Ross Cultrera v. Minister of National Revenue, [1980] CTC 2718, 80 DTC 1623

D E Taylor:—This is an appeal heard in Toronto, Ontario, on June 26, 1980, against income tax assessments for the years 1974 and 1975 in which the Minister of National Revenue assessed to tax in those years certain amounts received by the appellant from the sale of shares held by him in a company—Seal-Top Paving and Construction Limited (“Seal-Top” or the “Company”). Seal-Top is a company incorporated under the laws of the Province of Ontario which, at all material times, carried on the business of paving and construction contracting. Basil Cultrera is the appellant’s son and Sam Catalano is his son-in-law. The appellant was the beneficial owner of all of the shares of Seal-Top. In assessing the appellant, the respondent relied, inter alia, upon sections 2, 3, 38, 39(1)(a). 40, 54 and 69(1)(b) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

Contentions

For the appellant:

— In the spring of 1971, the appellant entered into an “oral option agreement” with his son and his son-in-law whereby he agreed to sell to them all the shares in the capital of Seal-Top.

—The said ‘‘oral option agreement” was confirmed in December of 1971 and again in December of 1972.

—As evidenced by an Agreement dated December 1, 1973, the said option was completed.

—The purchase price of $50,000 was payable by Sam Catalano and Basil Cultrera as follows: $30,000 in 1974; $10,000 in 1975; and the balance of $10,000 in 1976.

—The sale of the shares of Seal-Top took place pursuant to an oral option agreement entered into before December 31, 1971.

—In the alternative, any income ought to be taxed in the year the funds were received rather than all in the year 1974.

For the respondent:

—The value of the shares on Valuation Day was $60,000;

—The appellant sold the shares to Sam Catalano and Basil Cultrera in 1974 for the sale price of $50,000;

—The fair market value of those shares at the date of sale was $225,000;

—The sale was not an arm’s length transaction;

— By virtue of paragraph 69(1 )(b) of the Income Tax Act, the appellant is deemed to have received $225,000 for the shares;

—The taxable capital gain on the sale of those shares was therefore $75,166.50;

—The reserves of $14,667 in the 1975 taxation year and $7,333 in the 1976 taxation year were reasonable allocations for reserves in the taxation years in question for the portion of the proceeds of disposition not received by the appellant in the taxation year.

Evidence

Mr Basil Cultrera and the appellant both testified with respect to the history of the Company and the arrangements made for the sale of the shares. The evidence was that in 1971, Basil Cultrera and Sam Catalano did enter into the operation of Seal-Top as full-time employees and managers. The involvement of the appellant became progressively less after 1971. An agreement dated December 31, 1973, and a Memorandum of Agreement dated May 30, 1974, were entered as Exhibits A-2 and A-3 respectively, and read in part as follows:

EXHIBIT A-2

THIS AGREEMENT made as of the 1st day of December, 1973.

BETWEEN:

BASIL CULTRERA, of the Borough of East York, and SAM CATALANO, of the Borough of Scarborough, both of the Municipality of Metropolitan Toronto,

(hereinafter called “the Purchasers”)

OF THE FIRST PART,

—and—

ROSS CULTRERA, of the Borough of East York, in the Municipality of Metropolitan Toronto,

(hereinafter called ‘‘the Vendor”)

OF THE SECOND PART,

—and—

SEAL-TOP PAVING & CONSTRUCTION LIMITED, a Company incorporated under the laws of the Province of Ontario,

(hereinafter called “the Company”)

OF THE THIRD PART.

WHEREAS the Purchasers and the Vendor entered into an Option Agreement with respect to the shares of the Company in December 1971, whereby the Vendor agreed to sell all of his common shares in the capital of the Company to the Purchasers;

AND WHEREAS the Purchase price of FIFTY THOUSAND (50,000) DOLLARS was agreed upon as between the Vendor and the Purchasers hereto;

AND WHEREAS the parties entered into an oral agreement the month of December, 1972 to extend the option period for a further one (1) year period upon the same terms and conditions;

AND WHEREAS the shares which are the subject of the original Agreement are being held by the Vendor subject to payment in full of the purchase price as agreed upon.

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the covenants herein contained the parties hereto hereby agree as follows:

1. The effective date for the within representation and warranties is December 31, 1971. It is confirmed that the Vendor agrees to sell and the Purchasers agree to purchase on the Closing Date three (3) being all of the issued and outstanding common shares in the capital stock of the Company (hereinafter called “the Shares”). The Closing of this transaction of purchase and sale shall take place on the 1st day of February, 1974, or on such earlier or later date as may be mutually agreed upon (herein called the ‘‘Closing Date”).

2. The Purchase Price for the Shares shall be the acknowledged and previously agreed sum of FIFTY THOUSAND ($50,000) DOLLARS in lawful money of Canada payable on the Closing Date by the Purchasers to the Vendor by certified cheque.

EXHIBIT A-3

MEMORANDUM OF AGREEMENT made as of the 30th day of May, 1974.

BETWEEN:

ROSS CULTRERA, of the Municipality of Metropolitan Toronto, in the Province of Ontario,

Hereinafter called the “Vendor”

OF THE FIRST PART

—and—

BASIL CULTRERA and SAM CATALANO, both of the Municipality of

Metropolitan Toronto, in the Province of Ontario,

Hereinafter called the “Purchasers”

OF THE SECOND PART

JOHN B KEYSER, of the City of Mississauga, in the Regional Municipality of Peel,

Hereinafter called the “Solicitor”

OF THE THIRD PART

WHEREAS by an Agreement made the 1st day of December, 1973 provision was made for the purchase and sale of shares of Seal-Top Paving & Construction Ltd (the “Corporation”) all on the terms and conditions set forth in the said Agreement; and

WHEREAS the Solicitor has consented to join in this Agreement and to act in accordance with the terms and conditions hereof.

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the mutual covenants and agreements hereinafter contained, the parties hereto hereby agree each with the others as follows:

The appellant could not read or write in the English language but agreed that he had signed Exhibits A-2 and A-3, and that they represented his understanding of the arrangements with his son and his son-in-law.

Argument

For the appellant:

... in my submission, in this case of credibility and interpretation, there are three issues. The first is whether there was an oral agreement made in 1971 between Ross Cultrera on the one hand and Sam Catalano and Basil Cultrera on the other hand. .. . The second question is—was this an agreement, an agreement for the purchase and sale of shares or was it an option agreement.. .. Thirdly, did the appellant, Ross Cultrera, dispose of his shares in 1974 as is alleged by the Minister or in 1971 pursuant to the oral agreement?

. . . my submission is that the Minister’s reassessment is incorrect because it is based on the incorrect assumption that Mr Cultrera disposed of (to use the word sell does not help us), disposed of his shares in 1974 whereas the testimony you have heard today indicates, when looked at in its totality, that he disposed of those shares in December of 1971.

For the respondent:

The Minister’s position is essentially that the documentary evidence, the oral testimony, everything that is before the Board today shows that what the parties had in 1971 were discussions . . . .

Findings

It would be an oversimplification to indicate that the issue in this matter is only one of credibility. The witnesses gave straightforward accounts of the arrangements as they remember them and as they believe they understood them. I have no doubt that the appellant made some oral understanding with the other parties to sell the shares of Seal-Top and that understanding may have been reached in 1971. Therefore, to the degree that it is relevant, I can accept the statement made by counsel on behalf of the appellant in the Notice of Appeal and I quote:

In the Spring of 1971, the Appellant entered into an “oral option agreement" with his son and son-in-law whereby he agreed to sell to them all the shares in the capital of Seal-Top. (Italics mine.)

However, I do not believe the word “option” has any relevance at all in the context of this appeal, nor do I see that there is any necessary distinction herein between “sell” and “dispose of” as noted by counsel for the appellant. However, the critical facts upon which the decision must be based are simple: in 1971, there was nothing commited to writing; nothing was done by the parties to implement the “oral option agreement” until at least December 31, 1973; no payments were made until 1974; and the shares remained in the possession, control and name of the appellant during the interim period. The proposition of counsel for the appellant in essence is that the Board should interpret the action of the appellant in 1971 when he “agreed to sell” as a transaction of sale consummated during that year, effective and binding in that way against a third party—the Minister of National Revenue.

No legislative case record was provided by counsel to support that proposition, and I would think that from an income tax viewpoint at least the record is clear—a promise to pay is not payment and, by inference, a promise to sell is not a sale.

Summary

Whatever may have been the understanding between the parties in 1971 regarding the shares of Seal-Top, such shares for purposes of the determination of income tax liability were disposed of in the year 1974 and the proceeds are taxable as assessed by the Minister.

Decision

The appeal is dismissed.

Appeal dismissed.