
is
the
same
thing
in
the
case
of
the
permanent
disability
of
a
partner.
The
shares
are
paid
for
by
the
three
remaining
shareholders.
The
assets
of
the
company
are
not
diminished.
It
is
again
the
same
thing
when
a
partner
leaves
for
cause
and
receives
$1
for
each
of
his
shares.
There
is
no
diminution
in
the
assets
of
the
company.
In
fact,
the
shares,
pursuant
to
the
spirit
of
the
buy-sell
agreement,
would
be
transferred
to
the
three
shareholders
as
indemnity.
From
a
practical
point
of
view,
indeed,
when
somebody
must
leave
for
cause,
this
cause
has
generated
troubles
for
and
damages
to
the
other
partners.
The
shares
would
be
indemnity
for
those
damages.
The
Board
is
convinced
that
if
the
company
had
had
the
legal
authority
to
buy
Mr
Greenwood’s
shares,
this
purchase
would
have
been
the
best
solution
for
this
particular
problem.
The
shares
would
have
been
transferred
to
the
company
and
the
three
remaining
shareholders
would
have
been
the
only
owners
of
the
remaining
retained
earnings.
In
fact,
this
is
what
the
company
did.
Substantially
it
paid
Mr
Greenwood
for
his
shares.
However,
legally
it
was
impossible
to
transfer
the
shares
of
the
company
and
Mr
Greenwood
could
not
sell
them
to
a
third
party
(Agreement
A-1,
para
6(b)).
It
is
not,
however,
because
the
company
did
not
have
the
legal
authority
to
buy
the
said
shares
that
this
substantially
changed
something
in
the
value
of
the
balance
of
the
remained
earnings,
and
that
the
three
remaining
shareholders
became
richer
by
the
transfer
of
the
shares.
It
is
the
Board’s
opinion
that
after
the
payment,
the
said
shares
were
without
value
for
the
three
remaining
shareholders.
They
received
no
financial
advantages
by
the
transfer
of
those
shares.
Therefore,
no
amount
should
be
included
in
their
income
on
that
aspect.
5.
Conclusion
The
appeal
of
the
appellant
company
is
dismissed.
The
appeals
of
the
three
individual
appellants
are
allowed
and
the
matter
is
referred
back
to
the
respondent
for
reassessment
in
accordance
with
the
above
Reasons
for
Judgment.
Appeal
of
appellant
company
dismissed.
Appeals
of
individual
appellants
allowed.
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